PremiumThe US Food and Drug Administration’s (US FDA’s) clean chit to unit IV of Aurobindo Pharma Ltd removes a long-standing overhang. Sales from this unit, which accounts for about 9-10% of the firm’s US revenues, can now be ramped up.
The change in stance by US FDA led to the stock soaring 19% on Tuesday even as the broad market fell. From its lows on 23 March, the stock has more than doubled and now trades at ₹644.40.
The Unit IV plant is associated with several new drug applications in the injectables segment pending in the US, and is strategic to Aurobindo Pharma. The voluntary action indicated status implies that approvals should continue from this plant. A clean bill would also mean that launches could accelerate and thus boost the company’s US revenues.
The unit has 46 abbreviated new drug filings pending in the US, accounting for about 30% of its overall filings. Besides, injectables have a better margin profile in the US, which would add to Aurobindo Pharma’s operating leverage. Injectables accounted for about 18% of its US revenues in the last three quarters.
The company’s US business has been scaling up, with growth largely coming organically. Revenues from the US have shot up by 48% since Q1 FY19.
Another positive is that Aurobindo Pharma’s net debt is expected to shrink in the coming years. The cancellation of the Sandoz deal would further aid cash flows. “With the Sandoz deal called off, debt concerns have receded and earnings growth can sustain at high single digits over FY20-22," noted Bhavesh Gandhi, lead analyst at Yes Securities Ltd.
Nevertheless, fewer new drug approvals lately have been a worry. The company received approvals for just 20 new drugs in 2019, compared to 41 in 2018.
Besides, regulatory issues with the US FDA continue with regard to some of its other plants. Unit VII, another major facility, is still under official action indicated status, which will hamper new launches from this site. This unit also accounts for substantial filings in the US. This means that the firm has some more hurdles to overcome.
It is little wonder that despite doubling from its 52-week lows, the Aurobindo Pharma stock is still 23% lower compared to its 52-week high last April.
