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Aurobindo Pharma
Reuters: ARBN.BO Bloomberg: ARBP IN Exchange: BSE Ticker: ARBN
US FDA event not as serious as made out to be
Only 3% of current revenues and ~5% of EBIDTA could get impacted
With ~50% of US FDA inspections failing, 483s and Warning letters (WL) is a way
of life for drug suppliers to US. However Import Alert (IA) for Unit VI of Aurobindo
(APL), and without the formal letter yet, is a big surprise. Analysis indicates that
time gap between date of such letters and their being in public domain is rising.
With multiple units, APL has lower concentration risk. Only ~3% of revenue and
probably ~5% of EBIDTA is at risk. Cut estimates & TP by upto 8%. Maintain Buy
on improving cash flows and attractive valuations.
Surprise US FDA (FDA) Import Alert (IA) raises significant concerns
On 23
rd
Feb, Aurobindo (APL) announced that FDA has issued an IA on its website
dated 7
th
Feb preventing the import of any generics manufactured at APL’s Unit VI.
Investor concerns as seen in the 37% drop in stock price centre around (a) Is the
issue serious to warrant an IA (b) Was there a delay in disclosures (c) How much is
the short term (ST) and Long Term (LT) impact on financials and credibility.
Issue not as serious as seen in ~24% fall in stock price
(a) Until the formal FDA letter is delivered and is in public domain, the issue seems
serious. But with 50% failure rate for the 10,000 FDA inspections in last decade,
cGMP issues are a way of life for any drug supplier to US. (b) Time-lag between
issuance of such letters and its availability in public domain has risen to ~2 weeks
with most stocks reacting during this time. (c) With 4 FDA approved plants now,
APL has lower concentration risk. With only ~4 ANDAs for small drugs pending
approvals from Unit VI, growth potential is not impacted. Unit VI exports to US
accounted for ~3% of revenues. We estimate ~1-2 years for re-approval at a cost
of ~USD 8m. One-time inventory loss would be ~USD 2m. This would constrain
EBIDTA & PBT by ~6%. As per press, Pfizer Inc, which has a large sourcing deal
with APL, said it would support APL after understanding the issues raised by FDA.
Cut estimates & TP by ~upto 8%; maintain Buy; Risks
Cut estimates by <7%. Maintaining 40% discount to Mar’12e sector valuation, cut
TP by 8% to INR 280 (10.9x Mar’12e). APL is well-prepared for FCCB redemption
of ~USD 205m in May. Risks: (a) Regulatory (FDA) issues (b) execution risks, etc.
Import Alert
APL’s large manufacturing base
APL has a large manufacturing base with separate modular capacities
„ As seen in Figs 1 & 2, APL has a large range of capacities for APIs (Active Pharma
Ingredients or bulk drugs) and formulations.
„ Each of the product classes – non betallactums, penicillins, cephalosporins, ARVs and
other drugs - need to have individual capacities and in separate buildings.
„ Most of APL’s new capacities are separate modular units so as to meet regulatory
requirements, for future phased expansions and for isolation for any specific sub-section.
