Credit Suisse upgraded Aurobindo Pharma to OUTPERFORM (from Neutral) and increased target price to Rs 900 from Rs 710. Aurobindo’s large viral vector vaccine facility (300 mn doses) should be ready by Mar/Apr-2021 which will drive future growth of the company. Credit Suisse increased the target price of Apollo Hospitals to Rs 2,405 from Rs 2365. Apollo Hospitals has infrastructure to administer 100 mn doses annually and this can add Rs 2.5 bn EBITDA or 15% to FY22E.

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Manufacturing capacity is ample but cold chain infrastructure is key bottleneck:

India needs about 1.7 bn COVID-19 vaccine doses to vaccinate the majority of its adult population. It targets to administer 400-500 mn doses by July 2021. The key vaccines India is banking on are from Oxford/AstraZeneca, Novavax and J&J (temperature range is 2-8°C) and the earliest efficacy data is expected by end of Nov 2020/Dec 2020 and in the best case, vaccines can be rolled out in Jan 2021. There is sufficient capacity for vaccine manufacturing (>2.4 bn doses) and various components like vials, stoppers, syringes, gauze, alcohol swabs, etc. The bottleneck is cold storage infrastructure (especially refrigerated vans) and by using a part of the capacity of current immunization program (600 mn doses) and the cold chain infrastructure of the private sector (250-300 mn doses), potential vaccinations can reach 550-600 mn doses annually. Manpower required for administering the vaccine will be <100k.

Manufacturing plays:

Aurobindo’s large viral vector vaccine facility (300 mn doses) should be ready by Mar/Apr-2021. The pricing in export markets could be higher than in India and profitability could be at Rs 20-25 per dose and, therefore, on a 300 mn dose capacity, Aurobindo could benefit from a potential EBITDA of Rs 6.0-7.5 bn (or 12-15% of FY22E EBITDA). Cadila Healthcare also has a facility for 100 mn doses but it is for DNA vaccine and would not be able to manufacture vaccine from global players in the near term.

Vaccine administration plays:

Apollo Hospitals has infrastructure to administer 100 mn doses annually and this can add Rs 2.5 bn EBITDA or 15% to FY22E. Diagnostic companies like Metropolis should also benefit from an increase in demand for antibody tests (both before and after vaccination) but their pricing can sharply come down.

Higher vaccination to impact volumes of Covid-19 treatment drugs:

Cipla and Cadila Healthcare have benefitted the most from the sale of Covid-19 treatment drugs (especially Remdesivir) in Q2 FY21 and volume should substantially reduce in FY22 on increasing vaccination.