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Aurobindo Pharma (ARBN.BO)
Alert: Takeaways from India Pharma Conf., Dec. 6-7
Takeaways from Mumbai — Aurobindo Pharma presented at our India Pharma
Mini-Conference in Mumbai. Below are key takeaways.
Revenues to double by CY13 — Aurobindo Pharma expects to double revenues
from current levels to cUS$2bn by CY13. This would be driven by a combination of
higher revenues from licensing deals (Pfizer, Astra Zeneca, etc., to make up
cUS$400-500m revenues.), ramp-up of its own US business and growth from its
own injectables business. Incremental revenues from RoW markets and API
business will also add to growth.
EBITDA margin expansion to continue — Gross margin expansion should continue,
as the company will keep deriving higher revenues from formulations and gain
economies of scale (as utilisation levels go up). Going forward, R&D cost, as a
percentage of sales, will also keep coming down, supporting EBITDA margins.
Emerging markets key to long-term growth — The deal with Pfizer includes 60
products to be marketed by Pfizer in around 110 countries. Besides, it also has a
smaller deal with Astra and continues to talk to other large pharma companies.
The ramp-up is likely to to be relatively slow (vis-à-vis the US/EU markets), as
filings and approvals of such a large portfolio would take longer. These deals
should be a key revenue driver and also drive higher margins.
Other key takeaways — 1) Aurobindo expects to be a zero debt company by
Mar’2013; 2) FCCBs (maturing in May 2011) liability is at US$204m - the
company expects to pay through internal accruals; 3) Aurobindo is eyeing the
controlled substances & Oral contraceptives opportunities in the US, but
development is at a nascent stage; 4) it is looking at growing in Europe through its
own set-up (Italy, Portugal, Spain) and partnerships (such as France with Pfizer);
5) It has 72 final approvals & 29 tentative approvals out of a total of 128 ANDA
filings; 6) In talks for partnerships in Japan - should see some progress in the near
term.
Maintain Buy — High growth should drive a re-rating in our view and lead to
material appreciation over the next 6-12 months.
Aurobindo Pharma
Valuation
We value Aurobindo using a sum of the parts approach. Given that pharma is a
growth sector, we use P/E as our primary method to value the base business of
pharma companies. We value Aurobindo’s core earnings on 14x 12m forward
FDEPS - a 30% discount to the target multiple of 20x that we use for sector
leaders such as Cipla and DRL. We believe that the discount is justified at this
point, given the possibility of equity dilution (to redeem FCCBs in case they do not
get converted), risk of an appreciating rupee (c20-25% net exposure) and higher
customer concentration (the Pfizer deal). At 14x Mar ‘12E EPS we value
Aurobindo’s core business at Rs1550/sh. We also value Aurobindo’s dossier
licensing income at 5x. We believe the lower multiple captures the fact that this
income stream may not be recurring, at current levels, over the longer term. At 5x
Mar'12 estimates, we value Aurobindo’s dossier licensing income at Rs80/sh.
Cumulatively, we arrive at our target price of Rs1630/sh.
Risks
We rate Aurobindo Medium Risk as opposed to the Low Risk assigned by our
quantitative risk-rating system, which tracks 260-day historical share price
volatility. We maintain Medium Risk as the recent run-up in the stock and
convertible bonds maturing in May 2011 could prove to be a technical overhang if
the stock continues to rise. Key downside risks that could impede the stock from
reaching our target price include (1) Fresh equity dilution if FCCBs do not get
converted; (2) Execution hiccups in the supply deal with Pfizer; (3) Currency Risk
- an appreciating INR would be structurally negative.
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