Figure 1: Details on Aurobindo’s manufacturing plants
Category Unit No. Location Therapeutic segment Approved by
Formulations Unit III India Non-Betallactums Oral US FDA, MHRA (UK), WHO, Health Canada, MCC (SA), ANVISA (Brazil), TGA (Australia)
Unit VII (SEZ) India Non-Betallactums Oral US FDA, MHRA (UK), EU-GMP, ANVISA (Brazil), TGA-GMP (Australia)
NJ Unit USA Non-Betallactums Oral US FDA
Unit VI B India Cephs (Oral & Sterile) US FDA, Health Canada, MCC (SA), ANVISA (Brazil), NAM (Finland)
Unit XII India SSPs (Oral & Sterile) US FDA, MHRA (UK), Health Canada, MCC (SA), ANVISA (Brazil)
APIs Unit I India Non-Betallactums US FDA, MHRA (UK), WHO, TGA (Australia)
Unit VIII India GI, Anti-retrovirals US FDA, MHRA (UK), WHO, TGA (Australia)
Unit XI B India Anti-retrovirals US FDA, MHRA (UK), WHO
Unit IA India Cephalosporins (Non sterile) US FDA, MHRA (UK), TGA (Australia)
Unit VI A India Cephalosporins (Sterile) US FDA, Health Canada, WHO, NAM (Finland)
Unit V India SSPs (Sterile & Non sterile) US FDA, TGA (Australia)
Intermediates Unit IX India
Unit X India
Unit XI A India
Fermentation China
Source: Company, Note:, SSP= Semi Synthetic Penicillin,, GI= Gastrointestinals
FDA issues IA to Unit VI
Divergence between FDA website and company’s press release on IA
While FDA’s Import Alert on its website dated 7
th
Feb was for Unit VI and IV of APL, the latter
issues a press release on 23
rd
Feb stating that only Unit VI received an IA
However company gets clarification that only Unit VI has the IA
„ Unit IV is a new unit for manufacture of non-oncology, non-antibiotic injectibles and is
expected to be commercialized by end of current calendar.
„ It has neither been inspected by FDA.
„ In APL’s discussions with FDA, the latter clarifies that only Unit VI is under IA. Both
sections of Unit VI (VI A for API and VI B for formulations) face an IA
Investor concerns seem
overdone
Failure rates of FDA inspection is as high as 50% in last decade and is now climbing
„ Bloomberg Finance LP data shows that average failure rate is ~50% for the 10,000 plant
inspections undertaken by the FDA last decade.
„ While the failure rate declined to the decade low of 45% in 2007, it has since climbed
rapidly to 54% - the highest in the decade
„ Select data on plant inspections show that even innovators – Abbott, Pfizer and Merck
have a much higher failure rate than 50% average for last decade.
1) Is the issue so serious to warrant an IA?
The plant approval process
„ Immediately post an inspection, the FDA gives its set of observations as 483
(observation findings) to the company, who is asked to reply in 15 working days
„ In case the FDA is not fully satisfied with the replies, there would be the next round of
private communication. If the FDA believes that the variance from the cGMP norms is
large, it issues a list of 483s with the copy posted on its website for public perusal.
„ The company is given a fixed time frame to answer to these 483s. In case significant
variance persists, FDA may issue a Warning Letter (WL), which is also posted on its
website.
„ If a re-inspection reveals persistence of these significant issues, the FDA issues an
Import Alert.
FDA now seems to be issuing IAs prior to WL
We believe that in recent times, FDA has come across companies trying to dump large stock
into the market place, in case they believe that an IA may be issued. Hence, FDA has now
commenced issuing IAs, within a short time of inspection and even before the issuance of
any formal letters (483, WL, etc). This has been seen since Mar’10, wherein Apotex, Claris
and Aurobindo have received IA without WL.
Until the official communication, we would presume that the issue is serious for APL.
Companies have typically taken much more than 2 years to have their IAs cleared. Hence we
would assume that the issue is reasonably serious for APL.
2) Was there a delay in disclosure
IA does not seem to be a document, but just an Advisory to US Customs
„ Despite extensive sampling for last 3 years, we have not seen any formal IA document.
„ In the past, IA was accompanied by the WL as was seen for Ranbaxy. However as
stated above, since Mar’10 FDA seems to be issuing IA much before WL.
„ Hence IA seems like an advisory to Customs without any significant details.
Increasing time gap between the FDA dates & press release
In Fig 5, we have arranged companies chronologically. As seen in the last row in Fig 5, the
time gap between the FDA dates and the press release of individual companies has been
increasing. While WL for Sanofi’s Frankfurt plant is dated 9 Feb’11, the news came in press
on 23 Feb’11. APL indicates that it is yet to get any formal communication of the IA.
APL states that it will get a formal communication shortly
APL states that on being approached for clarification, FDA advised it to await the official
communication and then come back for discussion.
