Aurobindo has seen strong revenue growth of 12% CAGR over the past five years thanks to rapid deposits in the United States, acquisitions in Europe and growth in other geographies. Aurobindo is expected to achieve stable growth from its traditional base in generics and also move up the value chain with complex products.
These products have been in development for some time, but will likely be marketed within the next three years. So now is the time for long-term investors with a moderate risk appetite to take positions in the stock to take advantage of any upside. The valuation of the share is also reasonable, being in line with its historical prospective PE at 1 year of 16 times. In addition, the restructuring of the injectable division announced by Aurobindo should help unlock value for the company as a whole.
In fiscal year 21, Aurobindo derived half of its revenues from the United States, 25% from Europe and 12% and 8% respectively from the API and Antiretroviral segments. Of the $ 1.6 billion in US revenue, $ 1.1 billion was from oral solids and $ 250 million from injectables. The scale of Aurobindo’s generic operations in the United States, which is matched only by Sun Pharma and its specialty portfolio, would require a steady pace of new launches to be sustained. For example, to maintain the current base, Aurobindo would need 27 launches at US $ 5 million per launch, assuming an 8% price erosion. To address this, Aurobindo filed nearly 50-60 products and launched 34 products in the United States in FY21 and can be expected to maintain the current pace of launches going forward, given its large pool of pending deposits. The same launch rate would imply US sales growth of 8-10% in fiscal year 22-23 (adjusted for the sale of the Natrol division in Q321). Aurobindo plans to increase global revenue from injectables from US $ 380 million to US $ 700 million over the next three years. The implied growth (22% CAGR) is in line with the growth in FY17-20, ahead of FY21 impacted by Covid. A launch cycle of 12-15 injectables per year could support even higher growth in fiscal year 22-23. A plant in the US and India and expansion of the current IV unit are underway to achieve such growth.
Its European operations have benefited from acquisitions and product rationalization and markets can support further growth of 10% in fiscal years 22-23.
Aurobindo intends to invest nearly 3,000 crore with the government-announced PLI program to manufacture antibiotics and other APIs / intermediates. Even though 40% is absorbed internally, API sales can be doubled over the next five years if the program is successfully implemented according to management.
Aurobindo has repaid its debt from acquisitions and now has positive net cash.
Aurobindo is in advanced testing for its pneumococcal vaccine antibiotic, a limited competition product with a global market of US $ 6.2 billion and is expected to be approved within the next year. On the viral level, Aurobindo holds an exclusive license with the American company Covaxx for Vaxxinity (UB-612), a Covid vaccine, for sale in India and to UNICEF. Vaxxinity is in a phase 2 trial in Taiwan and a phase 2/3 trial is planned in India and other countries and Aurobindo has a capacity of 480 million doses per year. Both vaccines represent strong rent activity in low competition markets when approved.
Aurobindo acquired development data for four biosimilars (products similar to complex biologics) including bevacizumab in 2017.
The portfolio now covers 13 products, including 5 in the first wave. Four of the assets are at an advanced stage of testing and once approved a contribution to revenues can be expected from FY 23-24. Biosimilars are difficult to attract in US markets, but represent strong opportunities (Amgen generated US $ 650 million in 2020 from US sales of the biosimilar bevacizumab, launched in 2019).
Aurobindo is also developing 3 Depot injections (long-acting injectables), 8 inhalers and 8 transdermal patches with a cumulative addressable market size of US $ 16 billion in limited competition markets and expected revenue by the exercise 23. (See table).
Aurobindo’s expected revenue growth of 7 percent and EPS growth of 10 percent for fiscal years 21-23 according to Bloomberg’s consensus reflects stable growth in core operations. The stock is priced fairly at the current price, trading near its average 1-year term PE of 16 times EPS FY22 of ₹ 60. But investors can expect a gradual improvement in the product line and a restructuring of injectables to generate better returns.
Aurobindo has transferred its injectables business to a subsidiary and the board of directors is considering “value creation” options, which may involve unlocking the injectables business. Regardless of the outcome, the markets will independently assess Aurobindo’s Injectables business, which will also positively impact assessments of the rest of the business. Aurobindo is trading at a lower multiple than its peers which are trading at 20 times one-year futures earnings mainly due to weak branding activity. The next generation of complex products with high barriers to entry can offer similar protection to branded products and improve ratings as well. Investors will need to monitor inspections of factories where Aurobindo is awaiting clearance in units 1, 9, 11 and 7.