News Analysis

Buoyant growth prospects drive Aurobindo Pharma, despite weak fourth quarter earnings

Dhuraivel Gunasekaran BL Research Bureau | Updated on January 12, 2018 Published on May 30, 2017


Company expects lower pricing pressure in US than its peers in current fiscal

Despite weak earnings performance in the latest March quarter, shares of Aurobindo Pharma surged almost 11 per cent on Tuesday, as the management remained confident of healthy growth in FY18. The pharma company is also expecting lower pricing pressure in the US than its peers in the current fiscal.

In the latest March quarter, though, the company’s consolidated net profit fell 3.9 per cent year-on-year to Rs 533 crore, mainly due to pricing erosion in the US business.

Consolidated revenues of the company during the March quarter came in at Rs 3,642 crore, a fall of 3 per cent Y-o-Y. The formulations business of the company, which contributes to the chunk (79 per cent) of the company’s gross sales, fell 3 per cent year-on-year during the March quarter.

Operating margin stood at 19.8 per cent, down from 23.1 per cent during the same quarter last year, mainly due to one-time inventory write-off related to Actavis acquisition.

The US business, the key driver for the company, accounting for 45 per cent of its gross sales, witnessed a flat growth of almost one per cent in the March quarter compared to the same quarter last year. The growth in recent quarters in the US has been moderating owing to the increasing competition and pricing pressure in the oral solids business.

However, launches especially in the injectables business, which has been growing strongly, is expected to keep the company in good stead.

Apart from this, new launches from oncology and other complex drugs should help sustain topline growth in the US over the medium term.

During its earning call, the company guided that the pricing erosion in US is likely to continue in FY18, but would be around 7-8 per cent, which is lower than what peers in the space expect (mostly a double-digit price erosion).

As of March 2017, on a cumulative basis, the company filed 429 ANDAs with USFDA and received approvals for 314 ANDAs, including 38 tentative approvals.

Aurobindo Pharma has one of the largest pipelines of ANDAs amongst Indian peers, largely dominated by products from niche areas of controlled substances, injectables, penems and peptides. The company is hoping to launch 20-25 products in the US in FY 18.

The European formulations business, contributing 22 per cent to the gross sales, registered a fall of 8 per cent year-on-year in the fourth quarter.

But the company’s recent acquisitions in the region should drive growth over the long run. Further, the cumulative transfer of manufacturing of 69 products from Europe to India during the March quarter has led to substantial cost savings and propped up margins of the EU.

Sales from emerging markets registered a healthy 21 per cent growth Y-o-Y during the quarter. This has accounted for 5 per cent of gross sales of the company.

Research and development spend during 2016-17 stood at Rs 543 crore, 3.6 per cent of total revenue. The company has guided for capex spending to be around $ 120 million in FY18.

For the full year 2016-17, Aurobindo Pharma’s consolidated net profit rose 13.7 per cent to Rs 2,301 crore, while revenues grew 7.3 per cent to Rs 15,205 crore over the previous fiscal.

The stock’s valuation appears attractive at the current level. It trades at about 14 times its trailing 12-month earnings — more than 30 per cent discount to its three-year average.

Published on May 30, 2017

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