Buy Aurobindo Pharma, target Rs 920: Phillip Capital (India)

Phillip Capital (India) has a buy call on Aurobindo Pharma with a target price of Rs 920.

The current market price of Aurobindo Pharma is Rs 776.

Time period given by the brokerage is one year when Aurobindo Pharma price can reach the defined target.


Investment rationale by the brokerage-
ARBP to acquire a portfolio of oncology injectables in US: ARBP has signed a definitive agreement to acquire a portfolio of seven branded oncology injectable products along with their intellectual property and commercial infrastructure from Spectrum pharmaceuticals Inc - a US based Biopharma Company. It’s a debt free and cash free acquisition and comes with an up-front payment US$160mn and potential milestones up to $140mn.

Acquisition uplifts the quality of its US portfolio: The target portfolio includes marketed oncology/hematology brands (like - FUSILEV, FOLOTYN, ZEVALIN, KHAPZORY, MARQIBO, BELEODAQ, and EVOMELA) having target indication for different types of cancer including, non-Hodgkin’s lymphoma, advanced metastatic colorectal cancer, acute lymphoblastic leukemia, and multiple myeloma. The acquisition not only establishes ARBP in the US innovative proprietary branded market, it also provides an experienced branded commercial field force that can complement ARBP’s future oncology pipeline. ARBP has already filed para IV application for key oncology brands like – Pomalyst (Pomalidomide), Xtandi (Enzalutamide), Kyprolis (Carfilzomib), Gilotrif (Afatinib), etc having various cancer indications with cumulative market opportunity of >$4-5bn in US market.

The acquisition will be earnings accretive in FY20: The acquired portfolio generated sales of US$ 116mn in 2017 and US$ 80mn in 9m2018. ARBP expect to close the deal with in 90days and expects to achieve sales of US$100mn in the first year of acquisition. Although Spectrum was a loss making company due to higher innovative R&D spends, we (analyzing the cost structure of Spectrum) estimate over 30 per cent EBITDA margin for the acquired oncology portfolio. Considering the acquisition a leveraged buy-out and assuming 6 per cent debt cost, we estimate the acquired operation to add incremental revenue and EPS of Rs 7.0bn and Rs 0.6 in FY20 (implying 1.1 per cent incremental earnings). Although the acquisition is certain, we have not built it into our estimates as the acquisition is subject to FTC approval.

Recommend BUY with the revised target of Rs 920: We believe the acquisition is a great deal for ARBP as it qualitatively widens its business presence in the US, comes at a comfortable valuations of about one-time sales, and results in earning accretion. We believe ARBP’s pending acquisition of Sandoz’s generic as well as branded portfolio coupled with Spectrum’s branded oncology portfolio in US widens its business presence qualitatively and drives value growth. We value ARBP at Rs 920, i.e., at 16x FY20 EPS of Rs 57.3 (factoring the incremental EPS of Rs 6.5 from Sandoz acquisition). Recommend BUY with target of Rs 920.