Aurobindo Pharma: A turnaround story

Last Updated: Thu, Nov 22, 2012 19:43 hrs

For a pharma company targeting the global generics market, an import alert against its manufacturing facility is definitely not good news. Aurobindo Pharma has battled this and more through FY12. The company took a sales hit of $36 million due to import alerts on two of its plants. Fresh product approvals were also adversely impacted for the same reason. The fourth quarter was a washout as sales and margins fell sharply. But all these have been changing in the current financial year, with the company beating the Street’s estimates on both margins and revenues. The stock has returned 65 per cent over the last three months.

For starters, the company’s management has conveyed that the US Food and Drug Administration (FDA) has inspected one of the units which had received a warning letter. The company has responded to observations and is currently awaiting clearance. Edelweiss Securities says following the final inspection of facilities (Unit-IV, Unit-VI and Unit-XII), the company has moved a step closer to getting approval and further scale-up in business.

Apart from the key overhang of US FDA approvals, the company has also shown improvement in its core business in the September quarter. Sales grew 40 per cent year-on-year to Rs 1,500 crore. Even sequentially, revenues were up 24 per cent, indicating that the company is on the road to recovery. Operating margins which had declined to 11 per cent in Q4FY12 and Q1FY13 expanded by 500 basis points to 16 per cent.

Analysts believe Aurobindo would be able to sustain high margins as its core business is seeing improvement and fresh product approvals. Revenue and margin growth have been driven by growth in its dollar revenues from the US market, up 31 per cent to $77 million. The launch of generic versions of asthma medicine Singulair and the ramp-up in HIV medicine Combivir and cardiovascular drug Plavix have benefited the company, explain analysts. Analysts believe US revenues will get a further boost once it receives approvals for products filed. The company has 136 abbreviated new drug application (ANDA) approvals and 265 ANDA filings. According to Citi, strong revenue growth (own sales plus through large partners) and consequently rising capacity utilisation along with an improving product mix would drive strong earnings growth.

Most analysts have upgraded the stock, given that the earnings outlook appears less cloudy for FY13 and FY14. However, if the import alerts are not lifted by the US FDA and utilisation levels at the Hyderabad Special Economic Zone do not improve, then growth could suffer.

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