Aurobindo: Q1 a miss, but ahead of peers

New launches offset pricing pressure in the US; analysts bullish

Aurobindo Pharma’s June quarter (Q1) performance failed to meet expectations. The drug major’s US sales (nearly half of its revenue) declined half a per cent year-on-year (y-o-y) against analysts’ expectations of a flat to three per cent y-o-y growth. What played spoilsport was appreciation in the domestic currency. The US sales in constant currency terms grew three per cent y-o-y and seven per cent sequentially.

Sales in Europe, the secondlargest contributor to Aurobindo’s revenue (25 per cent), grew 10.4 per cent y-o-y and 18.1 per cent sequentially. The acquired Actavis business continues to witness improvement in profitability. Aurobindo has transferred manufacturing of 71 products from Europe to India, thus saving costs. The pharma firm has also completed the acquisition of Generis Farmaceutica SA to boost its Portugal business.

The ARV, or anti-retroviral, (drugs for people starting HIV treatment) and active pharmaceuticals ingredients (API) businesses fell 19.3 per cent and 14.9 per cent y-o-y, respectively, pulling down the overall performance. ARV contributes seven per cent to Aurobindo’s overall revenues, while API contributes 17 per cent. The lumpy nature of the ARV business (being tender-based) and API witnessing some impact of the goods and services tax (GST) were mainly responsible for the decline.

Overall revenue fell 2.3 per cent y-o-y at ~3,679 crore, lower than the Bloomberg consensus

estimate of ~3,873 crore. Earnings before interest, tax, depreciation and amortisation (Ebitda) fell 5.3 per cent y-o-y to ~842 crore, lower than the estimate of ~869 crore. Net profit at ~518.5 crore missed the estimate of ~567 crore.

On the contrary, Aurobindo performed better than most of its peers such as Lupin, Dr Reddy’s Laboratories and Taro (Sun Pharmaceutical Industries’ US subsidiary). An area of concern for the drugmaker is the pricing pressure. But, the launch of 15 generic drugs cushioned the decline.

Sarabjit Kour Nangra of Angel Broking said in the current pricing pressure environment, regular launches in the US were key. It has a strong product pipeline and no regulatory concerns. A well-diversified portfolio means not much dependence on any single product’s contribution in the US, thereby, lesser risks due to price erosion. The company received 17 approvals in Q1 and filed 13 new drug applications.

The launches also helped to maintain its gross margins, analysts said. Operating profit margin at 22.9 per cent was marginally lower than 23.6 per cent in the June 2016 quarter. The margins have improved substantially from 19.8 per cent in the previous quarter.

Ranbir Singh at Sytematix Shares expects a few more launches in the September quarter. The European business is also growing well, and all this is keeping analysts bullish on Aurobindo. Its stock gained four per cent during early trade on Thursday before ending flat, as it was pulled down due to selling in broader indices.