Aurobindo Pharma Has Been The Alpha Among Indian Drugmakers This Year

Stocks of most Indian drugmakers have made large gains so far this year amid increasing demand for their products following the Covid-19 outbreak and the sector being classified as an essential business when the nation went into a lockdown. And one company has stood out.Till July 31, shares of Aurobindo Pharma Ltd. have returned gains of nearly 91.44% to investors. The Nifty Pharma Index rose nearly 40% during the same period. Dr. Reddy’s Laboratories Ltd. has been the second-best performing pharma stock during the same period, returning gains of 57.28%..That has reflected in the financial performance of the drugmaker in the quarter and year ended March 2020. Operating profit rose by nearly a fourth year-on-year to Rs 4,864 crore in the three months through March, while margin rose to the highest in at least seven quarters, at 21.8%.The Hyderabad-headquartered company attributed that to an improved performance across geographies, including U.S. and Europe, and segments that make anti-retroviral drugs and active pharmaceutical ingredients—or the raw material for drugs. “The main reason is the good product mix within the geographies and low cost of material and also depreciation in the rupee,” Santhanam Subramanian, the company’s chief financial officer, said at an earnings call for the quarter ended March. “Every percentage of rupee depreciation will improve gross margin as well as Ebitda by about Rs 30-40 crore.”Yet, the company has faced obstacles. In April, it had to terminate a deal to acquire Sandoz Inc.’s generic oral solids and dermatology businesses in the U.S. as approvals from the country’s Federal Trade Commission failed to come in time.Here’s a look at reasons behind the stock’s performance.Strong EarningsAurobindo Pharma’s revenue and profit have risen steadily over the years.Growth in the U.S.—its largest market—Europe, and other markets aided revenue, according to the company’s annual reports. New product launches across markets and an improved market share of existing products, too, helped..The trend continued in the year ending March 2020, as its formulations business in the U.S. grew led by improvement in volumes of its oral solids and nutraceuticals—or nutritional supplements—and new product launches, the company said at the earnings call.The company has also been ramping up its anti-retroviral drug—used to treat HIV or AIDS—business since it started producing the dolutegravir medication. It expects growth in the segment going forward.Improved Balance SheetAurobindo Pharma’s debt fell in the last financial year as it utilised cash freed up after the deal with Sandoz fell through. Cash flows rose to a four-year high as it had accumulated cash for the deal. “The key highlight is debt, which has been a cause for concern,” Edelweiss securities said in a note in June.“The cash will be deployed in the coming quarters as we progress,” Subramanian said..The company intends to pare debt further with the freed-up cash. “The first objective is debt reduction, but we’ll also have capex, which is to the extent of $150-200 million for this year as well,” N Govindarajan, the drugmaker’s managing director, said. “As we move forward, with the growing business we also need some capacities. We will get better clarity in terms of deployment once we retire the debt.”Respite From Regulatory RiskRegulatory concerns over the company’s manufacturing units seem to have subsided for now, reducing headwinds.The U.S. Food and Drug Administration inspected Aurobindo Pharma’s unit IV—at Pashamylaram near Hyderabad—during Nov. 4-13, 2019, and issued a Form 483 with 14 observations, including deficiencies in assuring asceptic environment for making sterile products.In a subsequent inspection, the drug regulator issued a voluntary action indicated status—implying that it may not pursue regulatory action—that was revoked in February and reissued in April. The unit, according to a Motilal Oswal note in April, contributes up to 7-8% of the company’s annual U.S. sales of around $1.5 billion.While a few other plants remain under the U.S. FDA’s scrutiny, clearance for a critical plant indicates the company continues to work towards stricter adherence, ICICI Securities said. Motilal Oswal expects pace of launches to improve in the U.S. market going forward.That apart, the company has completed corrective and preventive actions for its unit-VII, informing the U.S. FDA about it. It has also completed remediation, including consultant certifications, for units I, IX, and XI. A desktop review—or virtual facility inspections during the pandemic—has been requested for unit-XI.Earnings OutlookThe company had previously guided for becoming net debt free by 2023, but later advanced the deadline by a year during the earnings call. “The way we have done the accelerated performance last year now we are advancing this to 2022,” Subramanian said. “We’re trying to reduce between $200-250 million (of debt) in the current fiscal.”The drugmaker is also targeting a gross margin of around 58%. “We think we will be around 58% to 59% based on the new currency rate,” Subramanian said.The company plans to launch 50-60 products this year, 25 of which have already been approved. At least 50 products are expected to be launched over the next 2-3 years.ValuationAs many as 29 out of the 34 analysts that track the stock have a ‘Buy’ recommendation on the stock. The company’s return potential indicates a downside of 2.6%. However, its price-to-earnings multiple is the lowest among larger peers..Analysts’ TakeAnalysts remain bullish on the company.“The company possesses one of the best enduring generics ecosystem among peers—vertically integrated model, lower product concentration—to withstand the volatility in the U.S. generics space,” ICICI Securities said. It expects U.S. revenue size to reach Rs 13,914 crore in FY22 at an annualised rate of 10.1% during FY20-22.Commentary on advancing debt retirement from end-FY23 to end-FY22 has further allayed concerns, Edelweiss Securities said. A flush pipeline should keep up U.S. growth, it said.Strong execution and debt reduction, according to Emkay Global, should drive the stock’s outperformance. The company said Aurobindo Pharma is one of its top large cap picks.HDFC Securities expects steady progress on differentiated pipeline to drive long-term earnings sustainability for the company.Motilal Oswal remains positive on the company on account of a robust abbreviated new drug application pipeline, pending approval, as well as a niche product pipeline build-up for the developed markets.

Aurobindo Pharma Has Been The Alpha Among Indian Drugmakers This Year

A closer look at why the drugmaker has stood out among peers.

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