New launches in US, margin expansion to aid Aurobindo: Goldman

Moneycontrol NewsNew product launches in the US, coupled with margin expansion is making Goldman Sachs upbeat on Aurobindo Pharma going forward. However, there are risks associated with the respect to drug pricing policy changes in the US and imposition of additional taxes.Goldman Sachs has set a target price of Rs 934 with an upside potential of 40 percent.The research firm feels that new product launches in the US are gaining momentum, which lead to a topline growth of 14 percent. It forecasts an EBITDA (earnings before interest, taxes, depreciation and amortisation) growth of 19 percent over the next two years against its peers’ growth of 12 percent. It also sees a 100 basis points (bps) margin expansion for the pharma major going forward on the back of an improving product mix towards complex generics.“Despite current market focus on potential US policy changes, we think its significant EV/EBITDA discount at 30% to peers is unwarranted (though closer to US generics players) and will narrow over time,” the firm added in its report.Goldman Sachs has raised concerns on policy changes to control drug prices. US President Donald Trump had tweeted regarding a policy in the works on the same. Also, the impact of destination-based tax (DBT) could hit the firm’s financials. “With 45% of Aurobindo’s FY17 estimated revenues from the US and the company being a net importer, a DBT would negatively impact profitability,” it said in its report.However, this could already be priced in and the market could have overlooked the potential positive offsets. A re-rating on the stock could be possible if catalysts such as ramp in in new product launches, market share gains in key molecules and margin expansion due to high-value complex drugs kick in, the research firm wrote in its report.Going forward, there is more room to grow potential mergers and acquisitions (M&As) and the balance sheet is on the mend, it said.