Good Q3, healthy outlook for Aurobindo
Strong growth in Europe, steady US prospects will drive earnings
Aurobindo Pharma’s reported profit after tax at ~5.95 billion for the December quarter (Q3), up 3 per cent year-on-year (y-o-y), may have disappointed the Street as the stock fell 2.4 per cent at ~602 on Thursday, but a closer look at its core performance and future prospects offer some comfort.
Aurobindo had to remeasure its US deferred tax assets and liabilities based on the new tax law and also recognise a one-time charge of ~664 million in the said period. Thus, its net profit came below estimates of ~6.63 billion.
The overall performance, however, was healthy, led by growing sales in the US and Europe. The US (44 per cent of top line) and Europe (27 per cent) businesses grew 9.4 per cent and 37 per cent, respectively, over the year-ago period. Thus, overall revenues at ~43.36 billion (up 11 per cent yo-y) came ahead of estimates of ~42.56 billion. Operating profit at ~10.26 billion was up 14.6 per cent y-o-y, leading to an 80 basis points (bps) expansion in margins. Although ARV (anti-retroviral or HIV treatment drugs) sales fell 30 per cent, decline was compensated by the 33 per cent rise in sales in the remaining geographies.
The weakness in the Street’s sentiment (the stock is down 24 per cent in three months) can also be partly attributed to the looming US Food and Drug Administration (FDA) inspection of the company’s injectables unit. But, some analysts are confident as the firm has seen a positive outcome for other inspections in the recent past.
Another worry is that major gains expected from the launch of generics of Renvela (kidney treatment) in the US in the September quarter were dented following the entry of more players, leading to a decline in Aurobindo’s market share.
Yet, Aurobindo has continued to mark decent growth in the US and in overall top line, thanks to a relatively lower dependence on any single product. In Q3, it launched eight products and received final FDA approvals for 20, including tentative approvals for two products. Its pipeline of 152 products offers some assurance that the growth momentum will sustain and will take care of any pricing pressures in the US. Among these, injectables (limited competition products) are expected to clock 30 per cent growth in FY19 as its overthe-counter range is ramping up. Its new oncology unit (Eugia), too, will start contributing from mid-FY19.
European sales were led by strong growth in the core business, currency benefits (constant currency growth stood at 40.1 per cent) and consolidation of Generis Farmaceutica SA (a Portugese company acquired earlier by Aurobindo). The company has transferred manufacturing of 78 products from Europe to India as on December 31, which will aid profitability.
Analysts remain positive on Aurobindo on account of healthy prospects in Europe and sustained traction in US sales. Ranbir Singh at Systematix Shares has maintained his target price of ~836. Ranjit Kapadia at Centrum Broking also maintains a ‘buy’ rating.