Growth in Q4FY20 was led by Europe, the Rest of the World. The US market remained resilient on stocking of anti-infectives and anti-virals. However, it was partly offset by QoQ dip in injectable sales due to lower elective procedures amid COVID-19. Gross margin improved on the back of lower-priced inventory, a better product mix, and currency impact.

Aurobindo's Q4FY20 sales were up 16.4% YoY to Rs 6,160 crore. Growth was largely led by: a) US formulations (48.6% of sales; 17% YoY constant currency growth) and b) the Europe business (27% of sales; 26% YoY growth). The ARV and Growth markets (6% of sales each) grew ~30% YoY in 4QFY20. The API business (12% of sales) was down 17.6% YoY, which dragged down overall growth to some extent.

US revenue rose 17% on a YoY basis to US$413mn led by new launches and volume gains. In FY20, Aurobindo launched 34 products and aims to launch 50-60 products across inhalers, nasals, topical, transdermals, biosimilars, and depo-injectables in FY21 with increasing complexity. Remote audits have been requested for units 1, 9, and 11 and quicker than expected remediation by the USFDA is an uptick risk. EU revenue also rose 26% YoY with some inventory stocking due to the COVID-19 lockdown.

In the short term, Aurobindo expects slower US sales growth in-line with the broader market slowdown; however, it believes the outlook for its US sales remains steady on a strong pipeline, portfolio breadth, cost competitiveness, and supply chain agility. They believe the pace of launches and pick-up in injectables both AuroMedics and Spectrum sales should help it sustain US sales growth. The US injectable pipeline remains strong, with 58 injectables products awaiting FDA approval (36% of its total pending approvals).

Aurobindo also maintains momentum in filings and approvals of Abbreviated New Drug Application (ANDAs) in the US - it filed 17 ANDAs during Q4FY20, which included 10 injectable filings. For FY20, it filed a total of 55 ANDAs, which included 19 injectables and plans 50-60 filings each year for the next two fiscal years. It received approvals for 6 ANDAs in Q4FY20 and 22 ANDAs in FY20 (including 8 injectables). Out of 34 products launched during FY20, 8 were injectables.

Aurobindo continues to see good progress in net debt reduction, with a reduction of USD87mn in Q4 (reduction of USD365m in FY20), taking net debt to USD359mn in FY20. The company aims for a net debt reduction of USD200-250mn thus bringing its long-term debt to zero in the next two years as compared to the earlier target that was to achieve zero debt level in three years.

As of the period ending 31 March 2020, Aurobindo had gross debt of USD734mn (USD1,007m in FY19), with more than 99% of debt denominated in foreign currencies. With a reduction in debt, Aurobindo also saw a decline in finance costs to 2.1% in Q4FY20 vs 3.2% in Q4FY19.

Aurobindo spent Rs 960 crore which is 4.1% of revenues towards R&D in FY20. With progress in the pipeline for differentiated products and biosimilars, it expects R&D to increase to 5.5% of revenues in FY21.

The company is currently working on five biosimilars and aims to file one biosimilar with the EU regulatory body by end of FY21 or early FY22. Apart from biosimilars, it is making gradual progress in differentiated generics such as inhalers, nasal sprays, topicals, transdermal patches, and depo injections, and it can manage its manufacturing capacities to achieve critical sales scale for these formulations.

Aurobindo acquired Apotex International is making gradual progress and expects to achieve EBITDA breakeven for H2FY21. Post EBITDA breakeven of Apotex portfolio, Aurobindo expects to return to EBITDA margins of 12-13% as compared to 9-10% currently.

Key Risks:

Failure to scale-up US sales, including injectables sales

A slowdown in ANDA approvals and USFDA related regulatory risks are part of the generics business

Deterioration in gross margins due to adverse product mix

A decline in anti-retroviral (ARV) sales due to funding squeeze by sponsors or other external factors

Final Thoughts:

After a rally of 60%+ for Aurobindo in 2020 YTD, with many believing that US business is priced in, the company can still sustain US growth despite a high base on a large product portfolio with the cost advantage of highly integrated manufacturing. In the past too, it has met and exceeded US growth expectations, and management sees no reason for a potential US slowdown. It has made notable progress in debt reduction, with net debt reduction of USD365mn in FY20, and now expects to achieve a target of zero long- term debt by end of FY22 as compared to the earlier end of FY23.

As compared to peers looking to rationalize R&D spends, Aurobindo is looking to step on the gas with growing investments in biosimilars, differentiated products, etc. as it looks to file 50-60 Abbreviated New Drug Application (ANDAs) per year going forward. This bodes well from a medium-term growth perspective.

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