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Pharmaceuticals
Potential Result Outperformers: Lupin, Cadila, Divis
Potential Result Underperformer: GSK
Growth momentum sustains; US, India to be key drivers
We expect most of our coverage universe to report strong growth on a yoy basis.
Seasonally weak quarter for domestic formulations may result in a tepid QoQ
performance. US and India should be the key growth drivers for most companies,
aided by new product approvals. Gradual revival of growth momentum in
emerging markets would further aid topline growth. Stability in forex rates should
limit forex gains/losses except on realized contracts. Overall for the sector
(excluding Ranbaxy, Piramal), we expect average sales growth of 17% YoY,
EBITDA growth of 27% YoY for our coverage universe, primarily led by Dr
Reddy’s (niche launches).
Companies like Glenmark, Piramal, and Cadila etc that have repaid debt
outstanding in their books will see savings on interest costs. Improving traction in
some of RoW markets is likely to aid business momentum. Outlook for custom
manufacturing players like Divis would be stronger as destocking at clients end
seems to be behind us. We expect Lupin and Divis to post strong results, largely
led by stronger export business.
Result Expectations – Key Highlights
Dr. Reddy’s: US business may see upside impact of recent launches like Lotrel,
Accolate and Prevacid gaining market share. With partial gain of lost market
share post product recall last year, the base business should also see
improvement in US. Russia/CIS markets continue with positive momentum while
seasonally weak domestic formulations may show sequential weakness. PSAI
segment yet to show significant upward traction. Margins are expected to improve
on a QoQ basis as recent high margin launches and better product mix should
increase gross margins in generics business.
Lupin: While the US generics business should sustain strong momentum due to
regular product launches, the branded business revival, especially Antara, would
be key to growth. Domestic business is likely to remain strong with estimated 18-
20% growth aided by steady new introductions. Improved business mix and
stable forex rates should lead to margin expansion as we expect EBITDA to grow
by 21% and PAT to grow at 41% yoy.
Divis: We expect strong momentum in topline growth to continue in 3Q, reflecting
business recovery. Moreover, impending capex plan of Rs2bn should further aid
revenue visibility for FY12. We expect EBITDA margins to bounce back from
weak 1H at above 40% driven by pickup in carotenoid sales and higher custom
synthesis revenues. We expect Divis to report strong 2H results, aided by
improved margins and sustained execution leading to improved business
visibility.
Cadila: We expect Cadila to post robust 23% growth in topline, largely driven by
strong domestic formulations growth (20%+) as well as US generics business.
Zydus Wellness should continue to grow strongly at 25-30% while the JV’s scaleup
should continue to add positively to profitability. We expect strong 33% growth
in profits YoY with marginal EBITDA margin expansion led by higher formulation
sales.
Biocon: We expect base business to grow at a robust 15% while impact from
research milestones from the recently concluded Pfizer deal may further boost
topline and profitability. We expect Syngene business (CRAMS) scale-up on the
back of BMS contract and supplies of Mycophenonate Mofetil and Tacrolimus
(immunosuppressant) supplies to partners will help maintain robust business
growth and margins. However, reported profits may be affected by accounting
difference due to amortisation of licensing income and associated R7D spend.
We expect strong 39% yoy profit growth aided by cashflows from research deals
on biosimilar pipeline.
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