Aurobindo Pharma Ltd 27 th September 2010

Transcription

1 CMP: Rs Recommendation: Buy Target Price: Rs 1250 Sector: Pharmaceuticals Market Data as on 24 th September 2010 Market Cap (Rs Mn) Free Float (Rs Mn) Week H/L / Avg 12m volumes ('000) Face Value 5 Bloomberg ARBP IN Reuters ARBN.BO NSE AUROBINDOP BSE Source: Company, SIHL Research Shareholding Pattern as on 24 th September 2010 Promoters 56.15% FII's 22.49% DII's 11.66% Others 9.70% Source: Company, SIHL Research Key Highlights: Improved product mix. Tied up with global pharma majors. Vertically integrated model. Largest ANDA pipeline among Indian peers. Catering to high growth margins and high growth markets. Strong internal accruals. Company likely to be benefitted from Obama visit. Abhishek Jain abhishek.jain@sihl.in Harsh Mehta harsh.mehta@sihl.in Investment Rationale Paradigm shift in business operations from API to Formulations Indian drug companies account for over 25% of the total generic drug applications made to the US FDA, which accounts for over half of the $ 60 bn market. The growth in global generic market will be mainly due to expiry of patent of various blockbuster drugs worth $ 20 bn in annual sales in 2011 and $ 105 bn in 2012 and pressure from government to curtail health budget. The company has generated 54% of total revenue in FY10 from formulation as compared to 31% revenue in FY07 from formulation. With significant presence in generic markets with dedicated R &D expertise, the company is set to gain from the above consequences. Tie up with global pharma players Aurobindo has entered into partnership with Pfizer in March 2009 wherein Aurobindo will be licensing and supply agreements to sell over 100 products in US, 30countries in EU and almost 110 ROW countries. Aurobindo Pharma has also entered into an agreement with global biopharmaceutical company AstraZeneca to supply several solid dosage and sterile products to 40 emerging markets, excluding India and China. Such Tie ups will enhance credibility of the company in highly advanced market like US and EU and enable Aurobindo s entry into high margin and high growth markets. Vertically integrated model and largest ANDA pipeline Aurobindo s high margin formulation business has been benefited from its own API s. Formulations now account for about 54% of its revenue and its margins have expanded to 18.5% in FY10 from the low double-digits last year. It is one of the largest companies in terms of manufacturing capacity, it currently owns 14 manufacturing facilities, of which, 11 facilities are in India, 2 in US and 1 in China. The company has 121 ANDA s approved in US from 169 fillings so far, which becomes the second largest pharma company in terms of portfolio among the Indian peers. Strong Internals accruals may allay FCCB s concerns Strong revenue growth with a richer sales mix in the recent past has helped the company improve its financial position considerably. The D/E ratio has come down from 2.2 in FY07 to under 1.2 in FY10. The company is now in a position to repay its outstanding FCCBs through a mix of internal accruals and other low cost borrowing options. This should further improve per share ratios of the company. 1 P age Branch Office:

2 Valuation The stock at Rs.1050 is currently trading at an attractive valuation of 11.26X and 8.83X at FY11E and FY12E EPS of Rs and Rs respectively. Price to earnings ratio of other companies in the same industry is trading at an average P/E of 20.11X. Higher share of revenues from formulations, strong internal cash flow and tie ups with major global pharma will lead to strong bottomline. We advise investors to buy the stock at CMP of Rs with the target price of Rs for the period of 6-12 months. Our target price is based on our DCF assumption; we have assumed WAAC as 11.38% and Terminal growth rate as 4%. We are fundamentally positive on sector and believe that generic drug companies would continue to benefit from the expiry of various blockbuster drugs, various steps taken by government to curb health budget and expected announcement on healthcare sector during the visit of US President Barrack Obama in November Company Profile SSPs, 17% Revenue Break Up in FY 10 Cephal osporin s, 19% Dossier Income, 5% Antivir als and Others, 8% Formul ations, 51% The Hyderabad-based drugmaker has transformed itself from a low-margin API manufacturer to a high margin formulations player. It has enriched its portfolio by adding life-style drugs to its traditional portfolio of anti-infective drugs. Aurobindo Pharma is an integrated low-cost manufacturer of generic drugs and APIs with globally approved manufacturing capabilities. It has a strong pipeline of abbreviated new drug applications (ANDAs) for generic formulations and drug master files (DMFs) for APIs in the US, Europe and South Africa. The drugmaker has a strong portfolio of anti-retroviral (anti-aids) drugs. It is leveraging its strength by actively supplying to global tenders. The company has entered into a partnership deal with Pfizer for supplying injectable in developed markets, such as US and Europe, and 70 other emerging markets. The company has developed its formulation activity through 15 different manufacturing facilities out of which 11 are based in India. All its facilities are integrated and are as per regulatory guidelines and most of them are approved by leading regulators like US FDA, UK MHRA etc. AUROs revenues can be further classified in segments like Formulations, API and Dossier Income. In formulations, AURO has capabilities to manufacture all types of complex procedures like layered tablets, extended release, jelly-fill capsules, ointments etc. The API portfolio is huge consisting higher percentage of Cephalosporins. 2 P age Branch Office:

