In our meeting, Mr Govindarajan (MD) emphasised that Aurobindo (ARBP) is well positioned to grow its US base business (46% of sales) led by (1) 40-45 launches with 20-25 approvals in FY20 and NBO^, (2) complex pipeline (oncology, derma, nasal assets) from FY20-21 and (3) inhalers, transdermals, depot, biosimilars FY22 onwards. Our visit to Unit-4 (injectables) and Aurobindo Biologics facilities reaffirms ARBP’s commitment to build cost-efficient pipeline for future growth. Given the recent warning letter on Unit 11 and OAI on Unit 1 and 9 would delay few approvals, we revise TP to Rs 715 (13x FY21E EPS) vs. Rs 800 (15x) earlier. We maintain BUY, as it is still well positioned for steady growth and margin given its strong pipeline. Its proposed acquisition (Sandoz select portfolio) could add EPS of Rs 9-10.
Received OAI (Official Action Indicated) on its API/Intermediate facilities largely on account of Sartans issue. Unit 11 received warning letter after our meeting. As per firm, Unit 11 has 7/5 pending approvals for FY20/21. Unit 3 (oral formulation) received 10 observations post USFDA inspection in May’19; ARBP has given detailed response on observations. It has total of 164 ANDA pipeline across 8 formulation facilities.
Expected debt/equity of 0.4x and debt/ EBITDA of 1.3x in FY20E; proposed Sandoz select portfolio acquisition at $900 mn (for $900 mn sales and ~20% EBITDA margin) could see debt/equity of 0.8x and debt/EBITDA of 2.3x in FY20E. Management remains comfortable given EPS-accretive acquisition. Of the 48 ANDA pipeline, it expects minimum 10 approvals (5 already approved) in FY20; Bag lines al-ong with 2nd new Lyophilized line at Unit 4 expected to resume from Q2FY20. Working on 6 products led by Dr. Satakarni (ex-Intas); aiming Bevacizumab biosimilar filing in EU ($1.9 bn market) by FY21; objective is to manufacture with best possible yields and be the last man standing even if prices go down significantly; key ophthalmic product (first wave) filing by end FY21/early FY22.