Aurobindo’s debt pain recedes as Sandoz deal is off

Outlook positive, but firm needs other growth avenues

Aurobindo’s acquisition of Sandoz’s dermatology and oral solid generics portfolios in the US — which had been already facing delays — has now been called off.

The company said the decision was taken as approval from the US Federal Trade Commission for the transaction was not obtained within the anticipated timeline.

Aurobindo was scheduled to acquire the portfolio with an upfront purchase price of $900 million in cash, making it the second-largest generics player in the US in terms of number of prescriptions. Therefore, scrapping of the deal is not good news.

The pharma major has had a strategy of turning around acquisitions for driving growth prospects. Among successful acquisitions in the last few years have been Natrol Inc’s nutritional supplement portfolio in the US, and the series of acquisitions in Europe. These include Actavis’ portfolio, followed by Apotex’s European operations.

Europe now contributes a fourth to revenues. After turning around the Actavis portfolio in Europe, the company is on course to turning around Apotex’s portfolio by shifting production to India and reducing cost.

While Europe grew 14.2 per cent in Q3FY20, US revenues (half of overall sales) rose a healthy 22 per cent year-onyear. The growth momentum is expected to continue. Analysts expect revenue growth of 12.9 per cent in Q4FY20 (11.9 per cent in Q3), led by key European and US sales. The stock, however, has corrected significantly (more than half from its April ’19 highs), caused by regulatory overhang and downgrades.

Analysts at Nirmal Bang Research recently revised its valuation multiple, reflecting caution on account of risk to business led by compliance issues at its large manufacturing facilities (Unit IV and Unit VII).

With the deal off the table, there might be some downgrades. However, the positive in the near term is that there will be no additional debt on account of the deal.

The company had debt of ~3,181 crore at the end of the December quarter. High debt has been a matter of concern for investors, with CLSA analysts saying the worst returns have been from leveraged companies like Aurobindo and Glenmark.

Consequently, analysts such as Amey Chalke at Haitong Securities say scrapping of the deal is a positive as the firm was acquiring a portfolio without any pipeline.