Stock movements for peers indicate that markets do not await formal communication
We have analysed the stock prices of various companies preceding and post the event
(issuance of 483/ WL/ IA) and the time gap between the event and its disclosure:
„ Stock price of Caraco fell by 52% in the month leading to the IA (25 Jun’09), while it
jumped 28% post the receipt of the IA
„ Stock price of Lupin fell by ~10% in the month leading to the issuance of the 483 letter
(12 Nov’08) and stabilized thereafter
„ Stock price of Ranbaxy fell by ~18% in the month leading to the issuance of the IA letter
(16 Sept’08) and then also had a free fall thereafter
„ Stock price of APL fell by ~12% in the month leading to the issuance of the IA letter (7
Feb’11) and then also had a free fall of 19% post the announcement.
3) What is the ST and LT impact on credibility of APL?
A significant overhang on ST reputation increases execution risks
„ As stated above, all drug manufacturers globally (including innovators) face significant
cGMP issues with the regulators (mainly FDA).
„ FDA will likely be a bit more stringent in the inspection of any other plant of APL.
Furthermore incase it discovers similar cGMP issues in other plants, it could lead to a swift
IA even for that plant as was seen with Apotex.
„ While every regulator has his own norms, such action by FDA may force other regulators
to be more stringent. However, despite having problems with FDA, we have seen Ranbaxy
and others getting approval from other regulators (UK, Japan, Australia, S.Africa, etc)
„ APL also has supply deals with a few companies – Pfizer, AstraZeneca, etc. These
companies could also be a bit more careful in their dealings with APL in future.
However none of its sites come up for FDA inspection in the next 2-3 quarters
„ Unit VI was re-approved by 6 major regulatory agencies in CY10
„ Its new SEZ (Unit VII) has been approved by FDA in Jul’10
„ Unit III was re-approved by FDA in 3Q CY10
We believe that none of its units comes up for FDA inspection in next 2-3 quarters.
Pfizer indicates its support to APL, after getting into the crux of the FDA issues
Pfizer sources 4 injectibles (cefazolin, cefotaxime, ceftazidime and ceftriaxone) and 1 oral
drug from this Unit. As per press, Pfizer Inc, which has a large sourcing deal with APL, said it
would support APL after understanding the issues raised by FDA.
This issue has little LT implications
With these issues expected to be sorted in next 2 years, we expect limited LT implications.
4) What is the short term (ST) and Long Term (LT) on financials?
With multiple manufacturing units, APL appears significantly protected
Unlike peers who have fewer FDA approved manufacturing units, APL with its 4 FDA
approved units currently on a lower US revenue base, appears significantly protected.
Unit VI, an old & small unit working at full capacity, (~USD 35m rev from US)
„ Unit VI produces bulk and formulations for oral and sterile (injectible) cephalosporin drugs
„ Unit VI accounts for ~3% of the total capacity of APL and works at rated capacities.
„ It generated revenues of ~USD 100m for FY11e (year to Mar’11e). This was made of
~USD 35m formulations to US (largely oral), ~USD 15m of non-US formulations and the
balance was APIs to Unregulated Markets.
What does the IA for Unit VI mean for APL?
„ APL will entirely lose annual revenues of USD 35m of US formulations from Unit VI. On
the FY11e projected revenue of ~940m, this amounts to < 4%.
„ No new product approval in US from Unit VI till it is reapproved. However we believe
that there are only 3-4 ANDAs pending approvals from Unit VI with the FDA. Again these
are small products. Hence the impact of future growth also will be nominal.
„ APL indicates that inventory worth USD 2m from Unit VI is in transit for US. With FDA
not asking for product withdrawals from US retail or distribution chains, the inventory
loss for APL will be limited to ~USD 2m
„ We estimate re-approvals to take 1-2 years at an additional cost of ~USD 8m
„ APL indicates that the USD 35m revenues had EBIDTA of ~USD 3m (ie ~9% margin).
For APL, our cost projections are given below resulting in ~18% EBITDA margin in
FY11e. For USD 35m US revenues from Unit VI, we project the cost break-up as given
below. The IA will result in no US formulation revenues and hence EBITDA loss of ~USD
8m.
