Why you should buy Aurobindo Pharma stock

Aurobindo reported strong revenue growth of 12 per cent CAGR in the last five years driven by rapid filings in USA, acquisitions in Europe and growth in other geographies. Aurobindo is expected to achieve stable growth from its traditional base in generics and also move up the value chain with complex products.

These products have been under development for some time, but will likely be commercialized in the next three years. This makes the time ripe for long-term investors with moderate risk appetite to take positions in the stock to benefit from the eventual upside. The stock’s valuation too is reasonable, being in line with its historical 1-year forward PE of 16 times. Also, the restructuring in injectable division announced by Aurobindo is expected to help unlock value for the company as a whole.

Sanguine outlook

In FY21, Aurobindo derived half of its revenues from US, 25 per cent from Europe, and 12 per cent and 8 per cent respectively from API and Antiretroviral segments. Of the US$1.6billion revenues from USA, US$1.1 billion was from oral solids and US$250 million from injectables. The scale of Aurobindo’s US generic operations which are matched only by Sun Pharma and its Specialty portfolio, would require a constant pace of new launches to sustain. For instance, to sustain the current base, Aurobindo would need 27 launches at US$5 million per launch, assuming a price erosion of 8 per cent. To meet this, Aurobindo filed close to 50 – 60 products and launched 34 products in US in FY21 and can be expected to maintain the current pace of launches in future, considering its large pending pool of filings. The same rate of launches would imply a US revenue growth of 8-10 per cent in FY22-23 (adjusted for Natrol division sale in Q321). Aurobindo expects to increase global injectable revenues from US$380 to 700 million in next three years. The implied growth (22 per cent CAGR) is in line with growth in FY17-20, before Covid-impacted FY21. Launch cycle of 12 to 15 injectable per year could sustain an even higher growth in the FY22-23. A plant in US and India, and expansion of current Unit-IV are in progress to achieve such growth.

Its European business has gained from acquisitions and streamlining of products and markets can sustain further 10 percent growth in FY22-23.

Aurobindo has plans to invest close to ₹3,000 crore with PLI scheme announced by the government to manufacture antibiotic and other API’s/intermediaries. Even as 40 per cent is taken up internally, API sales can be doubled in the next five years on successful implementation of the scheme as per the management.

Aurobindo has repaid its debt from acquisitions and is now net cash positive.

Deeper opportunities

Aurobindo is in advanced trials for its antibiotic Pneumococcal vaccine, a limited competition product with global market size of US$6.2 billion and is expecting approval in next one year. On the viral front, Aurobindo holds an exclusive license with US based Covaxx for Vaxxinity (UB-612) a Covid vaccine, for sale in India and to UNICEF. Vaxxinity is in a Phase 2 trial in Taiwan and Phase 2/3 trial is planned in India and other countries and Aurobindo has capacity for 480 million doses per annum. Both vaccines, represent strong annuity business in low competition markets when approved.

Aurobindo acquired development data for four biosimilars (products similar to complex Biologics) including bevacizumab in 2017.

The portfolio now covers 13 products of which 5 are in the first wave. Four of the assets are in advanced stages of trials and upon approval, revenue contribution can be expected from FY23-24. Biosimilars are difficult to gain traction in US markets, but represent strong opportunities (Amgen generated US$650 million in 2020 from US sales of bevacizumab biosimilar, launched in 2019).

Aurobindo is also developing 3 Depot injections (long acting injectables), 8 inhalers, and 8 transdermal patches with a cumulative addressable market size of US$16 billion in limited competition markets and revenues expected by FY23. (see table).

Aurobindo’s expected revenue growth of 7 per cent and EPS growth of 10 per cent for FY21-23 as per Bloomberg consensus reflects the stable growth in base operations. The stock is fairly valued at the current price, trading close to its average 1 year forward PE of 16 times FY22 EPS of ₹60. But investors can expect gradually improving product mix and restructuring in injectable to deliver better returns.

Aurobindo moved its injectables business into a subsidiary and the Board is considering options for “value creation”, which may imply unlocking injectables business. Regardless of the outcome, markets will value Aurobindo’s injectables business independently and this will reflect favorably on the valuations of the rest of the businesses as well. Aurobindo trades at a lower multiple to its peers which trade at 20 times one-year forward earnings, primarily on account of low branded business. The next generation of complex products with high entry barriers can provide protection similar to branded products and improve valuations as well. Investors will have to look out for plant inspections where Aurobindo is awaiting clearance in Units 1, 9, 11 and 7.

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