Pharma Q2 Preview: Lack of new US approvals to overshadow domestic revival

Analysts expect a 12% growth in revenues for the sector

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. Aggregate revenue growth would be the lowest in the last four quarters, point out analysts, who say that a decline in approvals and a lack of meaningful launches would drag the US market growth.

Emkay Global pointed out 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 amortization (Ebitda) growth would be around 8 per cent. Emkay also noted that as companies ramp up 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 that domestic sales were 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 non-recurrence of one-time opportunities at Sun Pharma, Cipla and Lupin.

Deepak Malik, analyst with Edelweiss, said that margins are expected to remain stable YoY and sequentially led by tight control on cost, as well as, depreciation of the Indian rupee.

Amongst big pharma, analysts expect Sun Pharmaceuticals to see a sequential decline in the US business on non-recurrence of a one-time supply opportunity. Cipla is expected to witness some competition in generic Sensipar that is likely to erode its US sales. Meanwhile, Dr Reddy's Laboratories has 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 anti-malarials.

Companies like Dr Reddy's Laboratories (DRL), Torrent Pharmaceuticals, Ipca are likely to see expansion in their Ebitda margins. Edelweiss said that DRL's Ebitda margins will 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). As 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 like Sun Pharma, Lupin, Cipla would see some contraction in their Ebitda margins. Brokerages felt that Ebitda margins of Cadila Healthcare, Glenmark, 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 that the RoW business of Aurobindo to grow by 25 per cent YoY, for DRL it is expected to clock a 20 per cent growth, while for Sun Pharma it is estimated to clock a 57 per cent growth (reflecting consolidation of Pola Pharma).