Pharmaceutical - Results Preview - Mixed Performance in the US Biz; Domestic Biz to See Moderate Growth - Reliance Securities

We expect 3QFY17E will be a mixed quarter for the Indian pharmaceutical companies with some of them are expected to deliver healthy sales growth led by improved ANDA approvals rate by the US FDA, no incremental pricing pressure in the US business and relatively stable currency in Emerging Markets. Few other companies are expected to deliver muted performance due to regulatory headwinds in the US and demonetization impact on India business. We expect the companies under our coverage to report Sales, EBITDA & PAT growth of 14.6% yoy, 23.6% yoy & 28.2% yoy, respectively in 3QFY17. Despite increased R&D spending by the Indian companies, we envisage EBITDA margins improvement of 195bps yoy & 56bps qoq on account of better product-mix, launch of some of niche/FTF/AG products and seasonality benefits in the US. We continue to remain positive on long-term prospects of the pharmaceutical sector and recommend being stock-specific. Sun Pharma (SUNP), Aurobindo Pharma (ARBP) & Cipla continue to be our top-picks.

US Biz: Strong Growth for SUNP, LPC & GNP

The US business remains mainstay for most companies under our coverage universe, as exports contribute ~55-60% to their total sales. Several measures i.e. aggressive R&D spend and scale-up in complex ANDA filings are considered to be the key re-rating triggers. SUNP (Halol plant), CDH (Moraiya), DRRD (Srikakulam & two other plants) are still facing the US FDA issues (Warning Letters) to their critical facilities. We expect stable pricing environment for the generic players. We envisage strong growth in US revenues for the companies like GNP (launch of gZetia; 180 days exclusivity), SUNP (launch of authorized generics), LPC (Glumetza/Methergine; seasonality benefits; Gavis), CIPLA (Invagen) & ARBP (new launches; injectables), while DRRD & CDH are expected to deliver muted performance.

Moderate Growth in Domestic Formulations Biz

We expect moderate sales growth in domestic formulations business of most companies under our coverage universe on account of muted growth in acute segment led by demonetization, while we expect healthy growth in chronic segment. We envisage low double-digit growth in domestic business. The Indian pharmaceutical market - which reported growth of 10% in Dec'16 - is expected to witness 16-17% CAGR in next few years led by new product launches. Hence, we continue to remain bullish on Indian pharmaceutical sector from long-term perspectives.

Key Developments to Watch Out For:

ARBP: Outlook on US and Actavis businesses and update on new launches as well as newly acquired Generis in Portugal
CDH: Update on the US FDA clearance for Moraiya facility and outlook on US/India business
CIPLA: Update on combination inhaler launch in the UK market and outlook on the US and India business
DRRD: Update on the US FDA clearance for Srikakulam, Duvvada & Miryalaguda API facilities. Outlook for the US and other emerging markets
GNP: Outlook on the US and India business. Update on progress of NCE/NBE pipeline
LPC: Outlook on Gavis business/new launches; competitive landscape for branded drugs in the US market
SUNP: Update on the US FDA clearance for Halol facility and outlook for the US/India business; Update on Ranbaxy integration; competitive landscape for Taro products in the US.

Source : Equity Bulls

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