Boost in US sales may drive re-rat­ing of pharma sec­tor

Price de­cline has slowed from dou­ble dig­its to lower sin­gle digit

Business Standard - - THE SMART INVESTOR - UJJVAL JAUHARI

The per­for­mance of top In­dian pharma com­pa­nies in the US mar­ket for the De­cem­ber quar­ter (Q3) in­di­cates that their gener­ics busi­ness in the world’s largest drug mar­ket might be turn­ing the corner.

Among com­pa­nies that have re­ported their num­bers, Cadila Health­care reg­is­tered its high­estever sales in the US mar­ket with a growth of 46 per cent over the year-ago quar­ter. Aurobindo Pharma, too, saw its US sales grow 27 per cent year-on-year. Taro (Sun’s US sub­sidiary) re­ported 13.5 per cent year-on-year growth af­ter a de­cline of 6.4 per cent in the June quar­ter. It was Taro’s Q3 show that saw Sun's stock spurt about 4 per cent ( Sun will an­nounce its re­sults on Tues­day).

Growth in the US mar­ket was the rea­son for the over­all rev­enue rise of these com­pa­nies. Cadila’s US sales (55 per cent of over­all) at ~1,934 crore, up 22 per cent yearon-year and 46.5 per cent se­quen­tially, came against ex­pec­ta­tions of tepid growth on a high base of last year. The ro­bust US growth com­pen­sated for a de­cline in Cadila’s do­mes­tic sales on the back of prod­uct ra­tio­nal­i­sa­tion. Aurobindo saw its over­all rev­enues grow 22 per cent year-onyear, boosted by US sales that con­trib­uted 46 per cent to the top line.

With con­tin­ued pric­ing pres­sure in the US mar­ket on the back of ris­ing com­pe­ti­tion and chan­nel con­sol­i­da­tion, growth for In­dian com­pa­nies had suf­fered dur­ing the past few years. Dr Reddy’s Lab­o­ra­to­ries and Lupin, which had seen their US sales de­cline in the past, got a respite in Q3. The pace of de­cline due to pric­ing pres­sure has come off now.

Dr Reddy’s re­ported num­bers did in­di­cate a re­vival in the US sales, as its rev­enues from North Amer­ica (pri­mar­ily the US), which is about 40 per cent of the over­all fig­ure, was up four per cent se­quen­tially. Edel­weiss Se­cu­ri­ties be­lieves that Dr Reddy’s promis­ing com­plex gener­ics pipe­line, strong earn­ings re­vival and com­pelling val­u­a­tions ren­der it a prime re-rat­ing can­di­date.

Lupin, which had seen a sharper de­cline in US sales, as its di­a­betes gener­ics port­fo­lio came un­der pric­ing pres­sure, saw just a one per cent year-on-year fall in US sales. On a se­quen­tial ba­sis, how­ever, it’s US sales grew 13.5 per cent. The man­age­ment be­lieves that its base busi­ness re­mains strong and the cur­rent quar­ter run-rate rep­re­sents the new base. Also, pric­ing ero­sion is back to the sin­gle-digit lev­els a against dou­ble-dig­its in prior quar­ters. Though Lupin and Dr Reddy’s both face reg­u­la­tory is­sues pro­vid­ing an over­hang, the for­ward prospects have im­proved with de­clin­ing pric­ing pres­sure. Sarab­jit Kour Nan­gra at An­gel Broking says macro pres­sure on the growth of com­pa­nies is out and only com­pany-spe­cific is­sues are play­ing out now. Com­pa­nies with a di­ver­si­fied port­fo­lio had seen a lower strain on growth and prof­itabil­ity com­pared to those with higher prod­uct con­cen­tra­tion. For ex­am­ple, Aurobindo – which has a highly di­ver­si­fied port­fo­lio with lesser de­pen­dence on any sin­gle prod­uct – has seen a lower im­pact of price ero­sion. Com­par­a­tively, Lupin saw a higher im­pact as its sales were de­pen­dent on fewer prod­ucts. Though Dr Reddy’s had a good port­fo­lio of lim­ited-com­pe­ti­tion drugs, it felt the heat, more so as prod­uct ap­provals and launches slowed due to reg­u­la­tory is­sues. Lupin is cur­rently in the process of re­solv­ing reg­u­la­tory is­sues re­lated to its Goa and Indore plants. Cadila has been able to re­solve reg­u­la­tory is­sues and has bet­ter near term prospects, say an­a­lysts.

Broadly, the year-on-year pain on growth for pharma com­pa­nies is gen­er­ally over and se­quen­tially, the sales are look­ing up, says Nan­gra. Ran­jit Ka­pa­dia at Centrum Broking con­curs and says that pric­ing pres­sure in the US is near­ing an end and is at lower sin­gle dig­its.

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