„ In the worst case scenario, there will be no US formulation exports (USD 40m) from Unit
VI – resulting in a 3% fall in revenues. EBITDA will be lower by USD 15m (loss of USD
8m, loss of earlier EBIDTA of USD 3m and additional costs of re-approval of ~USD 4m
per year)
„ For a better scenario, we assume that the plant will use US capacities for other markets
and hence total EBITDA fall of USD 13m (loss of USD 6m, loss of earlier EBIDTA of USD
3m and additional costs of re-approval of ~USD 4m)
„ In both these cases, loss of EBIDTA and PBT is ~5-6%.
Cut estimates & TP, Buy; Risks
Company well prepared to redeem convertibles in May’11e
FCCB redemption is not a concern
We believe that the company had cash of ~USD 60m on 31 Dec’10. It expects this to
increase by USD 30-40m from internal accruals and from the recent sale of its China
subsidiary. It also plans to draw down from its large unutilized lines of export credit. All these
are expected to help it redeem USD 205m of convertibles (FCCBs) in May'11e.
Cut estimates & TP
Cut estimates
Post the IA, we cut revenue estimates by ~3% for each of FY12e and FY13e. This, as the
cost of re-approvals will likely constrain EBITDA and PAT by ~7%..
Cut TP by 8%, maintain BUY
Considering that APL is (a) largely a commodity play (45% of revenues from low-margin and
volatile APIs) and (b) no exposure to high-margin and stable branded generics in semiregulated markets as compared to peers, we maintain 40% discount to Mar’12e and cut TP
by 8% to INR 280 (10.9x Mar’12e). Maintain Buy
Risks
„ Re-approval risks for other units by FDA and other regulators.
„ Inability to get Unit VI re-approved quickly
„ Execution risks due to increasing complexity of logistics, given the sharp increase in
number of product approvals across markets
„ Increasing dependence on Pfizer (from 7% of FY10 revenues to an estimated 13% in
FY13e)
„ Pricing pressures
„ INR appreciation against other currencies
Attribution
"The author of this report wishes to acknowledge the contribution made by Alok Barnwal, an
employee of AMBA research, a third party provider to Deutsche Bank of offshore research
support services."
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Aurobindo Pharma
Reuters: ARBN.BO Bloomberg: ARBP IN Exchange: BSE Ticker: ARBN
US FDA event not as serious as made out to be
Only 3% of current revenues and ~5% of EBIDTA could get impacted
With ~50% of US FDA inspections failing, 483s and Warning letters (WL) is a way
of life for drug suppliers to US. However Import Alert (IA) for Unit VI of Aurobindo
(APL), and without the formal letter yet, is a big surprise. Analysis indicates that
time gap between date of such letters and their being in public domain is rising.
With multiple units, APL has lower concentration risk. Only ~3% of revenue and
probably ~5% of EBIDTA is at risk. Cut estimates & TP by upto 8%. Maintain Buy
on improving cash flows and attractive valuations.
Surprise US FDA (FDA) Import Alert (IA) raises significant concerns
On 23
rd
Feb, Aurobindo (APL) announced that FDA has issued an IA on its website
dated 7
th
Feb preventing the import of any generics manufactured at APL’s Unit VI.
Investor concerns as seen in the 37% drop in stock price centre around (a) Is the
issue serious to warrant an IA (b) Was there a delay in disclosures (c) How much is
the short term (ST) and Long Term (LT) impact on financials and credibility.
Issue not as serious as seen in ~24% fall in stock price
(a) Until the formal FDA letter is delivered and is in public domain, the issue seems
serious. But with 50% failure rate for the 10,000 FDA inspections in last decade,
cGMP issues are a way of life for any drug supplier to US. (b) Time-lag between
issuance of such letters and its availability in public domain has risen to ~2 weeks
with most stocks reacting during this time. (c) With 4 FDA approved plants now,
APL has lower concentration risk. With only ~4 ANDAs for small drugs pending
approvals from Unit VI, growth potential is not impacted. Unit VI exports to US
accounted for ~3% of revenues. We estimate ~1-2 years for re-approval at a cost
of ~USD 8m. One-time inventory loss would be ~USD 2m. This would constrain
EBIDTA & PBT by ~6%. As per press, Pfizer Inc, which has a large sourcing deal
with APL, said it would support APL after understanding the issues raised by FDA.
Cut estimates & TP by ~upto 8%; maintain Buy; Risks
Cut estimates by <7%. Maintaining 40% discount to Mar’12e sector valuation, cut
TP by 8% to INR 280 (10.9x Mar’12e). APL is well-prepared for FCCB redemption
of ~USD 205m in May. Risks: (a) Regulatory (FDA) issues (b) execution risks, etc.
Import Alert
APL’s large manufacturing base
APL has a large manufacturing base with separate modular capacities
„ As seen in Figs 1 & 2, APL has a large range of capacities for APIs (Active Pharma
Ingredients or bulk drugs) and formulations.
„ Each of the product classes – non betallactums, penicillins, cephalosporins, ARVs and
other drugs - need to have individual capacities and in separate buildings.
„ Most of APL’s new capacities are separate modular units so as to meet regulatory
requirements, for future phased expansions and for isolation for any specific sub-section.
Figure 1: Details on Aurobindo’s manufacturing plants
Category Unit No. Location Therapeutic segment Approved by
Formulations Unit III India Non-Betallactums Oral US FDA, MHRA (UK), WHO, Health Canada, MCC (SA), ANVISA (Brazil), TGA (Australia)
Unit VII (SEZ) India Non-Betallactums Oral US FDA, MHRA (UK), EU-GMP, ANVISA (Brazil), TGA-GMP (Australia)
NJ Unit USA Non-Betallactums Oral US FDA
Unit VI B India Cephs (Oral & Sterile) US FDA, Health Canada, MCC (SA), ANVISA (Brazil), NAM (Finland)
Unit XII India SSPs (Oral & Sterile) US FDA, MHRA (UK), Health Canada, MCC (SA), ANVISA (Brazil)
APIs Unit I India Non-Betallactums US FDA, MHRA (UK), WHO, TGA (Australia)
Unit VIII India GI, Anti-retrovirals US FDA, MHRA (UK), WHO, TGA (Australia)
Unit XI B India Anti-retrovirals US FDA, MHRA (UK), WHO
Unit IA India Cephalosporins (Non sterile) US FDA, MHRA (UK), TGA (Australia)
Unit VI A India Cephalosporins (Sterile) US FDA, Health Canada, WHO, NAM (Finland)
Unit V India SSPs (Sterile & Non sterile) US FDA, TGA (Australia)
Intermediates Unit IX India
Unit X India
Unit XI A India
Fermentation China
Source: Company, Note:, SSP= Semi Synthetic Penicillin,, GI= Gastrointestinals
FDA issues IA to Unit VI
Divergence between FDA website and company’s press release on IA
While FDA’s Import Alert on its website dated 7
th
Feb was for Unit VI and IV of APL, the latter
issues a press release on 23
rd
Feb stating that only Unit VI received an IA
However company gets clarification that only Unit VI has the IA
„ Unit IV is a new unit for manufacture of non-oncology, non-antibiotic injectibles and is
expected to be commercialized by end of current calendar.
„ It has neither been inspected by FDA.
„ In APL’s discussions with FDA, the latter clarifies that only Unit VI is under IA. Both
sections of Unit VI (VI A for API and VI B for formulations) face an IA
Investor concerns seem
overdone
Failure rates of FDA inspection is as high as 50% in last decade and is now climbing
„ Bloomberg Finance LP data shows that average failure rate is ~50% for the 10,000 plant
inspections undertaken by the FDA last decade.
„ While the failure rate declined to the decade low of 45% in 2007, it has since climbed
rapidly to 54% - the highest in the decade
„ Select data on plant inspections show that even innovators – Abbott, Pfizer and Merck
have a much higher failure rate than 50% average for last decade.
1) Is the issue so serious to warrant an IA?
The plant approval process
„ Immediately post an inspection, the FDA gives its set of observations as 483
(observation findings) to the company, who is asked to reply in 15 working days
„ In case the FDA is not fully satisfied with the replies, there would be the next round of
private communication. If the FDA believes that the variance from the cGMP norms is
large, it issues a list of 483s with the copy posted on its website for public perusal.
