Aurobindo Pharma has demonstrated its strength in high-value generic formulations outside its established expertise in antibiotic cephalosporins. The company has filed over 30 new drug applications consistently each year in the US market, with 70 filings in FY14 and over 40 in H1FY15. The product pipeline, with over 180 applications pending approval, is one of the widest in the US market. Long-term drivers are peptides, oncology, hormones, softgels and nutraceuticals.
We believe Indian generics, which have a 4% market share by volume in injectables in the US (compared with a 26% share of the total generic US market) have a lot of potential there. Of the $25 billion total market opportunity in the next five years, $7 billion is off-patent. Though Aurobindo is currently the third-largest player among Indian injectables, its pipeline is strong and we believe overall sales in injectables will more than quadruple in the next two years.
We believe the stock’s re-rating is mostly done but the earnings growth outlook is robust. We forecast an EPS CAGR of 27% in FY15-17e led by the US and EU. We expect capex at R600 crore for the next two years; our ROIC improves from 20% in FY15e to 23.7% by FY17e. We value Aurobindo at 19.5x March-17e EPS of R81.3 to arrive at our target price of R1,586. Key downside risks are slow approvals in the US and slower margin improvement in the acquired business in the EU.