The Hindu Business Line : Aurobindo Pharma: Buy

The integrated capacities set up by the company, the ability to remain profitable in the competitive anti-AIDS business and the growing focus on the US generics market augur well.

Rising capacities will help Aurobindo deliver.

Kumar Shankar Roy

Investors with two-three year perspective can take exposure in the stock of Aurobindo Pharma, an emerging player in the formulations business (one-third of sales), with a stable base in bulk drugs.

Given the integrated capacities and the ability to remain profitable in the high-volume, low-margin anti-AIDS business, we believe the growing focus towards similar US generics market will pan out well for Aurobindo in the long-term.

At the current market price of Rs 523, the stock trades at 12 times its estimated FY-09 per share earnings and is attractively valued relative to peers such as Cipla, Matrix and Orchid Chemicals.

Our investment rationale is based on Aurobindo’s R&D-driven robust pipeline of drug filings, steady Active Pharmaceutical Ingredients (API) business and focussed formulations (finished dosages) strategy that derives strength from both forward and backward integration.

Payback due

For five years till 2004, Aurobindo embarked on a major restructuring and modernisation drive of its production facilities to make them globally compliant. It also invested resources in building a mega infrastructure for APIs and formulations to emerge as a vertically integrated company — five units for APIs and four for formulations are designed for regulated markets. At end-September this year, cumulatively, Aurobindo has 106 ultimate approvals for generic drug products and 117 submissions to the USFDA that provide confidential information about facilities, processes involved in making drugs. The company also plans to file 30 generic drug approvals annually for the next two years.

Aurobindo Pharma has thus readied itself for the competitive API business and its future business drivers, anti-AIDS formulations and US generics.

In the September quarter, the company’s formulations sales grew at 63 per cent, faster than the API sales at 23 per cent. Its strong presence in antibiotics such as semi-synthetic penicillin and cephalosporins, and diversification into cardiovascular, central nervous and gastrointestinal segments, augurs well too.

There has been build-up of significant inventory at Aurobindo’s US subsidiary in preparation for the launch of ten products, for which approvals have come. These revenues should start reflecting from the third quarter, boosting the consolidated performance.

While the commodity generics business remains crowded, Aurobindo has a developed marketing and distribution infrastructure in the US that will help it deliver volume commitments, essential in drug manufacturing.

Growth potential

Aurobindo is poised to capitalise on the growing anti-AIDS opportunity; over 50 million people globally are infected with the HIV virus. With most patients still untreated, its participation in contracts sponsored by WHO, US President’s Emergency Plan for AIDS Relief and Medecins Sans Frontieres can be productive. It already has 500+ anti-AIDS drug registrations in different countries.

Increased spotlight on the African nations, especially South Africa (over 11 approvals) and the licence to sell Stavudine and Didanosine ranges of products in Africa, along with existing Efavirenz fills up important gaps in its model. Aurobindo has also been ramping up its European presence. The acquisitions of Milmet Pharma (UK) and Pharmcin (the Netherlands) as well as 30-40 products awaiting approval in Europe, on the back of over 300 market authorisations, will benefit Aurobindo going forward.

Apart from maintaining a fast pace of filing of drug dossiers in Europe, Aurobindo’s European businesses reported formulation sales of Rs 190 crore in 2006-07, nearly five times the sales the previous year. Launch of formulations, which are on the cards, could boost revenues.

Favourable situation

While Aurobindo’s peers have faced margin pressure from rising prices of key inputs such as Penicillin and 7-ACA (7-Aminocephalosporanic Acid), Aurobindo has been shielded from this. Since both these raw materials are manufactured by Aurobindo and act as inputs for its end products, it has a clear advantage in the manufacturing process. Given the entry barriers in the form of capex involved in making these materials, the already meagre margins and strict environmental conditions, Aurobindo will continue to have an upper hand over its competitors in the medium-term.

The chief beneficiary will continue to be its Chinese unit, Aurobindo Bio-Pharma (Datong), serving around 45 per cent of the company’s Penicillin G needs, which has recently turned profitable.

While we feel that the high input prices are unsustainable in the long-term, rising contribution from formulation exports from the US, Europe and emerging markets, would see the contribution of APIs narrowing down to almost 50 per cent in FY-09.

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