Analyst corner | ‘Add’ on Aurobindo Pharma; revised fair value at Rs 620

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Published: February 21, 2020 7:03:07 AM

ARBP received an EIR for Unit-IV sterile unit from the USFDA for the Nov 2019 inspection.

Analyst corner, ARBP, USFDA, ANDA, AG distribution contract, Sandoz acquisition, AG distribution contract, ARBP tradesARBP received an EIR for Unit-IV sterile unit from the USFDA for the Nov 2019 inspection.

ARBP announced that the USFDA has accorded a VAI status to its Unit-IV sterile facility. This is a meaningful positive, and comes as a surprise given the nature of observations, and the spate of regulatory actions in the sector, including ARBP. Sandoz deal closure is now the next key catalyst, and we expect focus to shift to revenue growth, where we see challenges beyond FY22, given the increasing US scale. Add.

ARBP received an EIR for Unit-IV sterile unit from the USFDA for the Nov 2019 inspection. Unit-IV is a key sterile unit, expected to account for ~$170 million or ~10% of FY20E sales, and has the largest number of filings pending approval at 47 ANDAs (of total 153 pending ANDAs, of which 15 are expected to be launched in FY21). Our estimates already assumed a clearance for Unit-IV; the clearance now de-risks our $280 million and $343 million revenue forecasts for the sterile business in FY21/22, respectively.

We expect Sandoz acquisition to close in March 2020, and see the evolution of Sandoz portfolio and pipeline as a key sensitivity for ARBP, with the acquisition also adding three facilities, potentially helping diversify its manufacturing network (or gain synergies). Sandoz’s top 10 products accounted for ~40% of sales in the oral solids bucket, including one >$100 million product (levothyroxine); three $50-60 million products, including penicillin franchise, potassium chloride, as well as two AGs (Focalin XR and Adderall XR); and several products in the $15-20 million bucket. While products such as the penicillin franchise are likely to be sticky, levothyroxine is likely to be a short-lived opportunity with Sandoz potentially set to lose the AG distribution contract by CY22. We continue to expect sharper erosion in the $50-60 million bucket, explaining the expected drop in oral solids from $750 million in CY17 to an expected $560 million, with topicals also likely to decline to $235 million by FY21.

The sharp 20% spike in the stock largely reflects the end of a negative USFDA catalyst cycle, as other key units, particularly Unit-X (cleared in April 2019) and Eugia (cleared in June 2018), which are critical for the orals business, are clean from a regulatory standpoint. ARBP trades at 11X FY21E EPS and 7X FY20E EV/Ebitda. While the stock is relatively inexpensive on EV/Ebitda multiples, we see meaningful revenue growth challenges beyond FY21. ‘Add’ with a revised fair value of Rs 620/share (from Rs 560).

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