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YoY Recovery on the Cards
The companies under our pharmaceutical coverage universe are expected to report healthy sales growth on YoY basis (+17%) due to growth in the US business, while we expect the performance to remain sequentially muted. Domestic business of our coverage universe is expected grow by 7.4% YoY owing to overall slowdown in the market. The US business is likely to deliver 26% YoY growth on low base, stable pricing pressure and one-off opportunities, while the performance to remain sequentially muted. We expect EBITDA and PAT to grow by +23% YoY (12% QoQ) and 13.3% YoY (+14.5% QoQ). As per our channel check, API prices moderated during the quarter. Led by strong growth in the US business (one-off opportunities) and favourable currency movement, we expect margin to expand by 100bps YoY to 20.3%. We continue to remain positive on long-term prospects of the pharmaceutical sector and recommend being stock-specific.
One-off Opportunities & Low YoY Base to Drive US Growth
The US business remains mainstay for most companies under our coverage universe. We expect the US business of our coverage universe to grow by 26% YoY (in CC terms) owing to one-off opportunities, new launches and stable pricing environment in the US, while we expect 1.5% sequential decline led by slower ANDA approvals (55 in 1QFY20 vs. 93 in 4QFY19 and 64 in 1QFY19). One-off opportunities during the quarter are gSensipar (Cipla), gAndrogel (CDH), one time supply opportunity (SUNP) and gRanexa (LPC). We expect pricing pressure in the US to remain at low-mid single digit. INR/USD remained at 69.5 in 1QFY20 vs. 70.5 in 4QFY19 and 67.5 in 1QFY19. Despite much progress happened in last year on the US FDA compliance front, we have seen increased US FDA actions in 1QFY20 i.e. (1) 14 observations to Moraiya plant (CDH); (2) four observations to Halol plant and 11 observations to Dadra plant with VAI status (SUNP); (3) OAI status to ARBP’s Unit-I, IX, warning letter to Unit-XI and 10 observations to Unit-III; (4) some observations to TRP’s Indrad facility; and (5) OAI status with 2 observations for Goa plant and OAI status at Pithampur Unit 2 (LPC). Notably, the companies which have scale-up in complex ANDA filings are expected to sustain meaningful growth in their US business. We expect ARBP, Cipla, CDH, LPC, and SUNP to report healthy growth in US sales, while Alkem, GNP, and TRP to report weak/muted US sales on YoY basis.
Domestic Biz to Remain Sequentially Strong
Given weak 4QFY19, we expect the domestic formulations business of our coverage universe to deliver a strong 22.8% QoQ growth on low base in 4QFY19, while YoY growth is seen at 7.4%. We note that the Indian Pharmaceutical Market (IPM) grew by 7.9% YoY and 1.9% QoQ to Rs334.5bn in 1QFY20 (Rs328bn in 4QFY19 and Rs310bn in 1QFY19; Source: AIOCD AWACS). The IPM is expected to witness mid-teen growth over next few years led by new product launches.
Our top sectoral picks are: Alkem Labs and Sun Pharma
Key Developments to Watch Out For:
* Ajanta Pharma (AJN): Outlook on India and US business and EBITDA margin. f Alkem Labs (ALKEM): Outlook on India and US business and EBITDA margin.
* Aurobindo Pharma (ARBP): Outlook on the US business and new launches; update on debt repayment; and pending US FDA issues.
* Cadila HC (CDH): Outlook on the US business and new launches; update on Moraiya plant (pending Form 483); outlook on India business and margin.
* Cipla (CIPLA): Outlook on the US/India businesses.
* Glenmark (GNP): Outlook on the US and India business; update on progress of NCE/NBE pipeline/ out-licensing opportunity; and update on debt repayment.
* Lupin (LPC): Outlook on new launches in the US market, outlook on India/US and Japan business. Update on US FDA pending issues and ramp-up in specialty product i.e. Solosec.
* Sun Pharma (SUNP): Outlook on US/India business; update on ramp-up in recently launched specialty products; update on Halol (US FDA form 483); and competitive landscape for Taro products in the US.
* Torrent Pharma (TRP): Outlook on India and US business; update on US FDA pending issues at Dahej and Indrad and outlook on EBITDA margin.
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