MOSL: AUROBINDO PHARMA (Buy)-Good show-On track to build levers for future growth

Aurobindo Pharma: Good show; On track to build levers for future growth

(ARBP IN, Mkt Cap USD6.2b, CMP INR775, TP INR920, 19% Upside, Buy)

• Overall performance better than estimate: Aurobindo Pharma (ARBP) revenues grew ~7% YoY to INR47.5b (v/s est. of INR45.3b). Growth was largely led by the US and the anti-retroviral (ARV) segment, up ~7% and ~18% YoY, respectively. Europe and RoW segment grew by ~8% YoY and the active pharmaceutical ingredient (API) segment grew by ~6% YoY. Gross margin contracted 310bp YoY to 57% (+190bp QoQ) due to change in the product mix. EBITDA margin further contracted by ~360bp YoY (+330bp QoQ) to 21.6% (v/s est. of 20.5%) due to higher employee cost/R&D cost (up ~150bp/ ~100bp YoY, as % of sales). This was partially off-set by lower other expenses by 200bp (as % of sales). Adjusted PAT declined by ~15% YoY to INR6.6b (v/s est. of INR5.7b). The company incurred exceptional expense of USD12.5m related to purchase of R&D assets. For 1HFY19, sales stood at INR90b (+11% YoY), EBITDA at INR18.1b (-8% YoY) and PAT at INR11.7b (-10% YoY).
• Healthy traction in the US business: US sales came in at USD318m (-3% YoY and +12% QoQ). YoY decline is primarily due to a high base, which included g-Renvela sales. Price erosion in the US base business has stabilized at 5-6%. Specifically, Injectable sales stood at USD50m/USD86m in 2Q/1HFY19. ARBP has maintained its guidance of 30% YoY growth in Injectables sales, implying 55% YoY growth rate expected in 2HFY19. Bag-line with respect to Injectable Unit IV should be commercialized by 4QFY19. Natrol sales grew ~10% YoY to USD32.5m. During the quarter, ARBP filed 25 ANDAs in 1HFY19, including eight Injectables, taking the cumulative filings to 510. ARBP has 125 ANDAs pending for approval. The company has also guided for strong pace of filings over the next 4-5 years. Product specific, Target action date (TAD) for g-Toprol has been shifted to Jan’19.