Pharma Q1 preview: Poised for strong performance on rebound of domestic and stable US generics biz


As Indian drug makers brace to report their first-quarter earnings in the days ahead, analysts predict pharmaceutical companies to deliver strong performance in Q1FY19 helped by rebound of domestic formulation business on a base disrupted by GST last year and on currency tailwinds.

The US generic business that contributes around 40-50 percent of overall sales for many large Indian drug makers has started to see favourable regulatory environment and pick up of generic approvals.

On the flipside – the US pricing pressure though steady remains an overhang. The continued investment on R&D will also impact margins.

“For the first time after six consecutive quarters, the pharma companies under our coverage will report double-digit YoY growth of 13 percent in revenues,” said HDFC Securities in its latest report on the pharmaceutical industry.

“EBITDA and PAT will grow at 25 percent and 28 percent YoY, respectively. However, this growth is on the favorable base of Q1FY18, which was affected by GST disruption,” the report added.

Moneycontrol has put together some key factors that may influence earnings of Indian drug makers.

The US market:

The price erosion in the US is expected to remain in high single digits, while the approval rate that got slackened in Q4FY18 gained some momentum in the first quarter.

Most of the US-focused companies will report flat sequential growth on steady earnings before interest, tax, depreciation, and amortisation (EBITDA) margin.

“The USFDA approval rate rebounded to 198 nods after a temporary hiatus in Q4FY18 (109 approvals) due to additional documentation requirements for elemental impurities,” said Edelweiss in its report.

“Approvals for our coverage universe jumped to 66 in Q1FY19 (Q4FY18: 43), including 11 each for Cadila Healthcare and Aurobindo Pharma. Following the recent Halol clearance, Sun Pharma piled-up filings are expected to keep the approval rate buoyant for companies in our coverage,” the report added.

On the regulatory front, favourable inspections at Cadila (topical plant), Dr. Reddy’s (Medak, Srikakulam SEZ, UK), and Sun Pharma (Halol) demonstrate that the worst in terms of regulatory issues is over.

Domestic formulation business:

The GST rollout in the first quarter has resulted in destocking and supply side disruptions leading to the weak growth of the domestic business for the companies. The Indian pharmaceutical market (IPM) grew 8.5 percent in the first quarter. The IPM grew 6.8 percent during the same period in the previous year.

Companies to watch out 

Sun Pharma: Analysts expect the US revenue to be flat at $365 million sequentially, with Taro expected to decline by 4 percent. Domestic sales expected to grow 20 percent  YoY, on a favourable base impacted by GST related disruptions. EBITDA margins to decline sequentially to 19.6 percent.

Aurobindo Pharma: US sales expected to remain stable at $280 million due to the ramp-up in generic Arixtra (fondaparinux sodium injection). Europe to grow 25 percent YoY, driven by the Generis acquisition and 13 percent appreciation in the EUR. EBITDA margin is expected at 23 percent in Q1.

Dr. Reddy’s: US revenue expected to grow 3 percent to $230 million on QoQ with the launch of generic Aloxi and full quarter of generic Xenazine sales. India to grow 30 percent YoY, on a favourable base. EBITDA margins expected at 20 percent.

Lupin: US sales expected to remain stable for Lupin at USD240 million on QoQ as Solosec launch will likely offset competition in Methergine, Glumetza, and Fortamet. India business to grow 15 percent YoY, on a favourable base. EBITDA margins expected to remain stable at 20 percent

Cipla: US revenue expected to grow 6 percent to USD 110 million as the launch of generic Sustiva, generic Isuprel and full quarter of sales from generic Viread and Aloxi authorised generic (AG) are likely to offset base erosion. India business is expected to grow 25 percent YoY, assisted by Basalgar launch and a favourable base. Expect South Africa to be driven by 9 percent appreciation in the ZAR. EBITDA margin to remain stable at 18 percent.

Glenmark: US revenue expected to decline 23 percent to USD 125 million due to an erosion of generic Zetia. Sequentially, expect the US to grow 15 percent on the launch of generic versions of Welchol, Clobex, Temovate, and Protopic. India business is likely to grow 10 percent YoY, on base that was unfavourable despite GST related de-stocking in Q1FY18. EBITDA margin is expected to remain steady at 16 percent.

(With inputs from an Edelweiss report)



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