Aurobindo beats the pharma blues

Stock gains 7% as US formulation business growth boosts profit, net debt reduces by $115 million

Even as larger peers Sun Pharmaceutical and Lupin faltered on the bourses despite strong June quarter (Q1) earnings, Aurobindo Pharma gained seven per cent on Wednesday.

The company had declared its quarterly results after market hours on Tuesday. Not only were its profits better than the market expected but, in contrast to the worries on near-term US growth that the Street has for most large peers, Aurobindo’s prospects in the world’s largest health care market remains good.

With a strong approval rate for product launches in the US, it continued to benefit and expects the momentum to continue. The company was one of the top receivers of US Food and Drug Administration (FDA) approvals for new launches during FY16, getting 58 (with 28 in the March quarter. It launched seven products in Q1 and all this propelled the US formulations growth to 20.5 per cent from a year before. This it attributed to the new launches in the oral and injectibles segments.

Thus, earnings before interest, tax, depreciation and amortisation (Ebitda) grew 22.6 per cent, despite revenue growth of only 13 per cent to Rs 3,726 crore. The performance was clearly boosted by US formulations growth, despite softness in other segments. For instance, the anti-retro viral (ARV, of HIV treatment drugs) and Active Pharma Ingredient (API) businesses grew at a slow pace, due to seasonal factors.

However, with US formulations contributing 45 per cent to overall revenue, Ebitda at Rs 889 crore grew 22.6 per cent and the margins improved 188 basis points to 23.9 per cent. Net profit, thus, grew 24 per cent over a year, to Rs 585 crore.  

  The ARV business, part of formulations, contributing about eight per cent to revenue, remained flat; the API business (a fifth of revenue) could grow only 1.6 per cent. This, however, is expected to pick up in the coming quarters.

While the US business continues to grow well, Europe holds promises, too, after turnaround of the business acquired from Actavis. Aurobindo had acquired part of the loss-making European subsidiary from Actavis in 2014. Europe (22 per cent to overall sales) registered 12.1 per cent yearly growth in the quarter. The acquired business continues to see improvement in profitability, said the company. Aurobindo also transferred the manufacturing of four products from Europe to India and as of the end of the June quarter, 36 products had been cumulatively transferred. These moves have helped improve profitability in this business.

The other highlight has been a sharp reduction in Aurobindo’s net debt by $115 million, to $525 mn versus $640 mn at the end of March. While largely due to debt factoring (bill discounting to third parties for collection) of $150 mn, say analysts, the company said it expected to close FY17 with net debt of $500 mn.

Analysts at Religare Institutional Equities say the company is on track to deliver compounded annual growth of 21 per cent in earnings per share over FY16-18, led by the US business and a turnaround in the European business, as growth should continue trending up with impending launches (19 products approved but not launched). The other factor expected to boost growth in the US is the reduction in lag time between approvals and launches.

In the long run, the company has oncology products, hormones and peptides that can drive growth in two years time. Notably, the four peptide products in the pipeline offer a $3 billion market opportunity.

In this backdrop, analysts are also increasing their target price (the term for where it is expected to rise till) for the stock. Analysts at Citi Equity Research say Aurobindo remains their top pick in Indian pharma; they have a target price of Rs 1,170. The consensus target price of 13 analysts polled on Bloomberg after the results was Rs 967, for a stock trading at Rs 787.