MOSL: AUROBINDO PHARMA (Buy)-Revenue below estimate-Key product launches to drive US business

Aurobindo Pharma: Revenue below estimate; Key product launches to drive US business  

(ARBP IN, Mkt Cap USD5.8b, CMP INR580, TP INR750, 29% Upside, Buy)

• Net sales increased ~11% YoY (-7% QoQ) to ~INR40.5b (est. of ~INR42.4b). Gross margin was flat YoY (+70bp QoQ) at 58.8%. EBITDA grew ~4% YoY to INR8b (est. of INR9.6b), with the margin down ~130bp YoY to 19.9%, primarily due to higher employee cost (+160bp YoY) and R&D expense (+60bp YoY). Adj. PAT declined ~3% YoY to INR5.4b (est. of INR6b). For FY18, sales, EBITDA and adj. PAT stood at INR164.9b (+9.3%), INR37.9b (+10%) and INR25b (+9%), respectively.
• Strong growth in EU; pricing pressure subsiding in US: US business sales came in at USD271m (+10% YoY, -8% QoQ). Injectable business sales stood at USD34m in 4Q (v/s USD45m in 3Q). Almost 60-70% of the sequential decline in injectable sales is attributed to drug recalls. Injectable sales are expected to normalize by 2QFY19. Base business pricing in the US declined by ~8% YoY (-1% QoQ). ARBP expects pricing pressure to stabilize at ~5% YoY over the medium term. ARBP expects to launch ~30-40 products in the US, including key ones like Etanercept, Toprol XL, Omperazole and Ertapenem, over the next six months. EU business grew ~33% YoY in constant currency terms. Adjusted for Generis acquisition, EU business grew 17% YoY.
• Key concall takeaways: 1) Net debt remained stable at USD540m in 4Q; ARBP expects it to come down by ~USD100m in FY19. 2) Capex is expected to be ~USD175m in FY19. 3) EU business is expected to outpace industry growth at ~8-10% in constant currency. 4) ROW business is expected to grow at 15-20%. 5) Unit-IV and Unit-XII received EIR from US FDA. 6) Toprol XL approval expected by mid-FY19l; Etanercept approval expected over the next few weeks; Omeprazole approval likely by Jul-18.