Why Aurobindo Pharma Has Surged To A 30-Month High

Shares of Aurobindo Pharma Ltd. jumped nearly 4.7 percent, the highest in over 30 months, as of 1:25 PM after the margin of Sandoz's U.S. business, which it agreed to acquire last year, beat expectations for the March quarter.

The business, including Sandoz's dermatology and oral solid units, posted revenue and operating profit of $1.17 billion and $294 million, respectively, Novartis AG, which owns Sandoz, said

Novartis said the business has an operating margin of 25 percent and expects the divestment to take place by the third quarter of the current fiscal—a delay of a quarter from analyst estimates. Sell-side analysts for Aurobindo Pharma were factoring in a 20 percent operating margin for the business when the deal was announced.

The acquired portfolio would comprise over 300 abbreviated new drug applications, out of which 40-50 await approval. This, the Hyderabad-based pharmaceutical firm said, would drive growth in the near- and medium-term.

Prashant Nair, pharma analyst at Citi, said that numbers from the divested business add comfort to his proforma numbers as the brokerage was expecting a revenue of $900 million and operating margin of 20 percent. The higher Ebitda of the business provides a meaningful buffer on 2018 Ebitda, Citi said, assuming price erosion and marginal market share loss.

Sriraam Rathi, pharma analyst at ICICI Securities, agreed. He said in a note that he had expected a lower operating margin of 20–21 percent for the acquired business. He expected revenue of $900 million with a margin of 21 percent in FY21 from these businesses due to one-off sales and limited-competition products, which may not be recurring.

Param Desai, pharma analyst at Elara Capital, too, wrote in a note that the street was factoring in 20 percent margin for this business. The numbers disclosed by Novartis are much higher than Aurobindo Pharma's initial guidance upon deal completion, Neha Manpuria, pharma analyst at JP Morgan, wrote in a note.

The deal is expected to pay off for Aurobindo Pharma, according to brokerages. The company, ICICI Securities said, would be among the top three generic companies in the U.S. after the deal completion.

Nearly 33 out of the 39 analysts tracking Aurobindo Pharma have a ‘Buy' rating on the stock with the others recommending ‘Hold'. The Bloomberg consensus target shows a potential upside of 12 percent on the stock.