India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Aurobindo Pharma Limited
Execution mode
Investment rationale
Pfizer-like deals improve execution capabilities of Aurobindo
Aurobindo Pharma (Aurobindo) has over the years emerged as a preferred
supplier to global pharma majors and has entered into long-term supply
contracts with them. It has entered into a 15-year licensing and supply
arrangement with Pfizer for the supply of 40 products in the orals and injectable
segment. As per the agreement, Pfizer will in-license an array of generic pills
and injectable medicines from Aurobindo, as it looks at off-patent medicines
for the growth. We estimate that the deal with Pfizer can boost revenue by
USD200m by FY14e for the company. The current agreements are targeted
towards US and European markets and will continue to explore ways to
further extend this partnership.
Pfizer sales witnessed a pick-up in Europe during 2QFY11 and we expect the
sales to Rest of the World (RoW) to commence during 2HFY11. A major part
of the revenue for Aurobindo is now emerging from this out-licensing and
dossier deals with Pfizer. It has also signed a licensing and supply deal with
AstraZeneca during the quarter for marketing its products in emerging markets.
Deals improve utilisation levels and allow entry into niche segments
Aurobindo is moving up the value chain by entering niche formulation segments
of oral contraceptives, controlled substances as well as injectables. Pfizer
and AstraZeneca deals help increasing presence in the branded generic
segment and improving utilisation levels of existing infrastructure resulting in
better realisation on sales generated in the regulated markets.
Valuation and outlook
At the CMP of INR1,298, the stock trades at a PE and EV/EBIDTA of 10.3x
and 7x of its FY12e earnings respectively. We reiterate our BUY with an upward
revised target price of INR1,641, as we expect increased supply arrangements
with big pharmacos, strong ARV business, increased revenues from regulated
markets and consistent deleveraging to drive growth in coming years.
Investment rationale
Pfizer-like deals improve execution capabilities of Aurobindo
Aurobindo has over the years emerged as a preferred supplier to global pharma
majors and has entered into long-term supply contracts with them. It has entered into
a 15-year licensing and supply arrangement with Pfizer for the supply of 40 products
in the orals and injectable segment. As per the agreement, Pfizer will in-license an
array of generic pills and injectable medicines from Aurobindo, as it looks at offpatent
medicines for the growth. We estimate that the deal with Pfizer can boost
revenue by USD200m by FY14e. The current agreements are targeted towards US
and European markets and will continue to explore ways to further extend this
partnership.
Significant ramp up in capacity utilisation
The company has commissioned its formulation facility Unit VII in Hyderabad SEZ. It
has invested INR2.2bn for setting up a large manufacturing unit to cater to growing
demand for generic drugs from supply contracts and exports market. The facility would
cater to high value non-betallactum products for regulated markets and will further
enhance Aurobindo's capabilities in providing comprehensive pharma manufacturing,
distribution, services and solutions to its customers including global alliances. This
facility has an annual capacity to manufacture 6bn tablets (which can be increased
up to 18bn tablets with minimum incremental capex). We expect the capacity utilisation
to increase to 45-50% by the end of FY11e from the current levels of 30% (in three
months of operations). Increased product ramp-up from the Pfizer and AstraZeneca
deal will further lead the utilisation levels to increase by FY12e.
Streamlining operations for better performance
The company restructured its European operations and modified the product portfolio
by discontinuing low margin products and entering into licensing agreements with
MNCs. In these, revenues are in the form of milestone payments and supply contracts.
It has tie-ups with approximately 70 other formulators across EU countries and expects
a substantial chunk of revenues to flow in the coming quarters through other formulation
supplies. We expect the EU business to further ramp up in the coming quarters.
Increased allocations to PEPFAR and WHO aids ARV business
Aurobindo has the biggest basket of ARVs (anti-retrovirals) in the world. Given the
association with PEPFAR and the Clinton Foundation, the company is the largest
beneficiary in this segment. US has expanded the budget for PEPFAR from USD19bn
in CY08 by additional quantum of USD16.6bn in CY09 in order to increase the
scope of HIV medication. However, most of the allocated money currently remains
unutilised and thereby resulting in an opportunity for Aurobindo to bid for more
contracts and expand its revenues from the ARV business. The company is presently
scaling up its capacities to supply the ARVs in the developing markets of India, Africa
and Thailand.
Vertical integration maintains margins
Utilisation of its own APIs for its formulations has been the biggest advantage for
Aurobindo. Approximately 95% of its key intermediates and APIs are sourced captively.
This has helped Aurobindo broaden its product offerings from antibiotics & ARVs to
lifestyle related segments such as CVS, CNS and GI. We expect the company to shift
its focus from SPPs to high margin cephs. On the formulations front, it caters to the
high margin niche segments of oral contraceptives, controlled-release products, sterile
injectable and other lifestyle ailments. In the US, Aurobindo has 148 DMF filings - the
highest among Indian company - and has filed a total of 1,667 DMF filings globally.
We believe Aurobindo has a sustainable competitive advantage because of its
backward integration and large product filing.
Changing business-mix, increased capacities to expand margins
Aurobindo has transformed its business model from being a pure API play to a highend
formulations player with presence in the regulated markets of US and EU. Its
inorganic presence in the less-penetrated markets of Europe and US and changing
product mix in formulations segment such as oral contraceptives, controlled substances
and sterile injectables will result higher revenues in FY11e and FY12e. We expect the
company to reduce its focus on APIs as most of the output will be captively utilised.
With improving proportion of high-margin formulations, the gross margins are expected
to expand from 47% in FY09 to 54% in FY11e and 59% in FY12e. However,
manufacturing efficiencies and lower selling costs will result in margin expansion.
Moreover, higher employee cost due to scaling up of US and EU operations and RoW
will impact margins. EBIDTA margins are likely to improve from 16.8% in FY09 to
25% in FY11e.
Strengthening balance sheet
With rising contribution to the revenues from regulated markets, venturing into newer
business areas to improve capacity utilisation levels and focus on niche-APIs in the
domestic and international markets, we expect Aurobindo to generate strong operating
cash flow in the coming years. The company has incurred INR6bn in capex over the
past two years and we expect an additional capex of INR3bn over FY11-12. Healthy
operational cash flows should help the company improve its leverage from the present
1.0x to 0.3x in FY12e.
Valuation and outlook
The ramp-up in the regulated markets on the back of supply tie-ups across geographies
enables Aurobindo to have a better product mix with a transition towards selling highend
formulations. Additionally all concerns such as leveraged balance sheet, lower
growth, and profitability and return ratios have been effectively addressed. Aurobindo
has incurred all the required capex that can sustain growth and improve blended
utilisation rates from 65% to ~100% in the next few years.
We are of the view that Aurobindo’s transformation from an API player to formulation
player is almost complete. This would not only have a positive bearing on its growth,
but also improve its earnings quality as well. Hence, we raise our target P/E to 13x
arriving at a target price of INR1,641 and reiterate a BUY at current levels.
No comments:
Post a Comment