Aurobindo Pharma: Alliance cure

A large approved product portfolio, marketing alliances and increased formulation sales will ensure strong growth for Aurobindo Pharma.

Having been a laggard in expanding its base overseas, generics drug maker Aurobindo Pharma is looking at tie-ups and ramping of its marketing network to unlock the potential of its portfolio of approved drugs.

The Hyderabad-based company, which focuses on the six therapeutic categories of antibiotics, antiretrovirals (anti-AIDs medications), cardiovascular system (CVS), gastroenterologicals, central nervous system (CNS) and antiallergics markets, has a basket of 92 abbreviated new drug application (ANDAs) approvals from the US FDA. To increase its distribution strength, the company recently expanded its alliance with global pharmaceuticals giant Pfizer.

Front-end focus

While the two companies had entered into an agreement last year to market five products, the current deal gives Pfizer’s subsidiary, Greenstone, the marketing rights to a larger basket of products in the CNS and CVS categories. Pfizer will sell 39 solid oral dose products in the US, 20 in Europe and 11 in France.

The company has also given Pfizer the rights to sell 12 sterile injectable products (penicillins and cephalosporins) in the US and Europe. Analysts estimate the market size of the drugs to be about $200 million (Rs 1,000 crore). For Aurobindo, which has been struggling to encash its portfolio, the deal not only ensures a strong distribution front-end and steady cash flows, but also optimum capacity utilisation.

Currently, capacity utlisation at its formulation plants are at 40 per cent levels, while those at its API plants are at 70 per cent levels. While Aurobindo has a presence in 100 countries, it lacked distribution muscle and depth, which Pfizer can provide as the latter takes a shot at the $270billion non-exclusive market drug segment.

The US giant set up an Established Products Business Units segment last year as it expects this segment to grow by 85 per cent to about $500 billion over the next five years. For Aurobindo, which has a revenue target of Rs 4,000 crore by FY10, incremental sales from the relationship will go a long way in achieving the figure.

Higher exports

On the back of alliances, and its marketing infrastructure, the proportion of Aurobindo’s exports to sales is likely to move up to 65 per cent in FY09 and further to 70 per cent in FY10 from 63 per cent in FY08. A large part of this is due to the growth in its sales to the US, which at Rs 330 crore accounted for about 34 per cent of formulation sales for nine months ended December 2008 (9MFY09).

It is estimated that the US business, which is likely to end FY09 at around Rs 500 crore, would witness a 40 per cent growth in FY10. The higher growth has been possible as the company has been able to ramp up its ANDA filings from 1 in Q3 FY04 to over 145 now.

Europe, too, is expected to grow substantially in FY10 (15 per cent of formulation sales at Rs 147 crore for 9MFY09) as the company scales up its own product portfolio and leverages on the marketing network from its two acquisitions viz. Milpharm in UK and Pharmacin in Netherlands.

Unlike other companies, Aurobindo has not been aggressive on the first-to-file (FTF) opportunities in the US, which while they give windfall gains during the exclusivity period also involve litigation costs and competition from generic players. The five FTFs that the company is pursuing will come into play in 2011-12.

Valued-added categories

Aurobindo is focusing on the high-margin lifestyle category of CVS, CNS and gastroenterological drugs, which currently account for a third of formulation sales. The company has been increasing the share of formulations in its product mix. From Rs 140 crore in FY05 (10 per cent of sales), it has improved to Rs 1,000 crore (39 per cent) in FY08.

Going ahead, it is estimated that formulations will account for half of sales in FY09 and further improve to about 60 per cent in FY10 on the back of product approvals and sales to new markets. Antiretrovirals (ARV), which currently account for about 33 per cent of formulation sales, are likely to gross about Rs 500 crore for FY09 and grow by about 25 per cent in FY10.

The company has 25 ARV ANDA approvals from USFDA and an equal number in the WHO pre-qualification list. In FY08, the PEPFAR (the US President's Emergency Plan for AIDS Relief) programme spent $8 billion on AIDS control and over half of this was for antiretroviral treatment.

Higher margins

Operating margins have been improving over the last three quarters moving up from 16.8 per cent in Q1 FY09 to 19.2 per cent in Q3 FY09. Despite high cost raw material imports from China, inventory and pricing pressures from clients (raw material to sales has increased 490 bps y-o-y to 58.1 per cent) during this period, the company has been able to maintain its margins due to increase in formulation sales (up 560 bps y-o-y to 46.7 per cent).

STEADY RETURNS
In Rs crore	FY08	FY09E	FY10E
Net sales	2,435.00	3,043.75	3,956.88
EBIDTA	435.00	578.31	791.38
Net profit	238.00	312.00	395.69
P/E (x)	-	2.70	2.13
FY09 profits annualised, excluding forex losses

Margins should improve from Q1 FY10 as raw material costs trend down and formulations sales increase further. However, the company reported net profits of just Rs 20 crore in the last three quarters (9MFY09) due to forex losses (notional) of about Rs 215 crore.

Going ahead, net margins, should look up (interest costs have more than doubled to Rs 25 crore over the last three quarters in FY09) as the company has been bringing down its foreign currency convertible bonds (FCCBs) debt of $255 million (Rs 1,240 crore). FCCBs accounted for about 64 per cent of company’s net debt of Rs 1,950 crore as on December 31, 2008.

The company repurchased FCCBs to the tune of $26 million in January 2009 and may repurchase another $25 million by the end of current fiscal (to avail of discount in line with RBI policy).

If this happens, the total outstanding FCCBs will come down to $204 million (Rs 1,020 crore), of which $50 million is due in 2010 while the rest is payable in 2011.

Investment rationale

Given that the company has completed its Rs 200 crore expansion of SEZ near Hyderabad, and no capital expansion expenditure in the near future, cash flow from operations of about Rs 300 crore per year should suffice to pay for future liabilities.

With a 14-unit low-cost manufacturing base, large basket of product approvals and renewed focus on marketing, Aurobindo is likely to record 30-35 per cent revenue growth rates in FY10. At Rs 157.50, the stock trades at just 2.13 times its FY10 EPS of Rs 73.68, and can deliver handsome returns in the next one year.