Analyst Corner: Reiterate ‘buy’ on Aurobindo Pharma with TP of Rs 1,100

ARBP building manufacturing capacity in parallel with drug development process Aurobindo Pharma(ARBP) and COVAXX have signed an exclusive agreement to develop, manufacture and commercialise a Covid-19 vaccine (UB-612) for India and the United Nations Children’s Fund (UNICEF). UB-612 is currently in Phase-I trials, with Phase-II/III to begin in 1QCY21. With investments of Rs 1.5 billion under progress to create an annual capacity (to be ready by Jun’21) of 480 million doses, the revenue potential from this vaccine could be ~$280 million/$580 million in FY22E/FY23E, subject to regulatory approvals. We remain positive on the company on, improved outlook for the injectable business, WIP for its complex product pipeline, significantly reduced financial leverage, completion of remediation measures at sites under regulatory issues, potential upside from vaccines, and f) comfortable valuation. We value ARBP at 16x 12M forward earnings to arrive at our target price of Rs 1,100. Reiterate ‘buy’.

With the inking of this agreement, the development skills of COVAXX would complement ARBP’s development, manufacturing as well as commercialisation infrastructure. Since UB-612 requires normal refrigeration (no freezing required) for distribution, it would enable faster availability of the vaccine worldwide during the pandemic, creating a win-win situation for all stakeholders.

Even as the vaccine candidates are progressing through various phases of clinical trials and approvals, companies and countries already have agreements for supplying these vaccines, subject to approval. Oxford-AstraZeneca vaccine is leading the pre-order race with ~3.3 billion doses, followed by Novavax and Pfizer- BioNTech. The pricing of these vaccines varies depending on quantities ordered and the economic status of countries.

The Pfizer-BioNTech vaccine is priced at $19.5/dose in the US, while the Oxford-AstraZeneca vaccine is expected to be priced at $3/dose till the pandemic is officially declared over.

ARBP is on track to build a niche portfolio: Biosimilars, Topicals (filings from FY21), Nasals, Transdermal Patches, Inhalers, Oncology, Hormone products, and Depot Injections (filings would begin next year). It is increasing its reach/expanding portfolio in the EU market and shifting its manufacturing base to India, thereby improving profitability. Building manufacturing capacity would fasten the contractual process with vaccine developers.

We expect a 12% earnings CAGR over FY20-23E (on a high base of FY20, including Natrol sales), led by new launches/increased market share in key markets (US/EU), 180bp margin expansion, and lower financial leverage. The vaccine opportunity has the potential to add Rs 4.5/Rs12 to FY22/23E EPS, subject to regulatory approval. We value ARBP at 16x 12M forward earnings to arrive at our TP of Rs1,100. We remain positive on the company given capability to build a niche portfolio, cost efficiency owing to complete integration of manufacturing, and lower financial leverage. Reiterate ‘buy’.