 "Healthcare stocks: Moderate growth expected in June quarter")
After recording the weakest sales growth in the past five years in the March quarter, top generic companies are expected to witness moderate growth in the June quarter. While most analysts peg revenue growth between 11 and 13 per cent, against sub-five per cent growth in the previous quarter, operating profit and net profit growth is expected to be muted between seven and 11 per cent.
Bank of America-Merrill Lynch’s pharma analysts say while higher base, customer consolidation, and incremental competition in some key high-value products will impact revenue growth, profit growth might be hit by price erosion in the US base portfolio and higher research costs. What has put the brakes has been consolidation of the US retail chain, which has led to a fall in the bargaining power of drug makers, resulting in price cuts. Continued slowdown in product approvals is adding to their woes. With about 40 per cent of revenues from the US market, the recent quarters have seen a double-whammy on both revenue and margin.
However, a few players are expected to benefit, thanks to one-off/limited competition products. While Cipla will benefit from the supply of Nexium’s generic equivalent (which reduces acid secretion) to Teva, Cadila Healthcare’s sales are expected to be boosted by HCQS, a drug used for rheumatoid arthritis. Revenues of both companies are estimated to grow by 21-25 per cent in the June quarter, the highest across the large-cap generic space.Bank of America-Merrill Lynch’s pharma analysts say while higher base, customer consolidation, and incremental competition in some key high-value products will impact revenue growth, profit growth might be hit by price erosion in the US base portfolio and higher research costs. What has put the brakes has been consolidation of the US retail chain, which has led to a fall in the bargaining power of drug makers, resulting in price cuts. Continued slowdown in product approvals is adding to their woes. With about 40 per cent of revenues from the US market, the recent quarters have seen a double-whammy on both revenue and margin.
While revenue growth in emerging markets is likely to be hit by currency volatility, the bright spot continues to be domestic sales, about a quarter of the total for leading drug makers. The Indian pharma market has grown a strong 14 per cent year-on-year over the 12 months ending May, aided largely by volume growth. Given the 3.6 per cent hike (inflation-linked) in drugs under price control and 10 per cent in drugs out of price control, this should reflect strongly on growth in the coming months. Analysts say the historic trend of 1.5 times growth of GDP rate should continue going ahead.
Analysts say the three re-rating triggers for domestic pharma stocks (which have corrected on earnings slowdown worries, valuations) are sales pick-up, margin growth and higher new product approvals. While margin growth might not come about soon given a bit of pricing pressure and higher staff costs, clearance of the product approval backlog could translate into stronger US revenue growth. Overall, sales growth in the medium term is likely to be a function of both the current product portfolio and the acquired basket.