Aurobindo Pharma: Decent 3Q, US to fuel growth; reiterate LONG | Aurobindo Pharma Q3FY18 |

Aurobindo Pharma’s (ARBP) 3QFY18 Sales at Rs. 43.4bn grew by 11% yoy was largely in line with EE, EBITDA at Rs. 10.25bn grew 15% yoy was 3% below EE. EBITDA miss is largely attributable to lower gross margin and higher opex. Management commentary (as well peers) over slowing tapering price erosion with price bottom in the US seems to be positive for the industry and could particulary help Aurobindo go grow going forward with 1) Injectable pipeline guided to grow at 30% and 25 products lined up in Oral side to be launched. We reiterate Long rating on the stock with Mar’19 TP of Rs. 773 , set by ascribing 20P/E.

New launches critical for continued momentum in US biz: US sales declined by US$ 32mn qoq woing to additional competition in gRenvela. Injectable sales were at US$ 46mn (vs. US$ 55-60mn guided). ARBP remains confident of achieving 55-60mn in injectable sales by next fiscal on the back of gFondaparinux launch amongst others. Management indicated that overall price erosion in their base portfolio was ~2% and it shall come off further going off and renewed confident over Oral solid growth with 25 ANDAs launch planned over next 5-6 months.

R&D costs to inch up gradually: As ARBP is moving to the complex generic space, it would need to conduct clinical trials for some products. Management expects R&D to be in 3.5-4% range this year and in FY19 expected to in the range of 5-6%, but peak to 8% of sales during phase-3 trials for liposomal and biosimilars in FY19E. on Injectable side, company will be completing CT of Depo injections and filing could be in early FY19.

Europe margins to improve; outlook remains strong: Europe business sales grew by a robust 37% yoy (incl. integration of Generis Farmaceutica); ex-acquisition, base business grew 16% yoy in local currency. Growth was mainly led by new tenderds being flouted in their five major markets. However, management expects growth to moderate from current levels going forward. Actavis margins reached early double-digits with site manufacturing transfer of 78 drugs (out of 112 drugs planned) to the Indian facility and cost control.

ARV sees pricing pressure: ARBP stated that the ARV business declined during the quarter owing to deferment of shipments, while there remains overall pricing pressure in the market. However, it remained optimistic on the Dolutagavir combination and expects to gradually ramp up and aid the growth. In 2Q ARBP mentioned they have already received a two-year contract worth US$ 80mn (contribution to start from Apr’18).

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