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Pharmaceutical
Pharma sector back in the limelight
During 3QFY2011, the BSE healthcare (HC) index outperformed
the BSE Sensex after underperforming during 2QFY2011-the
first quarter of underperformance in 2010. The HC index surged
by handsome 10.3% as against a flat closing of the Sensex.
With markets nearing 21,000, increased risk-aversion led to
the sector's outperformance.
Barring the run-up in few mid-cap stocks, the rally in the HC
sector was broadly restricted to large caps, which gained around
10-20% during the period. Sun Pharma was the key gainer
amongst large caps, reporting gains of 19.4%, after posting a
stellar performance in 2QFY2011 and favourable appeals court
ruling, which has once again paved the way for Sun Pharma to
launch the generic Eloxatin. Other large-cap gainers during
the quarter were DRL and Cipla, which gained almost 14.2%
and 12.6%, respectively. Ranbaxy, on the other hand, remained
flat during the period.
Amongst mid and small caps, Lupin and Aurobindo Pharma
were the key gainers, gaining 21.1% and 24.8%, respectively.
Lupin and Aurobindo Pharma witnessed a surge on the back of
strong/better-than-expected numbers posted in 2QFY2011.
Amongst small caps, Indoco Remedies gained almost 17.7%.
Key developments
Ranbaxy launches Aricept in the US: Ranbaxy has launched
generic Aricept in the US, with 180-day exclusivity. Aricept, a
branded product of Eisai Pharmaceuticals, grossed sales of
around US $2bn in the US.Besides Ranbaxy, Greenstone will
launch the Authorised Generic of the product. During the
exclusivity period, Ranbaxy could garner sales and profit of
around US $240mn and US $168mn, respectively, contributing
around `16.8 to the company's EPS. This is the fourth First-To-
File (FTF) product monetised by the company, despite ongoing
USFDA issues (Imitrex, Valtrex, Flomax and Aricept) over the
last two years; hence, this has further reinforced management's
ability to monetise its FTF opportunities, despite issues with its
manufacturing facilities. Overall, we value the one-off FTF
opportunities of the company at `129/share.
Lupin settles patent litigation with Warner Chilcott: During the
quarter, Lupin, Warner Chilcott plc and its subsidiary Warner
Chilcott Company, LLC entered into a settlement agreement to
resolve the pending patent litigations involving Warner Chilcott's
oral contraceptive (OC) products, Loestrin 24 Fe and
Femcon Fe. The products, which grossed sales of ~US $250mn
and ~US $50mn in 2009, will go off patent in July 2014 and
April 2019, respectively.
Under the terms of the settlement agreement, Lupin has agreed
that, except in the event of an at-risk launch of a generic
Loestrin 24 Fe product by a third party, neither Lupin nor its
affiliates will market or sell a generic Loestrin 24 Fe product
prior to July 22, 2014. In addition, Lupin has been granted a
non-exclusive license by Warner Chilcott, covering Femcon Fe.
The license will permit Lupin to commence the product's
marketing either as an authorised generic product, which would
be supplied by Warner Chilcott, or as the generic equivalent of
Femcon Fe in the US beginning on the earlier of (1) the 180-
day exclusivity period, after which Teva Pharmaceutical Industries
will enter the market with a generic equivalent to Femcon Fe;
or (2) by January 1, 2013.
Under the agreement, Lupin has also been granted rights to
purchase and sell an authorised generic version of the Asacol
400mg product (a US $115mn product in 2009) in the US,
which would be supplied by Warner Chilcott, only if a generic
version of the Asacol 400 mg product is launched by a third
party in the US.
Going forward, from FY2013, OC, which addresses a market
opportunity of around US $3bn-4bn in the US, would be one
of the key growth drivers of the company. Lupin, which has
filed around 23 OC products in the US, expects to launch around
17-18 products over the next two years, with the first product
expected to be launched by 3QFY2012.
Takeda settles Actos patent litigations: Takeda and its wholly
owned subsidiary, Takeda Pharmaceuticals North America, Inc.,
entered into settlements with all the defendants in patent litigation
brought against the companies in response to their ANDAs for
generic Actos (pioglitazone HCl), Actoplus met (pioglitazone
HCl and metformin HCl) and duetact (pioglitazone HCl and
glimepiride). Actos, which is a Type-2-diabetes drug, reported
sales of around US $3bn.
According to the settlement, FTF players Mylan, Watson and
Ranbaxy, which are expected to get 180-day exclusivity, have
been licensed to enter the US market with generic Actos on
August 17, 2012, subject to regulatory approval, or earlier under
certain circumstances. We estimate Ranbaxy to gross net sales
and profit of US $128mn and US $64mn, respectively, during
the exclusivity period.
Piramal Healthcare goes in for a share buyback: The
shareholders of Piramal Healthcare approved the buyback of
~4.18cr shares or 20% of the company's share capital. The
buyback would be on a proportionate basis through the tender
offer at a price of `600/share, aggregating to `2,508cr. The
buyback would open on January 17, 2011, and end on
February 7, 2011. With promoters tendering equal number of
shares, the acceptance ratio for the shareholders would work
out to 20%. Further, with cash constituting a larger portion of
the balance sheet, clarity on the utilisation of the same would
be the key value driver for the stock.
ANDA approvals in 3QFY2011
During the quarter, Alembic and Lupin received four approvals
each, while Cadila received three approvals. Further, DRL
launched Zafirlukast, the bioequivalent generic version of
Accolate, in the US. The product launch was subsequent to the
summary judgment of non-infringement against AstraZeneca
by the US District Court of New Jersey. The product addresses a
market opportunity of US $50mn in the US.
3QFY2011 result expectations
The Indian pharmaceutical sector is expected to post robust
growth on the sales front for 3QFY2011. We expect our
coverage universe to register 14.7% yoy top-line growth, albeit
the 3.7% yoy appreciation in INR against USD on an average
during the quarter. Amongst large caps, Sun Pharma is expected
to post 48.2% yoy sales growth, mainly on the back of integration
of Taro. Other players, which are expected to post robust
performance, include Lupin and Cadila, which will report 36.6%
and 33.6% growth in net profit, respectively. Amongst small
caps, Indoco Remedies is expected to post 27.2% yoy and 60.0%
yoy growth in sales and net profit, respectively. Amongst the
MNC pack, Aventis is likely to post 40.4% growth in net profit,
on the back of a 668bp yoy improvement in OPM, compared
to the last corresponding period, which was marred by the
decline in the domestic formulation business.
Among large caps, Sun Pharma and Lupin to outperform
Among the large caps in our coverage universe, for 3QFY2011,
Sun Pharma is likely to post 48.1% yoy growth on the sales
front, mainly on the back of integration of Taro, which will drive
export formulation sales during the period. On the domestic
front, Indian formulation sales would continue to grow at a
healthy pace at 20%. However, despite strong top-line growth,
on account of the integration, operating profit is likely to grow
only by 22.8%, with margins likely to be around 29.9%, a dip
of around 619bp yoy, resulting in net profit registering yoy
growth of 32.0% during the period.
Lupin, on the other hand, is expected to register growth of 15.9%,
mainly led by formulation sales in the exports markets (US and
Europe) and the Indian domestic market. On the operating front,
margins are likely to remain stable at 19.4% during the period;
however, lower tax and interest outgo during the period would
lead to 36.6% growth in net profit in 3QFY2011.
DRL is expected to post top-line growth of 10.8% to `1,917cr,
driven by the US market. The region is expected to post growth
of around 35%. Similarly, the company is expected to see strong
traction in its Indian and Russian formulation businesses.
However, the PSAI segment is expected to post a lacklustre
performance during the quarter. The company is expected to
post OPM of 15.3%, up 90bp yoy. On the net profit front, the
company is expected to post net profit of `259.5cr, vis-à-vis a
loss during the last corresponding period, which was impacted
by the write-down on goodwill and intangibles.
Cipla is expected to post net sales growth of 15.4% to `1,552cr,
driven by exports. On the operating front, OPM (excluding
technical know-how fees) is expected to fall by 86bp yoy to
20.4% on the back of higher employee expenses. Further, net
profit is expected to register a decline of 9.5% yoy to `261cr, as
top-line growth will be offset by the fall in OPM.
Ranbaxy is expected to post a flat top line of `2,245cr. Growth
looks muted despite the launch of Aricept in the US, on the
back of high base during the last corresponding period on
account of sales of Valtrex. For Aricept, we expect the company
to post sales of around US $240mn during the exclusivity period.
However, the impact of the same would be more visible in
1QCY2011. On the operating front, Ranbaxy is expected to
report OPM of 17.4%.Overall, the company is expected to post
net profit of `312.6cr during the period.
Among mid caps, Cadila expected to continue its
outperformance
Cadila is expected to post strong 18.4% growth in net sales to
`1,143cr on the back of robust growth on the export and
domestic formulation fronts, where the company is expected to
grow at 18.2% and 19.4% yoy, respectively. On the OPM front,
we expect the company's OPM to expand by 82bp yoy to 19.9%
on the back of favourable product mix. Net profit is expected to
increase by 33.6% yoy to `173cr, driven by top-line growth
and OPM expansion.
We estimate Ipca Laboratories' top line to grow by 20.6% to
`474.9cr for 3QFY2011. The company is expected to post strong
growth both on the export and domestic fronts, where the
company is expected to log in growth of 17.2% and 23.8% yoy,
respectively. OPM is expected to compress by 140bp yoy to
21.1% on the back of rise in other expenditure. Overall, net
profit is expected to rise by 8.8% yoy to `63.4cr on the back of
pressure on operating margins.
Aurobindo Pharma is expected to post an 11% yoy rise in sales,
aided by formulation exports. Margins are likely to remain stable,
despite improvement in gross margins, on the back of higher
employee expenditure. Overall, net profit is expected to rise by
40% yoy on the back of lower tax-outgo during the period.
Indoco Remedies is expected to report top-line growth of 27.2%
to `121.7cr, driven by the domestic and export segments. The
company's OPM is expected to expand by 101bp yoy to 13.9%,
driven by growth in domestic formulation sales. As a result, net
profit is expected to increase by 60.0% yoy to `12.4cr.
Outlook and valuation
During the past three years, the BSE HC index has been among
the best performing indices, posting returns of 52.4% and
outperforming the market by 51.3% during this period. At the
current juncture, most of the stocks in our universe are currently
trading at fair valuations and, hence, we continue to recommend
a bottom-up approach.
In the generic segment, we prefer Cipla, Lupin, Cadila
Healthcare, Aurobindo Pharma and Indoco Remedies.
The CRAMS segment is witnessing near-term hiccups because
of inventory rationalisation and multiple mega global pharma
mergers in CY2009; these concerns are mostly factored in
valuations. In this segment, we recommend Dishman Pharma.
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