ARBP’s Q4FY18 revenues increased by 11% y-o-y, ~4% below our estimates, driven by a sharp 43% y-o-y fall in the ARV segment.
Aurobindo Pharma’s Q4FY18 revenues missed estimates, with US injectables and ARV segments driving ~4% revenue miss and higher R&D and SG&A spend leading to ~15% EBITDA and PAT miss. Slowdown in manufacturing to resolve the past recalls largely contributed to the injectables miss, with growth now contingent on ertapenem approval (H1FY19) and vancomycin launch (H2FY19). We cut FY2019/20E EPS by 8/7%. Add with a revised target price of Rs 640 (from Rs 690).
Weak quarter, as injectables and ARV segments drive a miss: ARBP’s Q4FY18 revenues increased by 11% y-o-y, ~4% below our estimates, driven by a sharp 43% y-o-y fall in the ARV segment. Notably, the US business posted revenues of $271 million, $4 million q-o-q lower than our estimates; within the US segment, injectables disappointed with $35 million revenues, $9 million lower than our estimate.
EU was strong in the quarter, growing at 48% y-o-y and exceeding our estimates by ~18%, even as the management suggested that the business has now achieved double-digit EBITDA margins. The big disappointment was in the ARV segment, which declined 43% y-o-y, driven by a combination of lower pricing as well as lower tender outlays in the quarter.
Gross margins were largely in line with our estimates at 58.8%, though higher R&D spend at 4.6% of sales (17% higher than estimates) resulted in PAT missing our estimates by 15%, with EBITDA margins at 19.9% as compared to our estimate of 22.5% (and 23.7% in Q3FY18). ARBP generated $93 million cash with net debt declining by $66 million to $540 million, missing FY2018 year-end guidance of $475 million; the management guided $100 million reduction in net debt in FY2019.
Manufacturing woes hurt injectables segment — vancomycin and ertapenem critical for FY2019: The $11 million q-o-q fall in injectables in Q4FY18 was largely driven by continuing product recalls from Unit-XII ($4-7 million), and resultant slowdown in production to address the root cause. Discontinuation of the bag line at Unit-IV ($3-4 million/quarter) further added to the pressures. On the positive side, both Unit-IV and Unit-XII received EIRs for the recent inspections, though EIR for the lyo block, at Unit-IV, is still awaited.
While we forecast US injectables to grow to $240 million in FY2019 from $165 million in FY2018, this is contingent on ertapenem and vancomycin, given our expectations of a steady base business (FY2019: $180 million). For FY2020, vancomycin RTU and cyclophosphamide RTU approvals should help maintain the injectables growth momentum, while omeprazole OTC launch in June 2018 (approval received), Welchol (Q2FY19) and Toprol-XL (H2FY19) will help maintain the momentum in US orals.
Valuations comforting: We cut our US forecasts for FY2019/20 by $65-70 million, though this is partially offset by higher USD/INR assumptions. We cut our FY2019/20E EPS by ~8% and ~7%, respectively to also factor in lower EBITDA margin, given higher R&D spend. Reiterate Add with a revised target price of Rs 640 (from Rs 690).