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High base effect to impact domestic growth rate
Indian pharmaceutical companies are likely to maintain strong growth in 3QFY11 despite
high base effect in 3QFY10. The sustained growth is driven by new product introductions
and higher penetration in the domestic and regulated markets. Domestic formulation market
is expected to maintain its growth momentum and rise ~17% with chronic therapy areas
outpacing the acute. However, we expect high base effect to catch up in 3QFY11 resulting
in lower sales in the domestic formulations segment. Pharma companies are expected to
register a growth of ~12-15% in the domestic market; however, adjusting with base effect,
the growth could be ~7-8%. Most domestic companies have expanded their field force in
3Q, which will also result in higher sales in the local markets. Pharmacos, such as Ipca,
Lupin, Sun Pharma, Cadila Healthcare, are expected to grow ~15-18%.
Regulated markets to witness strong growth on the back of higher
product approvals
Prescription trend for Indian companies supplying generics and branded generics has
witnessed an upmove. Indian companies have received approvals for products with
exclusivity - such as Lansoprazole and Zafirlukast for Dr. Reddy's, Donepezil for Ranbaxy
and Suprax chewable for Lupin - which will drive major revenue upsides in US. Companies
such as Lupin and Cadila Healthcare, which have a branded formulations business in the
US, have also witnessed stronger prescription sales in 3QFY11 after a dip in prescription
off-take despite strong marketing efforts during the last quarter.
CRAMs business on road to gradual recovery
Our interaction with Custom Research and Manufacturing Services companies gives us
some sense that customers have started re-stocking inventory in 3QFY11e. Big pharmacos
have resumed outsourcing after the recent spate of high-value M&As had resulted in
realignment of excess capacity. Companies such as Jubilant Lifesciences and Dishman Pharma
have signed sub-USD50m contracts. The outsourcing industry is still void of large multi-year,
multi-million dollar deals that will result in higher growth and better confidence in the industry.
We expect CRAMs companies to grow ~8-10% in 3QFY11.
Aurobindo Pharma
We expect the company to report a 15% growth in revenues at INR10.5bn, with increased
contribution from the Pfizer deal. This will also be the first quarter of Astrazeneca deal
contributing to Aurobindo. We expect ARV business to grow at 15% during the quarter and
export formulations to rise by 16%. We anticipate operating profits to grow by 15% to
INR2.9bn and maintain margins at 27.2% during the current quarter. However, net profit is
expected to drop marginally by 6% to INR1.6bn during the quarter.
Cadila Healthcare
We expect Cadila Healthcare to report a revenue growth of 16% to INR11.2bn during 3Q
and witness significant contribution from its Nycomed JV.
Zydus-Nycomed JV achieved a milestone as its API facility in Navi Mumbai has been
commissioned. The newly commissioned facilities mark the transition of Zydus-Nycomed
from an intermediate manufacturer to a full-fledged API supplier. We expect the domestic
formulations business to grow by 15% during the quarter on account of higher contribution
from chronic therapy areas. Better product mix and cost rationalisation efforts are likely to
result in 22% rise in operating profits to INR2.6bn with operating margin growth of 120bps
at 23.6% during the quarter. We expect Cadila to report a net profit growth of 25% to
INR1.6bn.
Indoco Remedies
We expect Indoco Remedies to report a revenue growth of 30% to INR1.2bn driven by
strong domestic and export sales. Operating margins are expected to expand by 100bps
to 12.9% whereas net profits by 50% to INR116m during the quarter.
Ipca Laboratories Limited
We expect Ipca to report a revenue growth of 17% to INR4.6bn during 3Q. This growth will
be achieved by a combination of higher sales in the domestic market and goods regulated
market sales. We expect operating margins to compress by 170bps to 21% and net profits
to grow by 8% to INR630m.
Lupin Limited
We expect Lupin to report a revenue growth of 17.5% to INR14.9bn driven by strong
domestic formulation sales and higher international contribution. Lupin's domestic formulations
business is expected to grow by 18%. Branded generics segment in the US will witness
higher growth on the back of increased sales in Antara prescription in the last two months.
We also expect other branded generic products to grow at a healthy pace.
Generics business on the other hand will grow at 18% in the regulated markets. Japan will
witness strong traction on a lower base resulting in higher revenue from that geography.
Better product mix and cost rationalisation efforts will result in EBIDTA growing by 17% to
INR3.1bn and PAT by 35% to INR2.2bn.
Sun Pharmaceutical Industries Limited
We expect Sun Pharma to report revenue growth of 50% QoQ. This will be the first quarter
of Taro Pharmaceutical's integration into Sun Pharma's international business. On the domestic
formulation business, we expect the segment to outpace the industry growth at 20% during
the quarter. However, despite stronger topline growth, we expect operating profits to increase
by only 19% on account of integration of Taro and associated costs to INR4.4bn and net
profits to grow by 12% to INR3.8bn.
Jubilant Lifesciences
Our interaction with the CRAMs companies suggests that big pharmacos have resumed restocking
inventory in 3QFY11e. Big pharmacos have realigned their manufacturing sites
after series of high-value M&A in 2009. Pharma companies have resumed outsourcing
research and manufacturing to Indian companies.
Indian companies such as Jubilant Lifesciences, Dishman Pharma and Divis Laboratories
have signed sub-USD50m contracts with big players. Though they are currently void of any
large multi-year, multi-million dollar deals, we expect this segment to gain traction only from
1QFY12e onwards. We assume Jubilant Lifesciences to grow at 11% to INR1.1bn. Growth
will be lower as this quarter will not include sales from the Agro Performance Polymer
business which was demerged in October 2010. We expect a de-growth in EBIDTA and
PAT at 3% (to INR2.3bn) and12% (to INR918m), respectively.
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