Pharma companies may post healthy numbers on strong global business, rupee fall

The pharmaceutical sector is likely to post strong earnings growth in the September quarter on the back of growth acceleration across geographies and benefit accruing from rupee depreciation. While both revenue and profit growth will continue to be in double digits for several firms, some analysts expect a muted growth for companies such as Sun Pharmaceuticals and Dr Reddy's Laboratories.

Ranjit Kapadia, senior VP – pharma, Centrum Broking, in his preview report on the sector, said "We expect pharma sector to report good results for the second quarter due to strong growth across geographies and benefit from depreciation of rupee. Companies are likely to report strong growth in the US generics market. Pharma companies under our covergae should report a revenue growth of 22% and profit growth of 20% year-on-year."

However, the key risks in this regard could be slowdown in the domestic pharma market and risks from global regulatory agencies going ahead.

Brokerage firm Motilal Oswal, on the other hand, said the high base effect will have an impact on the operational performance of some bigger players. "We expect sales growth of 14% y-o-y and earnings before interest, taxes, depreciation and amortization (EBITDA) growth of 19% y-o-y for our pharma universe (excluding one-offs). Adjusted profit after tax (PAT) is likely to grow 14% y-o-y, mainly due to a higher deprecation charge for most companies."

Stronger traction and improved sales mix in the US is expected to drive the revenue growth for Lupin, Cadila Healthcare, Torrent Pharma and Alembic Pharma, while the high base and slower new launches in the US are likely to see Sun Pharma and Dr. Reddy's growing in mid-teens. Biocon is also expected to report muted growth due to capacity constraints in insulin, a key growth driver for the company. Taro Pharma is expected to witness a stronger quarter due to price increases undertaken in the last quarter, which should propel Sun Pharma's US growth.

Daljeet S Kohli of IndiaNivesh, in his report, said, Sun Pharmaceuticals and Dr Reddy's Laboratories, which contributes 32% and 12% to the aggregate adjusted PAT, are expected to show muted growth of
13% y-o-y and 11% y-o-y for the quarter. This is due to lesser number of limited competition products and few launches in US market for Sun Pharma and Dr Reddy's.

It, however, expects companies under its coverage to deliver 20% and 15% y-o-y growth in sales and adjusted PAT, respectively for the September quarter.

The US generics is expected to grow by 27% year-on-year for the quarter. In addition to plain vanilla generics and para IV filings, pharma companies have already started investing heavily in limited competition complex molecules. These opportunities have higher as well as sustained profitability unlike limited period profitability seen in first-to-file (FTF) exclusivities.

"Though the opportunity remains promising, there could be quarterly volatility depending on product approvals from USFDA. As a result, we may see relatively lower y-o-y growth during the quarter," said Kohli.
On the domestic front, the market growth rate improved to 10.4% in August2014 from 9.3% in April 2014 due to 6.3% price increase taken by manufacturers for NLEM drugs and up to 10% for products outside price control in April 2014. "The price increase along with volume growth is likely to drive future growth. This is likely to benefit the entire pharma industry. We expect the growth momentum to continue due to the recent price revision and new product introductions," said Kapadia.

According to IndiaNivesh report, aggregate domestic formulation is expected to grow by 17% y-o-y. After four quarters of slow growth till the fourth quarter of the last fiscal, due to pricing cuts, domestic formulation segment is expected to show better performance in the second quarter of the current fiscal.

"Domestic formulation segment has already showed improvement in the first quarter and we expect this recovery to continue. Apart from new product launches and volume growth, pricing growth would also support the overall growth in domestic formulation going forward. The companies like Glenmark, Cipla and Sun Pharma would show superior growth compared to peers due to higher exposure to chronic portfolio," said the report.