Buy : Aventis Pharma CMP: Rs 1,360 Target : Rs 1,670

(BSE: 500674 | NSE: AVENTIS | ISIN: INE058A01010)

We attended the AGM of Aventis Pharma on 15 June 2007

The following are key highlights of the meet.

Export sales to increase after a dip in 2006

Export sales for CY06 witnessed a drop of 1.3% to Rs 2.3bn due to the removal of some products from the Federal Reimbursement list in Russia . The board of directors expects sales to pick up in CY07 with increasing sourcing of products
from group companies. Aventis exports APIs such as Articaine, Glibenclamide and Lasamide to group companies which witnessed a growth of 25% in CY06.

Received marketing approval on Rimonabant, launch date awaited

Aventis has received marketing approval on Rimonabant, an anti-obesity drug for Indian markets. However, the company is yet to declare a launch date for the drug. The anti-obesity market in India is valued at ~Rs 250mn and is growing at 50% annually. About 45% of the women and 29% of the men in urban India are believed to be overweight. A generic version of the drug has been launched in the market by Torrent Pharma, Zydus Cadila and Sun Pharma.

Rimonabant is currently approved in 37 countries and marketed in 18 countries under the brand name Acomplia. The drug has not been approved by the USFDA advisory committee citing adverse psychiatric risk. The company is likely to submit further data to the USFDA seeking approval.

India an important market for Sanofi Aventis

The chairman of Aventis Pharma, Dr. Vijay Mallya, indicated that the parent company – Sanofi Aventis – was extremely supportive of its Indian arm and that India was a very important market for the group.

New products to be launched from the listed subsidiary

The chairman explicitly mentioned that new products would be launched through the listed subsidiary and that there would be no conflict of interest with the unlisted subsidiary, Sanofi India . New R&D products would be launched after judging the market dynamics from time to time.

Other highlights

™ The management expects an increase in the volume of clinical trials

conducted in India for the group companies.

Lantus recorded a growth of 57% to Rs 218mn during CY06 whereas Combiflam recorded a growth of 27% to Rs 684mn.

33% of the company’s products fall under DPCO.

The company has planned a capex of Rs 232mn for CY07.

Aventis has no surplus land available for sale.

The JV with Chiron will continue and sales of Rabipur will not be affected.

Outlook: Strategic brands and exports to drive future revenue growth

We expect Aventis to clock a revenue CAGR of 12.2% over CY06-CY08 to Rs 11.1bn driven by a 20% CAGR in strategic brands coupled with exports growth. Exports are likely to contribute 24.5% of total sales in CY08.

EBITDA margin likely to expand 360bps over CY06-CY08

We estimate that the EBITDA margin will expand by 360bps to 28.6% over CY06- CY08, led by a better product mix in the domestic market and an increasing contribution from exports.

Earnings projected to grow at 19% CAGR

We expect a net profit CAGR of 19.2% to Rs 2.4bn over the same period fuelled by strong operational performance and healthy non-operational income on account of cash and cash equivalents of Rs 3.9bn in the books (Rs 168/share or 12.7% of market capitalisation).

Valuation

Maintain Buy with June 2008 target of Rs 1,670

Aventis’ focus on strategic brands in the chronic segment, powerful marketing network and close alignment with the parent company, make the stock attractive from a long- term perspective. At Rs 1,360, the stock is trading at 15.2x on CY07E EPS of Rs 89.4 and 13.0x on CY08E EPS of Rs 104.8. We maintain Buy with a June 2008 target price of Rs 1,670. Our target price is based on a P/E multiple of 16x on CY08E earnings, which is at a 20% discount to peer company Glaxo SmithKline..

Better product mix to expand EBITDA margin by 360bps over CY06-CY08

 

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