Aurobindo Pharma Rating: buy; Difficult final quarter for the company

Revenues at Rs 58.1 bn declined 3.2% on a y-o-y and q-o-q basis mainly on continued US pricing woes. US sales at $393 m (47% of Q4 revenues) declined 7.6% y-o-y (-1.1% q-o-q) on elevated price erosion in the base portfolio (price erosion was 11.5% in Q4 vs average of 9% in last 4 quarters), partially offset by volume gains.

As per ARBP, elevated price erosion may continue for the next few quarters and new launches remain critical to offsetting erosion in the base portfolio. Revenues from Europe at Rs 15.4 bn (26.5% of Q4 revenues) declined 9.1% q-o-q (-0.8%

Value unlocking of injectables arm awaited: ARBP had formed a committee of Independent Directors to assess ways for value discovery for Eugia Pharma (its subsidiary housing injectable assets). The evaluation is ongoing. It reaffirmed its goal of achieving global sales of $650-700 m from generic injectables by FY24 (vs $438 m in FY22). We expect US generic injectable sales to pick up notably from FY23 onwards and the US should contribute most (c60-70%) of the FY24 sales goal. It has a rich pipeline of 56 injectable ANDAs in the US.

Retain Buy, lower TP to `655 (from `845): The stock price for ARBP has corrected 27.5% in 2022 YTD (vs -6.1% for Sensex) and we believe the current price adequately prices in concerns on elevated pricing erosion in the US, and uncertainty regarding the timeline for the conclusion of the value discovery process for the injectables business. While pricing concerns continue in the US, we expect its US generics (excluding injectables) to sustain single-digit sales growth despite a large base (c$1.1 bn sales pa) on new launches (14 during FY22) and volume gains.

Initiatives to support long-term growth continue (e.g. R&D for biosimilars, vaccines, depot injections, capex for PLI [production-linked incentive] project for penicillin G, build-up of India formulations business, etc); however, we believe any meaningful contribution from these initiatives is at least two years away. Post Q4FY22, we adjust estimates to reflect continued input cost pressure and higher US price erosion and these changes lead to a 13.4%/16.6% cut in our EPS estimates for FY23e/FY24e.