Aurobindo Pharma: Margin concerns recede

Injectables, controlled substances, and full integration of Actavis acquisition to keep margins stable

Aurobindo Pharma rallied to its all-time high of Rs 1,043 on Friday and closed about three per cent higher at Rs 1,030, as higher margins in the July-September quarter put to rest concerns on the profitability front. The Street was worried about the price erosion in anti-depressant drug duloxetine (the generic version of Eli Lilly's multi-billion dollar brand cymbalta) and integration-related challenges of Actavis, the company it acquired earlier in the year. The company managed to post operating profit margins at 22.11 per cent, beating consensus analyst expectations of 20.5 per cent.

While competitive pressures remain, the beat on margins has come on the back of growth in its injectable portfolio and traction in the rest of the world business. Overall product mix also improved, with lower contribution of anti-retroviral or HIV drugs, which being tender-led fetch lower margins. Injectable business under its subsidiary Auromedics grew 119 per cent to around $17 million (Rs 104 crore) during the quarter, while its controlled substances and non-institutional business under subsidiary Aurolife also grew at a healthy clip.

The US revenues, which contribute more than half of formulation revenues and 40 per cent to overall revenue, grew 60 per cent year-on-year, while rest of the world business which accounts for seven per cent of formulation revenues grew 90 per cent. Analysts at Nomura feel the loss in duloxetine revenue was made up to an extent by a pick-up in the sale of amphetamine salt, a nervous system stimulant and anti-bacterial suspension sulfamethoxazole trimethoprim.

  The company's operating profit at Rs 637 crore came much higher than consensus estimate of Rs 598 crore. It is the higher growth at the operating level which helped the company post a 58.3 per cent rise in net profit to Rs 372 crore which was in line with estimates. The robust net profit number came in despite higher taxes (Rs 100 crore more than year ago quarter) and forex loss of Rs 42 crore.

The injectable range is expected to continue driving growth on the back of high-value product approvals coupled with traction in the controlled substances portfolio. The oncology portfolio over the next few years could also prove to be money spinner. Ranjit Kapadia at Centrum Broking feels that the stock has been re-rated in recent months due to improved performance in the US and higher valuation of the pharma sector as growth momentum is expected to continue in the future. Kapadia feels the margins at 22-23 per cent will be sustainable over the coming quarters and the company reiterated this point in a post-results investor concall.