„ The company is given a fixed time frame to answer to these 483s. In case significant
variance persists, FDA may issue a Warning Letter (WL), which is also posted on its
website.
„ If a re-inspection reveals persistence of these significant issues, the FDA issues an
Import Alert.
FDA now seems to be issuing IAs prior to WL
We believe that in recent times, FDA has come across companies trying to dump large stock
into the market place, in case they believe that an IA may be issued. Hence, FDA has now
commenced issuing IAs, within a short time of inspection and even before the issuance of
any formal letters (483, WL, etc). This has been seen since Mar’10, wherein Apotex, Claris
and Aurobindo have received IA without WL.
Until the official communication, we would presume that the issue is serious for APL.
Companies have typically taken much more than 2 years to have their IAs cleared. Hence we
would assume that the issue is reasonably serious for APL.
2) Was there a delay in disclosure
IA does not seem to be a document, but just an Advisory to US Customs
„ Despite extensive sampling for last 3 years, we have not seen any formal IA document.
„ In the past, IA was accompanied by the WL as was seen for Ranbaxy. However as
stated above, since Mar’10 FDA seems to be issuing IA much before WL.
„ Hence IA seems like an advisory to Customs without any significant details.
Increasing time gap between the FDA dates & press release
In Fig 5, we have arranged companies chronologically. As seen in the last row in Fig 5, the
time gap between the FDA dates and the press release of individual companies has been
increasing. While WL for Sanofi’s Frankfurt plant is dated 9 Feb’11, the news came in press
on 23 Feb’11. APL indicates that it is yet to get any formal communication of the IA.
APL states that it will get a formal communication shortly
APL states that on being approached for clarification, FDA advised it to await the official
communication and then come back for discussion.
Stock movements for peers indicate that markets do not await formal communication
We have analysed the stock prices of various companies preceding and post the event
(issuance of 483/ WL/ IA) and the time gap between the event and its disclosure:
„ Stock price of Caraco fell by 52% in the month leading to the IA (25 Jun’09), while it
jumped 28% post the receipt of the IA
„ Stock price of Lupin fell by ~10% in the month leading to the issuance of the 483 letter
(12 Nov’08) and stabilized thereafter
„ Stock price of Ranbaxy fell by ~18% in the month leading to the issuance of the IA letter
(16 Sept’08) and then also had a free fall thereafter
„ Stock price of APL fell by ~12% in the month leading to the issuance of the IA letter (7
Feb’11) and then also had a free fall of 19% post the announcement.
3) What is the ST and LT impact on credibility of APL?
A significant overhang on ST reputation increases execution risks
„ As stated above, all drug manufacturers globally (including innovators) face significant
cGMP issues with the regulators (mainly FDA).
„ FDA will likely be a bit more stringent in the inspection of any other plant of APL.
Furthermore incase it discovers similar cGMP issues in other plants, it could lead to a swift
IA even for that plant as was seen with Apotex.
„ While every regulator has his own norms, such action by FDA may force other regulators
to be more stringent. However, despite having problems with FDA, we have seen Ranbaxy
and others getting approval from other regulators (UK, Japan, Australia, S.Africa, etc)
„ APL also has supply deals with a few companies – Pfizer, AstraZeneca, etc. These
companies could also be a bit more careful in their dealings with APL in future.
However none of its sites come up for FDA inspection in the next 2-3 quarters
„ Unit VI was re-approved by 6 major regulatory agencies in CY10
„ Its new SEZ (Unit VII) has been approved by FDA in Jul’10
„ Unit III was re-approved by FDA in 3Q CY10
We believe that none of its units comes up for FDA inspection in next 2-3 quarters.
Pfizer indicates its support to APL, after getting into the crux of the FDA issues
Pfizer sources 4 injectibles (cefazolin, cefotaxime, ceftazidime and ceftriaxone) and 1 oral
drug from this Unit. As per press, Pfizer Inc, which has a large sourcing deal with APL, said it
would support APL after understanding the issues raised by FDA.
