Event update: Aurobindo Pharma (Outperformer) - Enters US specialty through oncology injectables

Event

Aurobindo has announced a transaction to acquire 7 branded oncology drugs from Spectrum Pharma along with commercial infrastructure for selling of products (~100 people including ~60 strong sales team)

Key highlights

• This acquired portfolio generated $76m revenues in 9mCY18 (-14% yoy); with annualized sales of ~$105m. Aurobindo will pay $160m upfront cash along with potential milestones of upto $140m (linked to achievement of cumulative sales of upto $800m in 2 of the products over next 5 years). The transaction is expected to close by March-April 2019.
• This portfolio is carve out from existing Spectrum business hence detailed financials are not available. With ~75% gross margins, we estimate >25% EBITDA margins for this portfolio making it attractively valued at <5x EBITDA; Mgt guides that transaction will be EPS positive from year 1 though the financial impact is likely to be limited.
• Strategically, this transaction kick starts Auro’s foray into specialty and it follows a host of other large domestic peers; There has been apprehension around medium term growth outlook for Auro’s generics only strategy so it should help to mitigate those concerns to an extent; Also, this transaction is unlikely to be a financial drag and will help Auro’s to gradually scale this business. The acquisition of the experienced commercial set-up from Spectrum should also help in shortening the learning curve in this new business segment.
• Notably, injectables (generics as well complex) have been one of Auro’s key competencies and through Eugia, the company has had big plans for the generic oncology (orals and injectables) space. Also, this set-up will also provide Auro with an established platform to market its biosimilars in the US going forward.
• Prima facie, Eugia and the Spectrum portfolio have significant synergies. Mgt believes Spectrum portfolio growth can be boosted by leveraging their injectable distribution capabilities. Going forward, the portfolio should get boosted by incremental generic and potential specialty filings (505 (b)(2) etc.) from the Eugia portfolio, making Auro a strong player in the oncology injectable specialty as well as generic space.

Valuations & view

Coupled with the proposed Sandoz acquisition, this transaction significantly enhances the scale of Aurobindo’s US business. Financially, we expect Net Debt / EBITDA to close at a manageable ~1.8x by March’20. Maintain Outperformer; Top pick in the pharma space