Fall in approvals in US to overshadow revival in domestic biz
Amid rising regulatory risk in the sector, pharmaceutical companies are likely to post 7-8 per cent earnings growth on a 12 per cent year-on-year (YOY) revenue growth in July-september quarter (Q2) of the current financial year.
Aggregate revenue growth would be the lowest in the past four quarters, point out analysts who say the decline in approvals and lack of meaningful launches would drag the US market growth. Emkay Global states in its report that weak US growth would overshadow the revival in the domestic business. It expects the revenues to grow by 12 per cent while earnings before interest, tax, depreciation, and amortisation (Ebitda) growth would be around 8 per cent. Emkay also noted that as companies ramp up their research and development (R&D) and specialty related spends, the margins would decline by around 140 basis points for its coverage companies. For example, for Sun Pharma, analysts expect R&D costs to come in at 6 per cent of sales, and Ebitda margins to decline by around 20 per cent as the US revenue declines 15 per cent sequentially.
Another brokerage, Edelweiss, however, noted that a 12 per cent YOY sales growth is strongest across sectors. It said domestic sales are likely to grow by 8 per cent YOY driven by the acute therapies (on account of a heavy rainy season). Edelweiss estimates US sales to clock an 11 per cent YOY growth but slip by about 4 per cent quarter on quarter (QOQ) on lack of new approvals as well as nonrecurrence of one-time opportunities at Sun Pharma, Cipla, and Lupin.
Deepak Malik, analyst with Edelweiss, said margins were expected to remain stable YOY and sequentially led by tight control on cost as well as depreciation of the rupee.
Amongst big pharmas, analysts expect Sun Pharmaceuticals will see a sequential decline in the US business on non-recurrence of a one-time supply opportunity. While Cipla will witness some competition in generic Sensipar that is likely to erode its US sales, Dr Reddy’s Laboratories (DRL) had five product launches in the US. In the domestic market, Torrent Pharma is likely to clock a 10 per cent YOY growth while Ipca is expected to benefit from strong growth in antimalarials.
Companies such as DRL, Torrent Pharmaceuticals, and Ipca are likely to see expansion in their Ebitda margins. Edelweiss said DRL’S Ebitda margins would expand to 21 per cent as cost rationalisation continues, while Torrent’s Ebitda would grow by
19 per cent YOY (implying 27.5 per cent margin). For Ipca, the Ebitda margins will grow 22 per cent QOQ on the back of cost reduction and gross margin improvement from better mix, technology & pricing and breakeven at Bayshore, claimed Edelweiss.
On the other hand, companies such as Sun Pharma, Lupin, and Cipla would see some contraction in their Ebitda margins. Brokerages felt that Ebitda margins of Cadila Healthcare, Glenmark, and Natco Pharma would remain stable. Apart from the US market, analysts expect the rest of the world (ROW) business to do reasonably well during the quarter. Kotak Securities said the ROW business of Aurobindo to grow by 25 per cent YOY. For DRL, it is expected to clock 20 per cent growth, while for Sun Pharma it is estimated to clock 57 per cent growth (reflecting consolidation of Pola Pharma).