Event update: Aurobindo Pharma (Outperformer) - Unit IV receives EIR; positive outcome

Event

Unit IV has received an Establishment Inspection Report (EIR) with Voluntary Action Initiated (VAI) status by USFDA

Key highlights

• With the receipt of this status, FDA will now start granting new ANDA approvals from this facility.
• Notably, in mid-November, the USFDA had conducted a surprise inspection for nearly 10 days in Unit 4, post which it had issued 14 observations. While our read of the observations suggested that most of these were primarily procedural, market has been concerned around potential escalation of the issues into an OAI which, in turn, would have impacted revenue / profitability growth for the company.
• Notably, Unit 4 is Aurobindo’s key injectables and ophthalmics unit and has 46 pending drug filings (~30% of overall filings). The unit contributed 9-10% of US sales in FY19 and is expected to drive significant component of future earnings growth too.
• This paves way for Aurobindo to broadly deliver on our earnings estimates of Rs46/63 in FY20/21E despite delays in approvals from Unit VII with the Sandoz acquisition contributing ~Rs11-12/share in FY21E
• Key event to watch now is the approval for the Sandoz transaction which is expected in the next few weeks along with some new big ticket approvals from Unit IV.

Valuations & view

Despite limited meaningful new launches over last few quarters, Aurobindo’s US performance has been far better than most peers in a tough operating environment. Improving traction in EU and RoW is adding to the overall growth momentum. Additionally, the proposed Sandoz business acquisition, arguably near the bottom of generic cycle, is positive for Aurobindo strategically and financially. Novartis disclosure on Sandoz financials is positive as it reinforces the significant value accretive potential of this large transaction. With this deal, Aurobindo will be 2nd largest US generics player and add niche dermatology segment to its strong Oral Solids and Injectables portfolio. This has significant long term competitive advantage. Auro believes monetization of its R&D investments in complex products will sustain organic growth momentum beyond FY20. Reiterate Outperformer with TP of Rs878 (14x FY21E EPS). Aurobindo is our preferred pharma pick.