Aurobindo Pharma
BUY
Price: Rs956 Target: Rs1,070 (Mar’11)
Broadening portfolio
* 3Q10 sales missed but profits were ahead of estimate: Aurobindo’s 3QFY10
adjusted net profit of Rs1.5bn beat our estimate. However, sales of Rs8.4bn (up
11% YoY) was lower QoQ and below our estimate of Rs9.6bn. Sales at Rs 8.36bn
was up 11% YoY and c. 13% below our estimate of Rs9.57bn. However, higher
dossier income and in-line EBIDTA margin (ex-dossier income) led to profits
being higher.
* Delay in FDA approval for SEZ led to sales miss: US sales grew 55% YoY but
were flat sequentially and 20% below estimate. Europe and ARV were also below
expectation. With 12 new US launches in 9MFY10, we were expecting sequential
improvement in sales. However, due to lack of capacities in non-pen-non-ceph
block and delay in receiving FDA approval for SEZ, US sales suffered. SSPs
declined mainly due to oral business, whereas injectable cephs grew well.
Company has guided to total income of Rs37bn in FY10.
* Pfizer relationship scaling up: Aurobindo has now signed over 85 products in
US/EU each, 60 in ROW, over 40 in Australia/NZ and 14 in Canada with Pfizer.
For ROW itself, it is addressing over 130 countries with a total of over 7000
dossiers. It has already filed c.40% of dossiers for these markets and has
received an estimated c. Rs2.5bn so far. Management is in talks with other
potential partners and has visibility of this revenue stream for next two years.
* Broadening pipeline: On the back of expanding dossier relationship, Aurobindo
has recently made forays into injectables (through Trident buyout), controlled
substances (investment in US), oral contraceptives and contract manufacturing.
With this, we believe it has broadened its pipeline significantly. It has invested
c.Rs9bn in capex over last two years and we estimate c.Rs6bn over FY11/12.
* Increase estimates by 6-10% and target price to Rs1070, BUY: We arrive at
Mar’11 target price of Rs1,070 based on 10x FY12E EPS. We have assumed
conversion of first two tranches and have built in refinance cost for the
remaining FCCB. Based on our assumptions, the impact of funding the last
tranche of FCCB through dilution at our target price will be 3%. The debt:equity
in such a case would be a very reasonable 0.2. Risk to our call is if Pfizer deal
were to fall through or if there are any FDA related issues.
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