3 SWOT Analysis Strenght Improving sales Mix. Assosciation with Phizer and Astra Zeneca. Vertically Integrated Model. Largest ANDA pipeline. Weakness High dependence on specific market. Lack of pricing power. High attrition of human resources. Oppurtunities Growth in EU expected to be robust. Growing demands for generics. Expiry of various blockbuster drugs in 2011 & Threats Delay in ramp up from Pfizer. Regulatory Approvals. Rupee - US dollors exchange rate. 3 P age Branch Office:

4 Paradigm shift in business operations Generics NDA & ANDA Filed as on 05/08/2010 Approved US FDA Europe South Africa Total Source: Company, SIHL Research The generics business, characterized by volume sales, have grown at a CAGR over 18% from 2004 to 2009 which is providing huge business opportunity for Indian Cos. Indian drug companies account for over 25% of the total generic drug applications made to the US FDA, which accounts for over half of the $ 60 bn market. The growth in global generic market will be mainly due to expiry of patent of various blockbuster drugs worth $ 20 bn in annual sales in 2011 and $ 105 bn in This provides Indian generic companies huge opportunity to position themselves to offer generic version of this drugs. Thus growth in generics drugs will be much higher than compared to patent drugs in coming years. There is also a global shift towards use of generics as governments worldwide are under tremendous pressure to curtail steeply escalating healthcare budgets. Aurobindo has built business model that has significant presence in generic markets with dedicated R &D expertise. Due to this transition from API to generic formulation the EBIDTA margins have increased from 10.3% in FY 06 to 18.5% in FY 10 and bottomline have increased from 4.1% in FY 06 to 12.8% in FY % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% API Formulations 10% 16% 31% 39% 46% 54% 90% 84% 69% 61% 54% 46% FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 EU, 7% ARV's, 14% Focus Markets in FY10 RoW, 6% US, 26% API, 46% Source: Company, SIHL Research Source: Company, SIHL Research 4 P age Branch Office:

5 Aurobindo Pfizer Association Aurobindo has entered into partnership with Pfizer in March 2009 wherein Aurobindo will be licensing and supply agreements to sell over 100 products in US, 30countries in EU and almost 110 ROW countries. Supply to the US and EU markets commenced from Q4FY09 and Q4FY10 respectively, while supplies to ROW markets are expected by Q4FY11E. The mix of exclusive, co-exclusive and non-exclusive deal helps Pfizer expand its generic portfolio using expertise and established distribution network in developed countries like the US, EU etc. Advantage of Aurobindo Pfizer deal More products under the umbrella will strengthen the relationship. Enhanced credibility in highly advanced market like US and UK. It will enable Aurobindo s entry into high margin and high growth markets, which will help company to move up the pharma value chain. This greatly improves Aurobindo s revenue and earnings visibility. Moreover, launch of injectable products by Pfizer will further boost sales. The deal with Pfizer will improve overall capacity utilization from 80% in FY10 to 98% in FY12E. No additional investment in front end infrastructure as it can leverage on strong marketing strength of Pfizer. Over time, Pfizer has scaled up the number of sourced products - the US (87), France (59) and Rest of EU (89), the scope of deal also included Australia, Canada and Rest of the world with more products as in table. Aurobindo has already started supplying products to Pfizer. In FY10, AURO booked dossier income of about Rs1997mn largely coming from Pfizer and in coming years with the new approvals especially in the sterile segment coming in and a revised deal signed in March 2010; the company could be booking substantial dossier income over the years. Region Oral Sterile Total US 75(CE) 22(E)+1(NE) 87 France 34(E)+13(NE) 12(NE) 59 Rest of Europe 77(NE) 12(NE) 89 Aus/NZ 44(NE) - 44 Canada 14 (NE) - 14 RoW 55 (NE) - 55 NE-Non Exclusive/ CE- Co Exclusive/E- Exclusive 5 P age Branch Office:

6 Aurobindo Pharma AstraZeneca Deal AstraZeneca and Pfizer deal will generate around $300 mn to $500 mn revenue next year. Aurobindo Pharma has entered into an agreement with global biopharmaceutical company AstraZeneca to supply several solid dosage and sterile products to emerging markets. These products fall under a broad range of therapeutic segments such as antiinfectives, cardiovascular system (CVS) and central nervous system (CNS). Aurobindo will supply 25 solid dosage and sterile products to be sold in 40 emerging markets, excluding India and China. Aurobindo will be able to utilise the strong distribution network of its partners to enhance its presence in various markets. Besides, the company has manufacturing facilities that has got approvals from regulatory bodies like the USFDA and WHO. This could come in handy for the company to bag more deals in the future Vertically integrated model and largest ANDA pipeline Aurobindo s high margin formulation business has been benefited from its own API s. Bulk drugs or Active Pharmaceutical Ingredients (API) are raw materials with medicinal properties. When converted into end products, such as a tablet or capsule, they are called formulations. Formulations, or high-margin drugs, now account for about 54% of its revenue and its margins have expanded to 18.5% in FY10 from the low double-digits last year. This has facilitated the company broaden its scope from just antibiotic and antiretroviral therapies (ARV) to high value growth segments such as CVS, CNS and GI. On the formulations front, the company caters to the high margin niche segments of oral contraceptives, controlled-release products, sterile injectable and other lifestyle ailments. The company has 121 ANDA s approved in US from 169 fillings so far, which becomes the second largest pharma company in terms of portfolio among the Indian peers. The US revenue has gone up by 4X in two years from Rs 2359 mn in FY08 to Rs 9124 mn in FY09. Aurobindo now has a total of 121 ANDA approvals (91 final approvals and 30 tentative approvals) from USFDA and is currently marketing 61 products in US. Its main products in the US include Valcyclovir, Amoxicillin, Cefpodoxime, Cefprozil, Carvedilol, Simvastatin, Metformin, Citalopram and Paroxetine. 6 P age Branch Office:

7 Robust infrastructure to provide operating leverage Second largest Indian company in terms of ANDA approval and third largest in terms of ANDA filings One of the largest companies in terms of manufacturing capacity, it currently owns 14 manufacturing facilities, of which, 11 facilities are in India, 2 in US and 1 in China. It has 6 APIs and 4 formulation facilities in India out of which 9 are approved by US FDA and other leading regulatory agencies of the world. The SEZ unit has initiated manufacturing of exhibit batches for global submissions at an unprecedented pace; on an average, exhibit batches for 5-8 products for global markets are being taken each month. It was inspected successfully twice by the US FDA, INFARMED (Portugal), ANVISA (Brazil), NMRC (Namibia) and MCC (SA) during this period. The company also hold a GMP clearance certificate for this facility from TGA (Australia). New production modules were commissioned within other existing facilities in India to add further to the capacities. The Dayton plant at New Jersey, USA has been commissioned adding substantial manufacturing strength. Aurobindo is currently the second largest Indian company in terms of ANDA approval and third largest in terms of ANDA filing. Aurobindo s upfront investment in building end to end integrated manufacturing infrastructure coupled with large product pipeline provides long term revenue and earnings sustainability. CRAMS Global Pharma Outsourcing Spend in $ bn The company now plans to dedicate its capacities to MNC by offering them manufacturing solutions in formulations. The company s entry into CRAMS (Contract Research and Manufacturing Services) will strengthen its clientele base and relationship and it will able to take advantages of various issues face by MNCs such as Shrinking pipelines, Expiry Patents and Government pressure to reduce health budgets. Aurobindo will partner with these MNC companies and cultivate opportunities to research, manufacture and develop compounds across the entire drug life cycle. It currently has an established portfolio of offerings in API and formulations which could see it earn large scale contracts for manufacturing from global pharma biggies E 7 P age Branch Office:

8 Strong Internals to allay FCCB s Concerns We expect the company to generate free cash flow of around ` 3.6 bn over FY10 FY12 The company has issued FCCB s in worth $ 60 mn and was due in August By early August 2010, FCCB worth $ mn was converted/repurchased and the balance amount of $ 2.12 mn is due for redemption in second week of August. The company has also issued FCCB s of around $ 200 mn in and is due before May 10, We expect the company to generate free cash flow (adjusting to capex) of Rs 3.6 bn over FY10-12E. In fact, the D/E of the company has already come down from 1.9x in FY09 to 1.2x in FY10. The remaining tranches of FCCBs (US$204mn including YTM) are due for redemption by Q1FY12. Since both of the tranches are out of money, we are treating them as debt and believe that company would be able to repay the debt through a mix of internal accruals and borrowings Risk & Concerns Risk related to high dependence on specific markets High dependence on US and European market. Aurobindo earns approximately 49% of its formulations revenues from the U.S. and 25% from the European Union. The company depend on the US market for a significant part of our future operating results. Failure to develop profitable operations in that market could adversely affect our business, results of operations, financial condition or prospects. Rupee-US dollar exchange rate Currency exchange rates could undergo change with Indian rupee gaining strength. This could reduce earnings. Regulatory approvals Multinational pharmaceutical companies have greater experience in clinical testing and human clinical trials of pharmaceutical products and in obtaining international regulatory approvals as compared to Aurobindo Pharma. This could render the company s technologies and products uncompetitive or limit our ability to introduce new products impacting adversely company s business. Delay in ramp up of sales from Pfizer Aurobindo has entered into a supplying agreement with Pfizer in 2009 and it has revised its deal in March Currently 10% of total revenue comes from Pfizer. The company is expecting around 20 to 25% of revenue from Pfizer in Any delay in order ramp up may produce a downside risk of topline revenue. 8 P age Branch Office:

9 Size of global pharmaceutical markets Industry Profile Global Industry The global pharmaceutical market grew by 7% in 2009 to reach US$837bn on a constant-dollar basis. InCY2010, the market is expected to grow by 4 6% in constant dollar terms, thus exceeding US$850bn. The global market is expected to witness 5% to 8% CAGR over the next 5 years. US, Japan and Europe constitute about 86% of the global pharmaceutical market and are growing at a slower annual rate of about 4% mainly due to loss of exclusivity, lesser new product approvals and price erosions due to generics competition. In contrast, pharmaceutical market of emerging economies like India, Brazil and Mexico are growing at a much faster rate of 12% - 16% per annum. By 2017, revenues from emerging markets are expected to touch US$ bn, with a CAGR of 12% to 15%. (Source: IMS Health Inc.) E 2013E Source: Company, SIHL Research Indian Industry India's pharmaceutical industry is presently the 3rd largest in the world in terms of volume. Domestic market showing an unprecedented growth of around 9% to generate revenue of about INR Billion (US$ 11.1 Billion) in FY The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. The government's Vision 2015 statement indicates an 18 percent plus CAGR for the pharma sector, translating to a doubling of revenues to $ 40 billion over the next five years. Indian firms produce about 60,000 generic brands across 60 therapeutic categories. India is among the world s lowest per capita expenditure on Pharmaceuticals products. Per capita expenditure $ P age Branch Office:

10 Market Outlook Views on pharma sector The share of top 20 pharma companies in India including global MNCs today is around 58% with takeovers and mergers happening fast over the last few years. Even more acquisitions are on the cards, as the Indian pharma sales are expected to more than double in the next 5 years. The recent acquisition of Piramal Healthcare s formulation business by the US based Abbott Lab at almost 9 times Piramal s Sales at $ 3.72 bn has made headlines. Within next 2 years patents worth more over $125 bn would expire and this will also give huge opportunity to the Indian generic makers. Peer Group Comparison Company Name Year End Ranbaxy Labs Net Sales PBIDT PAT EPS PATM% ROCE% ROE% Dr Reddy's Aurobindo Pharma Cipla Sun Pharma P age Branch Office:

11 Financial Statement P & L Account (Rs mn) FY 08A FY 09A FY 10A FY 11E FY 12E Income from Operations 24,359 30,773 35,754 41,278 49,864 % growth 26.3% 16.2% 15.4% 20.8% Expenditure (inc)/dec in stocks , Employee Cost 1,930 2,437 3,273 3,667 4,113 Other expenditure 5,504 6,805 7,039 7,843 9,474 Consumption of Raw materials 12,612 15,238 17,793 20,080 23,380 Purchase of traded goods 1,615 1,041 1,267 1,445 1,995 Total Expenditure 20,948 25,609 27,523 32,330 38,063 EBITDA EBITDA Margin 3,411 5,164 8,232 8,948 11,801 Depreciation 1,004 1,276 1,493 1,698 2,008 EBIT 2,407 3,888 6,738 7,250 9,794 Other Income Interest ,147 Exceptional items - -2,500 1, PBT 2, ,544 6,919 8,947 % revenue 12% 2% 21% 17% 18% Tax ,914 1,730 2,326 PAT 2, ,631 5,189 6,621 % of revenue 9.8% 1.7% 15.7% 12.6% 13.3% EPS Equity Face value P age Branch Office:

12 Balance Sheet (Rs mn) 2008A 2009A 2010A 2011E 2012E Sources Of funds Share capital & warrants Reserves & Surplus 10,971 12,144 18,012 23,201 29,822 Minority Interest Loans Secured Loans 6,972 9,877 8,641 7,017 7,978 Unsecured Loans 12,113 13,453 12,905 14,035 14,959 Deferred Tax liabilities Total Liabilities 31,090 36,564 40,833 45,528 54,034 Application of Funds FIXED ASSETS Gross block 16,544 19,736 24,077 27,379 32,365 Less: Depreciation 4,177 5,749 6,968 8,666 10,674 Net block 12,368 13,988 17,109 18,713 21,691 Capital work in progress 2,781 5,363 5,701 6,501 7,501 15,149 19,351 22,809 25,213 29,192 Investments CURRENT ASSETS, LOANS & ADVANCES Inventories 7,950 8,776 11,025 12,657 14,962 Sundry debtors 6,650 8,898 9,560 10,732 12,965 Cash and bank balances 2,826 1, ,121 Other current assets Loans and advances 3,091 3,869 3,713 4,128 4,986 20,591 22,890 25,059 28,428 35,122 LESS: CURRENT LIABILITIES AND PROVISIONS Current liabilities 4,932 5,435 6,728 7,805 9,973 Provisions ,255 5,701 7,080 8,157 10,325 NET CURRENT ASSETS 15,335 17,189 17,979 20,270 24,798 Deferred Tax Assets/Liability Total Assets 31,090 36,564 40,833 45,528 54, P age Branch Office:

13 CASH FLOW (Rs mn) 2009A 2010A 2011E 2012E PAT Depricaition non cash adjustment Change in WC CASH FLOW FROM OPERATION Capital Expenditure change in Investment(dec)/inc other investing cash flow cash flow used in investing Issue of Equity Issue/Repay Debt Dividend Paid Other financing cash flow Cash Flow from Financing Foreign currency translation Adj Net Cash Opening balance Closing Balance Ratio 2008A 2009A 2010A 2011E 2012E Growth Ratio Revenue 26.33% 16.19% 15.45% 20.80% EBITDA 51.40% 59.40% 8.70% 31.88% Profitability Ratio Gross Profit ratio 14.00% 16.78% 23.02% 21.68% 23.67% Net Profit ratio 9.78% 1.67% 15.75% 12.57% 13.28% ROCE ratio 12.44% 16.48% 6.03% 33.99% 42.18% Debt Equity Ratio EV/Sales EV/EBIDTA EV/Adj PAT P age Branch Office:

14 Management Profile Mr P.V. Ramaprasad Reddy Chairman of the Board and a promoter of the Company. He leads the strategic planning of the Company and pilots the successful implementation of the Company's ventures. Mr K.Nithyananda Reddy Managing Director and a promoter of the Company. He is versatile with the manufacturing technology and supervises the overall affairs of the Company. Dr. K. Ramachandran Non Executive Director Consultant to a number of Indian and international organizations on entrepreneurship and strategy. Dr. M Sivakumaran Whole time director He looks after research and development, new product development and total quality management. Mr M Madan Mohan Reddy Whole time director He looks after formulations manufacturing. 14 P age Branch Office:

15 Technical Corner The stock has a good support at 1010 levels and the important resistance at 950 levels. Stochastic and MACD are negative while RSI are neutral is an important level and if close above 1095 level the stock may move upto 1150 level. We advise investors to BUY at CMP with a target price of 1250 with a time period of 6 to 12 months. 15 P age Branch Office:

16 Research Team: Abhishek Jain Head of Research Rekha Ahuja Research Analyst Vikas Jain Research Analyst Siddharth Rajpurohit Research Analyst Yogesh Tiwari Research Analyst Mitesh Panchal Technical Analyst Harsh Mehta Associate Vipul Thakkar Institutional Sales Krunal mody Dealer Contact: /83 You can also access our reports on Bloomberg (SHAH <GO>) and Capitaliq. Disclaimer: The Information provided by SMS or in newsletter or in any document has been prepared by Shah Investor s Home Ltd (SIHL). The Information provided by SMS or in newsletter does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. SIHL or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report or SMS. This Information provided by SMS, reports or in newsletter is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this Information provided by SMS, report or in newsletter should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this information provided by SMS, report or in newsletter (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. The information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. The information provided by report or SMS is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SIHL and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this Information provided by SMS or in newsletter in certain jurisdictions may be restricted by law, and persons in whose possession this Information provided by SMS or in newsletter comes, should inform themselves about and observe, any such restrictions. The information given or Information provided by SMS, report or in newsletter is as of the date of the issue date of report or the date on which SMS provided and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. SIHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, SIHL is under no obligation to update or keep the information current. Nevertheless, SIHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither SIHL nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in the Information provided by SMS, report or in newsletter are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. 16 P age Branch Office: