 "Ongoing correction an opportunity to buy pharma stocks")
Powered by sales from the US, Indian pharma companies are expected to post a revenue growth of around 15 per cent for FY14. Product launches and revenues from exclusivities and higher sales from the existing product base will help boost sales in the US in the current financial year. Even in the June quarter, it was the US that boosted performance with year-on-year growth rates ranging from 29 per cent to 38 per cent for the top pharma companies. While sales from the rest of the world (excluding India) are growing and most companies are looking at improving the same, they still form a smaller part of the overall pie with the exception of Dr Reddy's Laboratories and Ranbaxy Laboratories, which has a significant presence in the Commonwealth of Independent States, or CIS (former Soviet republics), whose largest constituent is Russia.
On the domestic front, sales growth was among the lowest in many quarters, and was largely in the single-digit territory, with some companies reporting a drop in growth as well. However, sales growth should look up as policy uncertainty on pricing fades and companies resume their normal despatches at the designated price. Most analysts believe it should trend up to double-digits, driven by volume growth, product launches and higher anti-infective sales from the December 2013 quarter.
Given the prospects in the domestic and foreign markets, the rally in pharma stocks is likely to continue. The BSE Healthcare Index has outperformed the broader indices with a return of 23 per cent over the last year. The BSE Sensex returned eight per cent during the period. The ongoing correction in pharma stocks, analysts say, is an opportunity for long-term investors.
While Ranbaxy has already seen a rerating (eight of 21 analysts polled by Bloomberg have upgraded the stock) on the back of a robust show, Cipla and Sun Pharmaceutical Industries have also seen their earnings being upgraded, given their strong showing in the domestic market, as well as prospects. India's largest company by market capitalisation, Sun Pharma, has given a revenue forecast of 15-20 per cent for FY14.
The Lupin stock has become attractive after a correction of 10 per cent recently. However, the turbulence in the domestic performance will continue in the September quarter, too, due to pricing-policy issues. The market will also be watchful on how Japanese sales pan out, looking at the 12 per cent year-on-year decline in Japanese revenues during the June quarter. The decline had come on the back of adverse currency movement and lower orders for the Japanese subsidiary, I'rom.
For Dr Reddy's, the Street, apart from keeping an eye on domestic market growth, will be watchful of sales in the Russia and CIS region. The slow growth in the region was attributed to seasonal factors and high base effect by the company. Analysts such as Ranjit Kapadia of Centrum believe Dr Reddy's prospects in the US markets are strong, given its robust product pipeline. The company, which saw its north American sales grow 37 per cent year-on-year, has lined up 64 abbreviated new drug applications (ANDAs), pending with the US Food and Drug Administration (USFDA), of which eight are first-to-files (FTF), which gives it exclusivity on the expiry of the respective patents.
Ranbaxy's prospects from here on will hinge on its ability to turn around growth in other geographies apart from US. Ex-US, the growth revenue growth was just two per cent. The approval for launch of anti-hypertensive product Diovan and anti-viral Valcyte generics in the current calendar year will be potential triggers for the stock.
The revenues of leading pharma companies in the quarter ended June were primarily driven by the US sales growth with an exception of Cipla. Sun Pharma's US sales marked a growth of 31.8 per cent, while Ranbaxy's 29 per cent growth in US sales to Rs 770 crore led to a fortune reversal on the bourses. Ranbaxy's US sales had been a matter of concern for investors looking at the USFDA issues.
US and European sales that contribute 46 per cent to Lupin's overall revenues, grew 29 per cent year-on-year providing impetus to overall revenues as domestic and Japanese sales slumped. Dr Reddy's, too, had a similar case where US generics sales (38 per cent of overall revenues) grew 37 per cent and drove the top line, while domestic revenues, the PSAI (pharmaceutical services and active ingredients) segment and Russia and the CIS region could not grow substantially.
Cipla, which is now trying to grow its base in the US, saw export to other geographies grow 27.7 per cent and drive its revenues. This was remarkable looking at the high base in the year-ago quarter that saw supplies of an anti-depressant drug to Teva Pharma drive export revenues.
Pricing policy spoilsport
The companies in general saw their domestic revenues getting affected by the implementation of the new pharma pricing policy. While Dr Reddy's saw flat revenue growth in the domestic market, Lupin actually saw its sales decline five per cent over the year-ago quarter. Ranbaxy could see a meagre six per cent sdomestic growth. On an average, domestic sales have been growing at over 10 per cent for most pharma companies. The reason for Lupin's decline in domestic revenues was not just limited to the pricing policy, but also to a temporary ban on the sales of diabetes drug pioglitazone that is an important contributor to the company's domestic revenues.
However, Sun Pharma and Cipla bucked the trend. Sun Pharma's domestic growth at 16.7 per cent was the best among peers. Cipla, too, impressed with 11 per cent domestic sales growth adjusted for low base seen in the June 2012 quarter. With an impressive all-round performance the two have seen earning upgrades.
On the domestic front, sales growth was among the lowest in many quarters, and was largely in the single-digit territory, with some companies reporting a drop in growth as well. However, sales growth should look up as policy uncertainty on pricing fades and companies resume their normal despatches at the designated price. Most analysts believe it should trend up to double-digits, driven by volume growth, product launches and higher anti-infective sales from the December 2013 quarter.
Given the prospects in the domestic and foreign markets, the rally in pharma stocks is likely to continue. The BSE Healthcare Index has outperformed the broader indices with a return of 23 per cent over the last year. The BSE Sensex returned eight per cent during the period. The ongoing correction in pharma stocks, analysts say, is an opportunity for long-term investors.
While Ranbaxy has already seen a rerating (eight of 21 analysts polled by Bloomberg have upgraded the stock) on the back of a robust show, Cipla and Sun Pharmaceutical Industries have also seen their earnings being upgraded, given their strong showing in the domestic market, as well as prospects. India's largest company by market capitalisation, Sun Pharma, has given a revenue forecast of 15-20 per cent for FY14.
The Lupin stock has become attractive after a correction of 10 per cent recently. However, the turbulence in the domestic performance will continue in the September quarter, too, due to pricing-policy issues. The market will also be watchful on how Japanese sales pan out, looking at the 12 per cent year-on-year decline in Japanese revenues during the June quarter. The decline had come on the back of adverse currency movement and lower orders for the Japanese subsidiary, I'rom.
For Dr Reddy's, the Street, apart from keeping an eye on domestic market growth, will be watchful of sales in the Russia and CIS region. The slow growth in the region was attributed to seasonal factors and high base effect by the company. Analysts such as Ranjit Kapadia of Centrum believe Dr Reddy's prospects in the US markets are strong, given its robust product pipeline. The company, which saw its north American sales grow 37 per cent year-on-year, has lined up 64 abbreviated new drug applications (ANDAs), pending with the US Food and Drug Administration (USFDA), of which eight are first-to-files (FTF), which gives it exclusivity on the expiry of the respective patents.
Ranbaxy's prospects from here on will hinge on its ability to turn around growth in other geographies apart from US. Ex-US, the growth revenue growth was just two per cent. The approval for launch of anti-hypertensive product Diovan and anti-viral Valcyte generics in the current calendar year will be potential triggers for the stock.
The revenues of leading pharma companies in the quarter ended June were primarily driven by the US sales growth with an exception of Cipla. Sun Pharma's US sales marked a growth of 31.8 per cent, while Ranbaxy's 29 per cent growth in US sales to Rs 770 crore led to a fortune reversal on the bourses. Ranbaxy's US sales had been a matter of concern for investors looking at the USFDA issues.
US and European sales that contribute 46 per cent to Lupin's overall revenues, grew 29 per cent year-on-year providing impetus to overall revenues as domestic and Japanese sales slumped. Dr Reddy's, too, had a similar case where US generics sales (38 per cent of overall revenues) grew 37 per cent and drove the top line, while domestic revenues, the PSAI (pharmaceutical services and active ingredients) segment and Russia and the CIS region could not grow substantially.
Cipla, which is now trying to grow its base in the US, saw export to other geographies grow 27.7 per cent and drive its revenues. This was remarkable looking at the high base in the year-ago quarter that saw supplies of an anti-depressant drug to Teva Pharma drive export revenues.
Pricing policy spoilsport
The companies in general saw their domestic revenues getting affected by the implementation of the new pharma pricing policy. While Dr Reddy's saw flat revenue growth in the domestic market, Lupin actually saw its sales decline five per cent over the year-ago quarter. Ranbaxy could see a meagre six per cent sdomestic growth. On an average, domestic sales have been growing at over 10 per cent for most pharma companies. The reason for Lupin's decline in domestic revenues was not just limited to the pricing policy, but also to a temporary ban on the sales of diabetes drug pioglitazone that is an important contributor to the company's domestic revenues.
However, Sun Pharma and Cipla bucked the trend. Sun Pharma's domestic growth at 16.7 per cent was the best among peers. Cipla, too, impressed with 11 per cent domestic sales growth adjusted for low base seen in the June 2012 quarter. With an impressive all-round performance the two have seen earning upgrades.