Aurobindo Pharma shares in a sweet spot among bitter pharma pills
Aurobindo Pharma shares are performing well on the back of a diversified portfolio and a strong set of regulatory approvals
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Mumbai: Even as most large pharmaceutical companies are off investors’ radar, there is one stock that still rules—Aurobindo Pharma Ltd is doing well on the back of higher generic drug approvals in the US and a diversified product portfolio.
A Mint analysis showed that among Nifty 50 stocks, the Hyderabad-based pharma company has been among the top three bets for at least the last five quarters. This analysis in based on the highest percentage of “buy” or “outperform” ratings of the total brokerage ratings assigned to each Nifty stock.
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Currently, 89.47% or 34 of the 38 brokerages tracking the stock have a “buy” or “outperform” rating on it. Two of them have a “hold” or “neutral”, while two others have rated it a “sell”, “reduce” or “underperform”.
Aurobindo Pharma has one of the highest generic product approvals in recent times in the US market, boding well for the company. Peers such as Dr. Reddy’s Laboratories Ltd and Sun Pharmaceutical Ltd have been facing compliance issues with the US Food and Drug Administration (FDA) at their plants, which impacted earnings of these companies.
So far in 2017, shares of Aurobindo Pharma have risen 1.5%, while stock price of Sun Pharma, Dr. Reddy’s, Lupin Ltd and Cipla Ltd declined 12.6%, 12.9%, 27.1% and 4%, respectively.
On Wednesday, Aurobindo Pharma’s shares ended almost flat at Rs678.80 on the BSE, while benchmark Sensex index closed up 0.1% at 31,245.56 points.
For most leading pharmaceutical companies, the US market accounts for nearly half of their revenues. The business environment in the US has become challenging as increased competition and consolidation in distribution channel has enhanced pricing pressure for generic drugs.
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Hence, the strong pace of drug approvals benefits Aurobindo Pharma, as it helps offset price erosion in existing products.
In fiscal year 2016-17, Aurobindo Pharma received final approval from the US FDA for 61 generic drugs and it launched 35 products, according to the company’s investor presentation dated 29 May.
As of 31 March, the company’s total product filings with the US FDA stood at 429, of which it has got final approval for 276 and tentative approval for 38. It has 115 products awaiting regulatory approval.
Market opportunity for 115 products under review and 38 drugs that have tentative approval is estimated at $61.1 billion, the company said in the presentation citing data from IMS Health.
Aurobindo Pharma is likely to launch some important products in the current fiscal, which will aid growth in the US market, brokerage Nirmal Bang Institutional Equities, said in its 29 June report on the company.
The company’s consolidated revenue grew 8% on year to Rs15,090 crore in 2016-17. The US market accounted for 45.3% of total revenue.
“With potential for the approval of 5-7 complex generics and many limited competition drugs, there is a strong possibility of rerating of Aurobindo Pharma, from the current valuations of 13.8 times and 15.5 times PER (price earnings ratio) for FY18E and FY19E respectively vs peers’ trading range of 18-21 times,” Surajit Pal, analyst at Prabhudas Lilladher Pvt. Ltd said in a 29 June note. The brokerage expects the valuation gap to narrow down in fiscal year 2018-19.
Also, Aurobindo Pharma has a diversified portfolio and is well-placed to monetize on its research and development (R&D) pipeline, analysts said.
In a note on 13 June, broking firm IDFC Securities, which has an “outperformer” rating on the stock, said the broad base business mix differentiates Aurobindo Pharma from its peers.
“Irrespective of the ongoing price erosion trends especially in the oral solids business, the company remains optimistic on growing overall US sales on the back of continued strong growth momentum in its non-OSD (oral solid dosage) franchises e.g. injectables, controlled substances, nutraceutical and OTC,” IDFC Securities said in the note.
With the type of portfolio that Aurobindo Pharma has, price erosion of 6-7% is likely this year, Vishal Manchanda, analyst at Nirmal Bang said in the report.
“Aurobindo Pharma consistently endeavours to ensure that it stays away from product concentration. Currently, no single product launched in the US market contributes more than 3% to revenues of the company. Top 25 products contribute less than 40% to revenues of the company,” Manchanda said.
The US FDA is currently working to expedite generic drugs entry in to the US as part of its efforts to ensure affordable medicines to the citizens. This move is seen as a double-edged sword as on one hand it will help Indian companies launch products faster in the market, on the other, it will mean more competition, leading to further price erosion.
According to a Citi research note dated 28 June, risk to base business from this measure of the US FDA is the lowest for Aurobindo Pharma due to its large, diversified basket and limited revenue concentration.