MOSL: AUROBINDO PHARMA (Buy)-Positives outweigh risks – time to accumulate

​Aurobindo Pharma: Positives outweigh risks – time to accumulate

(ARBP IN, Mkt Cap USD5.4b, CMP INR592, TP INR900, 52% Upside, Buy)

• ​USFDA inspections not a cause of concern: Aurobindo Pharma’s (ARBP) Unit 3 (oral solids; ~USD200m sales) and Unit 4 (injectables; ~USD100m of sales) facilities received six and seven observations, respectively, following the USFDA inspection in April 2017. Unit 3 observations are already out – there are no data integrity issues, with all the observations being procedural in nature. Unit 4 was previously inspected in September 2016 and received EIR in February this year. The inspection was triggered as ARBP added a new block in the facility. According to the company, all the observations at Unit 4 are procedural (letter should be out in coming few days).
  
• Lower tax rate in US bodes well; risk mitigation strategy in place for border tax: The US government has proposed to lower the corporate tax rate from 35% to 15%. The company’s US subsidiaries generated PBT of INR5b in FY16 and paid tax @32% of PBT. If the tax rate in the US comes down to 15%, then ARBP will save >INR1b in FY17/18E (EPS of ~INR1.8-2). On the other hand, border tax adjustment is a key overhang to the generic suppliers. We believe ARBP can mitigate this risk partially by expanding its Auro Life facility (can go 3x by doing brownfield expansion).
  
• Pricing risk lowest among peers: No single product for ARBP contributes more than 3% of sales (unlike SUNP, LPC and DRRD, where the top three products account for >20-25% of sales). Also, no single ANDA has any meaningful disproportionate contribution to margins, as ARBP has a matured product basket with all ~190 launched ANDAs facing competition from multiple players (typically 4-5 or more).