Event update: Aurobindo Pharma (Outperformer) - Unit VII classified as OAI; however Novartis commentary on Sandoz portfolio allays fears

Event

1) Unit VII has been classified as OAI 2) Novartis provides updates on financials of the Sandoz portfolio that is being divested to Aurobindo

Key highlights

• Aurobindo’s unit VII is classified as Official Action Indicated (OAI) by the USFDA. Given the delay in classification, this was expected. This will lead to delay in new product approvals from this facility.
• There are about 29 ANDAs (excluding PEPFAR products) pending from unit VII. ~15 of these ANDAs had an expected approval data over FY21-22 so will get impacted by this OAI status. As none of these products were expected to be substantial so financial impact won’t be meaningful
• Key event to watch now is the classification of the Unit 4 (injectable unit) inspection – due over the next ~15 days
• On the positive side, Novartis disclosures on Sandoz are fairly positive from an earnings contribution perspective. Novartis mgt indicated that the net sales of the Sandoz business was $1.174bn in CY18 and $1.072bn in 2019. In terms of core operating income, it was $294 million in CY18 and now $272 million in CY19.
• These numbers are tracking well ahead of guidance amid market concerns on significant potential profit erosion in this portfolio over the last few quarters. This is a significant positive development. Novartis mgt has guided for the transaction to be completed by Q1CY20.
• Recurring EBITDA contribution from this transaction will be lower than CY19 annualized profits given discontinuation of certain products (e.g. Suboxone AG etc.) as well as mandatory product divestments. Despite these adjustments, the business tracking well in line with our FY21e recurring EBITDA estimate of US$200m (EPS of ~Rs12/share).

Valuations & view

Novartis disclosure on Sandoz financials is positive as it reinforces the significant value accretive potential of this large transaction. At the same time, while OAI classification for unit 7 is a disappointment, we see limited financial impact of this development. Overall, we believe Aurobindo’s business model continues to be a firm wicket with continued strong growth in US and EU in a tough operating environment. Maintain Outperformer. Aurobindo is our preferred large cap pharma pick.