FY18 has seen the two key investor concerns on Aurobindo — (i) R&D quality and (ii) lack of significant launches — getting addressed. It has launched three key products in Q1, driving a 5% FY18e EPS upgrade. The launches also underscore ARBP’s R&D quality and improve confidence for other key launches including Renvela tabs. Aurobindo’s deeper, better quality filings and cost leadership position it well to overcome the US pricing challenge. Retain Buy. 3 key launches in Q1FY18: ARBP has in Q1FY18YTD launched 7+ products (vs 5 in Q4FY17) including 3 complex products — Meropenem, Strattera and Renvela suspension. Two of these were positive surprises in terms of competition (4 generics in Strattera vs JEFe of 7-8) and timing (Renvela suspension Q1FY18 launch vs JEFe Q4FY18). Approval pace also remains one of the highest among peers with 16 approvals in FY18YTD.
Renvela approval validates R&D strength
The recent approvals for Renvela suspension addresses the concerns on R&D quality, in our view. R&D strength should be assessed on two parameters (i) complexity of products and (ii) quality of filings. Aurobindo, in our view, has made one of the better quality filings as reflected in its ability to receive approval in a shorter time frame. The recent approvals for Renvela and meropenem also addresses its ability to get complex approvals. In fact, in Renvela, Auro was a late filer but is the first to receive approval, even as peers like Lupin and Cipla have struggled over the years.
Near term earnings upside; best placed to overcome pricing challenge
Aurobindo remains our preferred pick in the large cap space ,trading at 12.5x FY19e P/E, a 20%+ discount to peers. However, it has much better visibility and growth in earnings. Its diversified portfolio, large product pipeline and better quality filings lend support to the topline, while its cost leadership makes it best suited to mitigate US pricing pressures, in our view. Further, Renvela approval also increases possibility of earnings upgrade. Any 3m exclusivity in Renvela Tablet (JEFe: Q3FY18 launch in three player market) should lead to a 3% EPS upgrade.
We adjust our EPS for the recent launches and our FY18e-19e EPS increase by 5-2%. Despite the recent run-up the stock is still trading at 12.8x FY19e P/E, a 20% discount to peers. Retain Buy with a revised PT of `780 (from `750) based on a target 15x FY19E P/E (10% discount to peers). Risks: Delays in approvals or deterioration in the balance sheet.
Renvela — a key positive
Aurobindo is the first generic to receive Sevelamer generic approval despite being one of the last filers. While multiple generics including Lupin, Cipla, and Actavis have filed for the product they have struggled to get approval. In fact, Lupin the first filer has now guided for a late FY19 approval at best. The approval then addresses the key investor concern on quality of R&D and ANDA filings. We have highlighted that Aurobindo despite being a late filer in most products has had much better quality of filings which will aid faster approval and better returns. This approval validates the same.
Positive surprise to near term earnings
The Renvela approval also raises possibility of earnings upgrade in FY18/19: (i) Lower competition in suspension – Aurobindo will likely remain the only generic for the near term in Renvela suspension. Most peers have indicated a 2HFY18 or FY19 timeframe for approval but they have seen consistent delays. We build a 4m exclusivity for Auro. Any additional 3m exclusivity should add 1% to earnings. (ii) Tablet launch — We build a tablet launch from end Q3FY18 but along with 2-3 more players. There is the possibility of exclusivity for Aurobindo if peers’ approvals are delayed. Any 3m exclusivity should lead to 3% upgrade to earnings.