Aurobindo fights US pricing pressure

New products, cranking up volumes among key steps

Aurobindo Pharma has shed 10 per cent over the last four trading sessions after pricing pressures and compensations to dealers in the US led to lower-than-expected performance for the December quarter. Management said pricing pressure (price erosion) in its base business was seven per cent on a sequential basis and 13 per cent over a year ago. Not surprising that earnings estimates have been cut by four to five per cent for FY18.

Company expects pricing pressure to remain high over the next few quarters. Analysts at Jefferies say Aurobindo portfolio, which has a major share of off-patent drugs, reflects overall price erosion. The US accounts for 55 per cent of formulation sales of Aurobindo. Formulations are the biggest segment for the company, accounting for over 80 per cent of overall sales. For the first time in over eight quarters, sequential US sales declined.

What worsened US performance was a couple of one-offs, which included higher other expenses of $4.5 million and four per cent of US sales paid as compensation to dealers for falling prices. This led to operating profit margin coming at 22.9 per cent, or 150 basis points below expectations, and 64 basis points lower than a year ago. Adjusted for one-offs, operating profit and operating profit margin were in line with estimates. 

The company is counting on new launches and volume growth for its US business. Elara Capital believes anti-biotic and anti-viral medications could be revenue generators in FY18. Launch of generics (copies of patented drugs) of diabetes medication Fortamet, stuck in litigation, could be another trigger. The company is going to scale up its research and development costs as it intends to increase the pace of approvals, especially in complex and high-margin products. It has recently entered biosimilars through acquisition of four early-stage products from TL Biopharmaceutical AG, which could be filed after 2020. 

Despite pricing pressure in the US, analysts at Jefferies are positive on prospects in that geography given the large ANDAs (abbreviated new drug applications) pipeline, timely approvals, cost leadership, and the highest approval rate among peers. Given the 159 pending ANDAs, analysts believe the company could see earnings grow at a robust pace.

Meanwhile, despite cut in earnings per share, stock valuation at 12.7 times the company's FY18 net profit is attractive and comes at a 30 per cent discount to the sector.