Aurobindo cancels Sandoz deal

Shares of drug maker Aurobindo Pharma gained 5% today even after it decided to call off the $1 billion Novartis’ Sandoz oral solid and dermatology portfolio acquisition due to considerable delays in gaining US FTC approval.

The acquisition would have made the pharma company the second largest generic player in the US market.

Aurobindo Pharma buying Sandoz select portfolio was considered to be a value accretive and one of the important catalysts.

Successful completion of the deal would have added 15% annualized to Aurobindo’s EPS estimates and added significant scale, catapulting the drug maker as the second largest generic player in the US.

The drug maker is grappling with regulatory challenges in the US and is likely to see moderate single-digit growth in the interim. USFDA flag for Unit IV is a key monitorable in the near term.

Over the past 12 months, the company has received a warning letter for its Unit-XI (API), with the USFDA also classifying Unit I and XI (both API), and Unit-VII (oral formulations) with an OAI classification.

Meanwhile, the deal termination will remove a near-term earnings driver given the meaningful $900 million sales accretion to Aurobindo’s US sales, as well as significant cost synergies, though, conversely, it will also help improve the medium-term growth profile, given concerns over a slowing growth profile for the combined entity.

Holzkirchen-based Sandoz is a leading player in generic pharmaceuticals and biosimilars and a division of Swiss drug major Novartis.

The deal termination will remove a near-term earnings driver for ARBP, given the meaningful >US$900 mn sales accretion to ARBP’s US sales, as well as significant cost synergies, athough, it will also help improve the medium term growth profile, given growing concerns over a slowing growth profile for the combined entity.

The deal termination will also remove debt overhang, as the net debt for the combined entity was expected to increase to Rs100 bn, which on a stand-alone basis is now expected to decline to around Rs12 bn in FY2022

Post the Sandoz deal termination, we believe regulatory actions will again come into the limelight, particularly, in the event of a rapid price erosion scenario for ertapenem, its largest US product (US$70-80 mn sales in FY2020E).

Over the past 12 months, the company has received a warning letter for its Unit-XI (API), with the US FDA also classifying Unit I and XI (both API), and Unit-VII (oral formulations) with an OAI classification.

This now makes the outcome of Unit-IV critical, though, we believe an OAI is a likely outcome. Unit-IV is key sterile facility, which is expected to account for US$170 mn FY2020E sales, and has the largest number of filings pending approval at 47 ANDAs (of 153 pending ANDAs, of which 15 are expected to be launched in FY2021)

The company has four other plants under USFDA scrutiny (Unit XI: warning letter & Unit VII/I/IX have official action indicated (OAI) status)

Over the past one year, nine sites have been inspected by the USFDA. Units 1, 11 and 7 have been classified as Official Action Indicated (OAI) and Unit 9 has been issued a warning letter recently. Units 5 and 8 were inspected in Oct’19 and classified as VAI.

Recently, there has been revocation of inspection classification at Unit 4 and thus we await further clarity from a compliance perspective

Hence going ahead it is likely that the stock will remain in a close range. until clarity emerges from the regulatory side frpm USFDA going ahead.

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