This issue has little LT implications
With these issues expected to be sorted in next 2 years, we expect limited LT implications.
4) What is the short term (ST) and Long Term (LT) on financials?
With multiple manufacturing units, APL appears significantly protected
Unlike peers who have fewer FDA approved manufacturing units, APL with its 4 FDA
approved units currently on a lower US revenue base, appears significantly protected.
Unit VI, an old & small unit working at full capacity, (~USD 35m rev from US)
„ Unit VI produces bulk and formulations for oral and sterile (injectible) cephalosporin drugs
„ Unit VI accounts for ~3% of the total capacity of APL and works at rated capacities.
„ It generated revenues of ~USD 100m for FY11e (year to Mar’11e). This was made of
~USD 35m formulations to US (largely oral), ~USD 15m of non-US formulations and the
balance was APIs to Unregulated Markets.
What does the IA for Unit VI mean for APL?
„ APL will entirely lose annual revenues of USD 35m of US formulations from Unit VI. On
the FY11e projected revenue of ~940m, this amounts to < 4%.
„ No new product approval in US from Unit VI till it is reapproved. However we believe
that there are only 3-4 ANDAs pending approvals from Unit VI with the FDA. Again these
are small products. Hence the impact of future growth also will be nominal.
„ APL indicates that inventory worth USD 2m from Unit VI is in transit for US. With FDA
not asking for product withdrawals from US retail or distribution chains, the inventory
loss for APL will be limited to ~USD 2m
„ We estimate re-approvals to take 1-2 years at an additional cost of ~USD 8m
„ APL indicates that the USD 35m revenues had EBIDTA of ~USD 3m (ie ~9% margin).
For APL, our cost projections are given below resulting in ~18% EBITDA margin in
FY11e. For USD 35m US revenues from Unit VI, we project the cost break-up as given
below. The IA will result in no US formulation revenues and hence EBITDA loss of ~USD
8m.
„ In the worst case scenario, there will be no US formulation exports (USD 40m) from Unit
VI – resulting in a 3% fall in revenues. EBITDA will be lower by USD 15m (loss of USD
8m, loss of earlier EBIDTA of USD 3m and additional costs of re-approval of ~USD 4m
per year)
„ For a better scenario, we assume that the plant will use US capacities for other markets
and hence total EBITDA fall of USD 13m (loss of USD 6m, loss of earlier EBIDTA of USD
3m and additional costs of re-approval of ~USD 4m)
„ In both these cases, loss of EBIDTA and PBT is ~5-6%.
Cut estimates & TP, Buy; Risks
Company well prepared to redeem convertibles in May’11e
FCCB redemption is not a concern
We believe that the company had cash of ~USD 60m on 31 Dec’10. It expects this to
increase by USD 30-40m from internal accruals and from the recent sale of its China
subsidiary. It also plans to draw down from its large unutilized lines of export credit. All these
are expected to help it redeem USD 205m of convertibles (FCCBs) in May'11e.
Cut estimates & TP
Cut estimates
Post the IA, we cut revenue estimates by ~3% for each of FY12e and FY13e. This, as the
cost of re-approvals will likely constrain EBITDA and PAT by ~7%..
Cut TP by 8%, maintain BUY
Considering that APL is (a) largely a commodity play (45% of revenues from low-margin and
volatile APIs) and (b) no exposure to high-margin and stable branded generics in semiregulated markets as compared to peers, we maintain 40% discount to Mar’12e and cut TP
by 8% to INR 280 (10.9x Mar’12e). Maintain Buy
Risks
„ Re-approval risks for other units by FDA and other regulators.
„ Inability to get Unit VI re-approved quickly
„ Execution risks due to increasing complexity of logistics, given the sharp increase in
number of product approvals across markets
„ Increasing dependence on Pfizer (from 7% of FY10 revenues to an estimated 13% in
FY13e)
„ Pricing pressures
„ INR appreciation against other currencies
Attribution
"The author of this report wishes to acknowledge the contribution made by Alok Barnwal, an
employee of AMBA research, a third party provider to Deutsche Bank of offshore research
support services."
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