Company Update | Pharmaceuticals

January 18, 2019

Aurobindo Pharmaceuticals

BUY

CMP

`774

Acquires branded oncology products

Target Price

`890

Aurobindo Pharma’s subsidiary Acrotech Biopharma has acquired portfolio

Investment Period

12 Months

of seven marketed oncology injectable products from Spectrum

Pharmaceuticals. Aurobindo Pharma Limited will be acquiring the portfolio

Stock Info

on a debt free and cash free basis. The acquisition will help Aurobindo to

Sector

Pharmaceuticals

enter the branded oncology market with a range of products, which are

Market Cap (` cr)

45,367

well recognized by the oncology Industry. The portfolio is expected to

Net Debt (` cr)

2,579

Beta

1.1

generate a revenue of around US$100mn for the first 12 months after

52 Week High / Low

830/527

completion of the transaction for Aurobindo. Acquisition will be for an

Avg. Daily Volume

48,323

Face Value (`)

upfront purchase price of US$160mn in cash plus up to US$140mn on

BSE Sensex

36,374

achieving regulatory and sales-based milestones. Acquisition values the

Nifty

10,905

acquired company at 1.6xMarketCap/sales (on upfront payment), which

Reuters Code

ARBN.BO

Bloomberg Code

ARBP.IN

we believe is attractive. The acquired business, as guided by the

Management has EBDITA margins better than APL (20-22%), making the

Shareholding Pattern (%)

deal attractive in terms of payback also. Transaction is expected to be

Promoters

51.9

MF / Banks / Indian Fls

14.4

accretive to normalized EPS from first full year of ownership and will

FII / NRIs / OCBs

20.1

augment the net profit growth by 3% on a full year basis (as the acquired

Indian Public / Others

13.6

entity). We maintain a Buy with a revised target of `890.

Abs.(%)

1yr

3yr

Sensex

3.4

3.7

50.4

Adds branded portfolio to the company: Aurobindo Pharma’s subsidiary

Aurobindo Pharma

0.0

17.5

(3.2)

Acrotech Biopharma will acquire portfolio of seven marketed oncology

injectable products from Spectrum Pharmaceuticals. The acquisition will help

Aurobindo to enter the branded oncology market with a range of products,

which are well recognized by the oncology Industry. Thus with this the

branded injectable business will be around 3% of sales in FY2020E. The

portfolio is expected to generate a revenue of around US$100mn for the first

12 months after completion of the transaction for Aurobindo. With this,

Aurobindo will also acquire a well-established and experienced branded

commercial infrastructure to continue commercializing these brands.

3-year price chart

1000

Niche product portfolio: The acquired portfolio of the injectable includes

800

Fusilev (levoleucovorin), Folotyn (pralatrexate injection), Zevalin

(ibritumomab tiuxetan), Marqibo (vincristine sulfate liposome injection), and

600

Beleodaq (belinostat) for injection, Evomela (melphalan) for injection and

400

Khapzory (levoleucovorin).

Amongst these products, almost 70% of sales is accounted by two products;

namely Folotyn (pralatrexate injection) & Evomela (melphalan) for injection.

Source: Company, Angel Research

In addition, while Fusilev has seen generic competition, Khapzory

(levoleucovorin) has been launched last year and hence has scope of

enhancing the sales of the company. These products of the company are in

the niche segments witnessing a growth of 3-4% pa; however, its two big

products (Folotyn (pralatrexate injection) & Evomela (melphalan)) enjoy

Sarabjit Kour Nangra

market share of around 20% & 44% respectively. In addition, most

022-39357800 Ext: 6806

importantly these two products do not face patent expiry until 2026/27.

[email protected]

Please refer to important disclosures at the end of this report

Aurobindo Pharmaceuticals

Apart from these products, the deal has potential to add to the expected

sales. Under the terms of the deal, Aurobindo will make US$160mn up-front

cash payment and up to US$140mn in milestones as listed below. Thus, the

deal provides for further enhancement of sales, which could accrue from

further R&D efforts for products Marqibo & Khapzory respectively.

Marqibo Milestones

$30mn for FDA Product Approval for MARQIBO with label indicated for

diffuse large B-cell lymphoma

$10mn for FDA Product Approval for MARQIBO for any indication other than

the B-Cell Lymphoma Indication, single vial or pediatric ALL

$30mn for Net Sales of MARQIBO during any trailing twelve (12) month

period during the Milestone Period are equal to or greater than $300,000,000

$10mn for Net Sales of MARQIBO during any trailing twelve (12) month

period during the Milestone Period are equal to or greater than $400,000,000.

Khapzory Milestones

$5 million for Net Sales of KHAPZORY during any trailing twelve (12) month

period during the Milestone Period are equal to or greater than $50,000,000

$5 million for Cumulative Net Sales of KHAPZORY are equal to or greater

than $150,000,000 at any time during the Milestone Period

$10 million for Cumulative Net Sales of KHAPZORY are equal to or greater

than $200,000,000 at any time during the Milestone Period

$15 million for Cumulative Net Sales of KHAPZORY are equal to or greater

than $300,000,000 at any time during the Milestone Period

$25 million for Cumulative Net Sales of KHAPZORY are equal to or greater

than $400,000,000 at any time during the Milestone Period.

The milestone period lasts for five years post the closing of the transaction.

KHAPZORY milestones only payable in the event KHAPZORY is assigned a

unique J-code.

Outlook & Valuations: On valuation front, the company paid almost

1.6xMarketCap/sales (on upfront payment), which we believe is very attractive.

The addition whole US$140mn will be paid up if the sales for the two said above

products reach US$800mn; which we believe is attractive. On the Operating

front, the company guided that the acquired business has OMP is better than

company’s current OPMs (around 20-22%). It’s an all cash deal and company

has guided that it will take 90 days for such deals to be integrated, so mostly it

will start reflecting in FY2020. We believe that the deal can add almost ~`3% on

EPS growth in FY2020, with major benefits reflecting in FY2021 (when the ramp-

up of sales can enhance the profitability of the company). Given the

opportunity and Aurobindo Pharmaceuticals position in the global generic, we

believe that the company still should give decent upsides on the stock. Hence,

we maintain our buy with a price target of `890.

January 18, 2019

Aurobindo Pharmaceuticals

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited, Bombay

Stock Exchange Limited, Metropolitan Stock Exchange Limited, Multi Commodity Exchange of India Ltd and National Commodity &

Derivatives Exchange Ltd It is also registered as a Depository Participant with CDSL and Portfolio Manager and Investment Adviser with

SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Limited is a registered entity with SEBI for Research

Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number INH000000164. Angel or its associates has not

been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market. Angel or its

associates/analyst has not received any compensation / managed or co-managed public offering of securities of the company covered

by Analyst during the past twelve months.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make

such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies

referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits

and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the

contrary view, if any

The information in this document has been printed on the basis of publicly available information, internal data and other reliable

sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this

document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way

responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot

testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.

While Angel Broking Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,

redistributed or passed on, directly or indirectly.

Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in

connection with the use of this information.

Disclosure of Interest Statement

Aurobindo Pharma

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or

relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

J Ratings (Returns):

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

Reduce (-5% to -15%)

Sell (< -15%)