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  • Aurobindo Pharma is spreading good vibes in the market: All you need to know

    Publish Date: September 10, 2018

    Drug company Aurobindo Pharma acquired Sandoz Inc’s dermatology business and three manufacturing facilities in the US for an initial cash payment of $900 million on Thursday.

    The acquisition makes Aurobindo Pharma the “second-largest generic player in the US by number of prescription”, according to the official statement of the company.

    The deal seems to be a win-win for both Aurobindo and Novartis — Sandoz Inc is a part of Novartis’ generic division. While Novartis has been keen to exit the generic drugs business, Aurobindo Pharma’s ambition is to scale-up its dermatology business in the US.

    Good deal

    Aurobindo will see a healthy spurt in its revenues post the takeover. We believe the combined revenues will be around $2.2 billion in FY2020, partly because the acquired Sandoz businesses generated sales worth $1.2 billion in 2017. That means Aurobindo’s business will expand by a healthy 75%.

    Novartis has been looking to offload its dermatology business since last year. Initial reports suggested that the Novartis was looking to sell the business for anything between $1-1.5 billion. That suggests it was a good deal for Aurobindo. That’s because Aurobindo will not pay more than $1 billion — the Hyderabad-based may pay a further $100 million depending on future performances.

    Related read: Our most recent market report on Aurobindo Pharma

    Novartis may have been happy to sell for a lower range, probably because a price depression in the US market has reduced business valuations.

    Way ahead

    As mentioned earlier, Aurobindo has been eyeing to strengthen its footprint in the dermatology business. It has been the intent for most Indian companies. But Aurobindo’s acquisition has positioned itself as the leader in the therapeutic segment.

    The Indian pharmaceutical company has acquired Sandoz’s tablets and capsules business as well. The solid oral portfolio, which comprises 70% of the total deal, will further bolster the company’s position in the market. A Mint report suggests that the pharma company will look to work on high scale and lower margins to boost profitability.

    Although the acquisition will stretch the balance sheet, the company’s past record suggests it has managed to handle such situations before.

    Market reaction

    The company’s stock surged 8.8% to reach its 52-week high on Friday following news of the acquisition that is set to improve its product offering. The company said the acquisition will add 300 more products. We believe the products that are in the pipeline will be another booster for the pharmaceutical company. Product launches of Concerta in FY2020, Intuniv in FY 2021 and Suboxone (FY2023 or earlier) will give the company an added edge in the US market.

    Most brokerages have upgraded its the company’s target price as well. Kotak Securities believes that Aurobindo’s “superb execution in the US market and consistent scale-up” will improve the company’s profit after tax (PAT) by 13.2% and earnings per share (EPS) by 13.1% by FY2020.

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