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During 4QFY2011, the BSE healthcare (HC) index
underperformed the BSE Sensex after having outperformed in
3QFY2011. The HC index dropped by 10.6% as against the
5.2% fall in the Sensex in the same period. The sector was affected
because of major expectations from the Union Budget
remaining unfulfilled, levying of MAT on SEZ units and some
lower-than-expected results in 3QFY2011.
The downward rally during 4QFY2011 varied from a single to
a double-digit drop across the sector. Amongst large caps,
Sun Pharma declined by 9%, despite good 3QFY2011
performance. Cipla declined by 13% during the period. Ranbaxy
was no exception, down 26% during the period. Among mid
caps, Lupin dropped by 14%, whereas Aurobindo Pharma was
strangled by a 26% dip, after getting caught under the USFDA’s
clutches, which imposed an import alert. During 4QFY2011,
Dishman reported a 35% drop due to poor 3QFY2011
performance. Amidst small caps, Indoco Remedies lost 10%
due to lower-than-expected 3QFY2011 results. Cadila, Alembic
and Aventis stood out positive amongst our universe, up 2%,
8% and 3%, respectively, in 4QFY2011.
Key developments
Dr. Reddy's gets US court's nod to sell Allegra: The U.S. District
Court of New Jersey filed a stipulation and order, lifting an
earlier motion for preliminary injunction and clearing the sale
of Dr. Reddy's generic version of Allegra D24, which was
approved by the USFDA on March 16, 2010. DRL would be
able to enjoy a longer period of exclusivity for the product,
given that there is no visible competition for the product in the
near future. For FY2012, we expect DRL to post gross sales of
US $60mn and net profit of US $42mn. We have accorded
NPV of `13.2/share for the product.
Hospira receives USFDA approval for Docetaxel: During
4QFY2011, Hospira received USFDA approval for Docetaxel,
the generic version of Sanofi-Aventis's Taxotere, an anti-cancer
product. Taxotere posted sales of ~US $1.2bn in 2010 in the
US. This approval would boost Cadila's earnings, which has a
50:50 JV with Hospira for six oncology products, of which
Docetaxel is also a part, helping it garner US $30mn from this
product, leading to incremental 5% (`1.9/share) on our
estimated EPS of `39.6 in FY2012.
Cadila and Bayer to set up new pharmaceuticals JV in India:
During 4QFY2011, Bayer HealthCare and Zydus Cadila signed
an agreement to set up a 50:50 JV company, Bayer Zydus
Pharma, for the sale and marketing of pharmaceutical products
in India. Bayer HealthCare's pharma division would provide its
existing sales and marketing business in India to the new
company and Zydus would offer its women healthcare products,
diagnostic imaging business and other products. In addition to
Bayer HealthCare's currently existing pharmaceutical product
portfolio in India, the JV would focus on the sale and marketing
of the future patented pipeline of pharma products. Both Bayer
HealthCare and Zydus will supply the JV with products sourced
from their manufacturing operations. This is positive for Cadila,
as it would acquire a branded product basket, further
strengthening its position in the domestic market. The deal is
expected to start contributing from FY2012.
Lupin settles patent litigation with Sunovion: During 4QFY2011,
Lupin and Sunovion Pharmaceuticals (subsidiary of Dainippon
Sumitomo Pharma Co.) entered into a settlement agreement to
resolve the pending litigation over Lunesta (Eszopiclone). The
product grossed sales of ~US $787mn in 2010 and would go
off patent in November 2013, which could be extended to May
2014 if Sunovion obtains additional six months exclusivity on
the product, post which Lupin is entitled to sell its generic version.
Ranbaxy settles patent litigation with Abbott: During 4QFY2011,
Ranbaxy and Abbott entered into a settlement to resolve the
patent litigation involving Tricor (annual sales of ~US $1bn in
the US). However, as the terms of the settlement are not
disclosed, it cannot not be ascertained when Ranbaxy would
be able to launch its drug in the US. Abbott already has a
settlement with Teva, permitting it to launch its low-price generic
version in March 2011.
Mylan sues USFDA to block Ranbaxy's Lipitor sales:
During 4QFY2011, Mylan sued the USFDA to block Ranbaxy's
exclusive rights to sell the generic version of Pfizer's cholesterol
pill Lipitor (US sales of US $7.27bn for the 12 months period
ending September 30, 2010 - IMS Health). Ranbaxy had
reached an agreement with Pfizer in 2008 to sell copies of Lipitor
beginning November 2011 and was entitled to a 180-day
marketing exclusivity as a reward for being the first to
challenge the Lipitor patent. According to Mylan, other generic
drug makers should be allowed to enter the market as soon as
the patent expires. In its complaint, Mylan stated that Ranbaxy
is not eligible for the marketing exclusivity due to ‘false and
unreliable data’ from its manufacturing site in Paonta Sahib,
India, where Lipitor’s copies would be produced and, thus wants
the court to force the FDA to say publicly that Ranbaxy's
application is tainted by Ranbaxy's misconduct and that the
application must be denied and the 180-day reward be
announced void. Currently, Lipitor contributes `67/share to our
target of `588. Even in the worst-case scenario, assuming there
is no contribution from Lipitor, the target would be `521/share.
USFDA import alert imposed on Aurobindo: During 4QFY2011,
the USFDA imposed an import alert for the detention of
Aurobindo Pharma’s products from its Cephalosporin facility
(Unit VI) located in Andhra Pradesh, India. The unit was audited
by the USFDA in December 2010. Subsequently, the USFDA
imposed an import alert on the entire unit. Until the issue is
resolved, the import alert will be affecting all shipments from
Unit VI to the US market. The unit generated ~US $70mn of
sales in FY2010, of which US $35mn (4% of FY2011E sales)
were from the US, with sterile products contributing
US $4mn-5mn of sales in the US. Aurobindo Pharma is awaiting
approval for 15 ANDAs, mostly sterile, from this site.
ANDA approvals in 4QFY2011
During 4QFY2011, Cadila and Sun Pharma received five
approvals each. DRL received four approvals. Out of which,
DRL launched pantoprazole sodium and Levocitirizine tablets
in the US. These products address a market opportunity of
US $1.8bn and US $238mn, respectively, in the US. Aurobindo
Pharma received three approvals during the period.
4QFY2011 expectations
We expect the pharma sector to close FY2011 with a mixed
4QFY2011 performance. We expect our universe to post 11.0%
yoy top-line growth, despite the 1.4% yoy appreciation in INR
against USD on an average during the quarter.
Amongst large caps, Sun Pharma is expected to post 27.3%
yoy sales growth, mainly because of Taro's integration. Cipla is
expected to post net sales growth of 12.2% yoy and overall net
profit growth of 48.9% yoy. Other players, namely DRL, Lupin
and Cadila, are expected to report 50.6%, 8.2% and 24.2%
growth in net profit, respectively.
Amongst small caps, Indoco Remedies is expected to post 8.5%
yoy and 51.4% yoy growth in sales and net profit, respectively.
Alembic is expected to post strong sales growth of 22.4% and a
whopping profit on a comparative basis.
Amongst the MNC pack, Aventis is likely to post 12.2% growth
in net profit, led by an 83bp yoy improvement in OPM.
Cipla and DRL to outperform
For 4QFY2011, Sun Pharma is likely to post 27.3% yoy sales
growth, mainly due to Taro's integration, which will drive export
formulation sales during the period. On the domestic front,
Indian formulation sales are expected to report a muted
performance. Despite strong top-line growth, on account of
Taro's integration, operating profit is likely to decline by 4%,
with margins likely to be around 28.4%, down 938bp yoy,
resulting in a 16.1% yoy drop in net profit.
Lupin is expected to post 15.9% yoy growth, led by formulation
sales in the export (US and Europe) and domestic markets.
With flat gross margin, OPM is likely to contract by 78bp for
4QFY2011. Net profit is expected to increase by 8.2%.
DRL is expected to post strong results with top-line growth of
15.9% to `1,904cr, majorly driven by the US market, which is
expected to post 44.1% growth for the quarter. The company is
expected to see strong traction in its Indian and Russian
formulation businesses as well. In the PSAI segment, lacklustre
performance is expected for 4QFY2011. The company is
expected to post OPM of 13.8%, up 241bp yoy. We expect DRL
to post net profit of `251cr, up 50.6% yoy.
Cipla is expected to post net sales growth of 12.2% to `1,478cr,
driven by its domestic performance. OPM (excluding technical
know-how fees) is likely to come in at 20.5%, up 522bp yoy,
due to lower other expenses. Net profit is expected to increase
by 48.9% yoy to `268.7cr, boosted by strong performance at
the operating level and lower taxes during the quarter.
We expect Ranbaxy’s net sales to decline to `2,164cr during
1QCY2011, as Aricept (the FTF opportunity) reported
below-expectation sales in 4QCY2010. The company’s
operating profit is likely to dip by 67%, leading to OPM of 11.7%,
due to lower gross margin. We expect net profit of `142.3cr.
Cadila and Indoco to take the lead
Cadila is likely to post yet another strong quarter with 24.0%
growth in net sales to `1,012cr due to robust growth on the
domestic formulation front. OPM is expected to expand by 35bp
yoy to 19.8% due to favourable product mix. Consequently, net
profit is likely to increase by 24.2% yoy to `147.6cr.
We estimate Ipca Labs' top line to grow by 25.4% to `457.7cr
for 4QFY2011. The company is expected to post strong growth
on the export and domestic fronts, reporting growth of 15.2%
and 25.8% yoy, respectively. OPM is expected to increase by
113bp yoy to 18.9%, led by gross margin expanding to 59.0%.
Overall, net profit is expected to rise by 11.9% yoy to `41.7cr.
Aurobindo Pharma is expected to post net sales growth of 13%
yoy, led by formulation exports. OPM is expected to grow by
426bp yoy to 20.6% due to improved gross margin. Overall,
net profit is expected to rise by 20.2% yoy because of higher
depreciation costs, but lower tax outgo during the quarter.
Indoco Remedies is expected to report top-line growth of 8.5%
to `118.2cr, driven by the domestic segment. OPM is expected
to expand by 719bp yoy to 17.3%, driven by growth in domestic
formulation sales. Consequently, net profit is expected to
increase by 51.4% yoy to `12.5cr.
Outlook and valuation
We have a positive earnings outlook for the sector.
The long-term growth drivers for the pharma sector both for
domestic and exports remain intact, which will aid the sector
trade at premium valuations to the Sensex. For FY2011-13E,
we expect our universe companies to report an earnings CAGR
of 21% vis-a-vis 17.6% for the Sensex.
In the generic segment, we prefer Cipla, Lupin, Cadila
Healthcare, Aurobindo Pharma, Alembic and Indoco Remedies.
In CRAMS, there have been indications of a gradual recovery
and ramp-up from most players, though the segment is currently
witnessing some pressure. In this segment, we recommend
Dishman Pharma, as its valuations discount the worst.
Going forward, with gradual improvement in the business,
we expect the stock to be an outperformer.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
During 4QFY2011, the BSE healthcare (HC) index
underperformed the BSE Sensex after having outperformed in
3QFY2011. The HC index dropped by 10.6% as against the
5.2% fall in the Sensex in the same period. The sector was affected
because of major expectations from the Union Budget
remaining unfulfilled, levying of MAT on SEZ units and some
lower-than-expected results in 3QFY2011.
The downward rally during 4QFY2011 varied from a single to
a double-digit drop across the sector. Amongst large caps,
Sun Pharma declined by 9%, despite good 3QFY2011
performance. Cipla declined by 13% during the period. Ranbaxy
was no exception, down 26% during the period. Among mid
caps, Lupin dropped by 14%, whereas Aurobindo Pharma was
strangled by a 26% dip, after getting caught under the USFDA’s
clutches, which imposed an import alert. During 4QFY2011,
Dishman reported a 35% drop due to poor 3QFY2011
performance. Amidst small caps, Indoco Remedies lost 10%
due to lower-than-expected 3QFY2011 results. Cadila, Alembic
and Aventis stood out positive amongst our universe, up 2%,
8% and 3%, respectively, in 4QFY2011.
Key developments
Dr. Reddy's gets US court's nod to sell Allegra: The U.S. District
Court of New Jersey filed a stipulation and order, lifting an
earlier motion for preliminary injunction and clearing the sale
of Dr. Reddy's generic version of Allegra D24, which was
approved by the USFDA on March 16, 2010. DRL would be
able to enjoy a longer period of exclusivity for the product,
given that there is no visible competition for the product in the
near future. For FY2012, we expect DRL to post gross sales of
US $60mn and net profit of US $42mn. We have accorded
NPV of `13.2/share for the product.
Hospira receives USFDA approval for Docetaxel: During
4QFY2011, Hospira received USFDA approval for Docetaxel,
the generic version of Sanofi-Aventis's Taxotere, an anti-cancer
product. Taxotere posted sales of ~US $1.2bn in 2010 in the
US. This approval would boost Cadila's earnings, which has a
50:50 JV with Hospira for six oncology products, of which
Docetaxel is also a part, helping it garner US $30mn from this
product, leading to incremental 5% (`1.9/share) on our
estimated EPS of `39.6 in FY2012.
Cadila and Bayer to set up new pharmaceuticals JV in India:
During 4QFY2011, Bayer HealthCare and Zydus Cadila signed
an agreement to set up a 50:50 JV company, Bayer Zydus
Pharma, for the sale and marketing of pharmaceutical products
in India. Bayer HealthCare's pharma division would provide its
existing sales and marketing business in India to the new
company and Zydus would offer its women healthcare products,
diagnostic imaging business and other products. In addition to
Bayer HealthCare's currently existing pharmaceutical product
portfolio in India, the JV would focus on the sale and marketing
of the future patented pipeline of pharma products. Both Bayer
HealthCare and Zydus will supply the JV with products sourced
from their manufacturing operations. This is positive for Cadila,
as it would acquire a branded product basket, further
strengthening its position in the domestic market. The deal is
expected to start contributing from FY2012.
Lupin settles patent litigation with Sunovion: During 4QFY2011,
Lupin and Sunovion Pharmaceuticals (subsidiary of Dainippon
Sumitomo Pharma Co.) entered into a settlement agreement to
resolve the pending litigation over Lunesta (Eszopiclone). The
product grossed sales of ~US $787mn in 2010 and would go
off patent in November 2013, which could be extended to May
2014 if Sunovion obtains additional six months exclusivity on
the product, post which Lupin is entitled to sell its generic version.
Ranbaxy settles patent litigation with Abbott: During 4QFY2011,
Ranbaxy and Abbott entered into a settlement to resolve the
patent litigation involving Tricor (annual sales of ~US $1bn in
the US). However, as the terms of the settlement are not
disclosed, it cannot not be ascertained when Ranbaxy would
be able to launch its drug in the US. Abbott already has a
settlement with Teva, permitting it to launch its low-price generic
version in March 2011.
Mylan sues USFDA to block Ranbaxy's Lipitor sales:
During 4QFY2011, Mylan sued the USFDA to block Ranbaxy's
exclusive rights to sell the generic version of Pfizer's cholesterol
pill Lipitor (US sales of US $7.27bn for the 12 months period
ending September 30, 2010 - IMS Health). Ranbaxy had
reached an agreement with Pfizer in 2008 to sell copies of Lipitor
beginning November 2011 and was entitled to a 180-day
marketing exclusivity as a reward for being the first to
challenge the Lipitor patent. According to Mylan, other generic
drug makers should be allowed to enter the market as soon as
the patent expires. In its complaint, Mylan stated that Ranbaxy
is not eligible for the marketing exclusivity due to ‘false and
unreliable data’ from its manufacturing site in Paonta Sahib,
India, where Lipitor’s copies would be produced and, thus wants
the court to force the FDA to say publicly that Ranbaxy's
application is tainted by Ranbaxy's misconduct and that the
application must be denied and the 180-day reward be
announced void. Currently, Lipitor contributes `67/share to our
target of `588. Even in the worst-case scenario, assuming there
is no contribution from Lipitor, the target would be `521/share.
USFDA import alert imposed on Aurobindo: During 4QFY2011,
the USFDA imposed an import alert for the detention of
Aurobindo Pharma’s products from its Cephalosporin facility
(Unit VI) located in Andhra Pradesh, India. The unit was audited
by the USFDA in December 2010. Subsequently, the USFDA
imposed an import alert on the entire unit. Until the issue is
resolved, the import alert will be affecting all shipments from
Unit VI to the US market. The unit generated ~US $70mn of
sales in FY2010, of which US $35mn (4% of FY2011E sales)
were from the US, with sterile products contributing
US $4mn-5mn of sales in the US. Aurobindo Pharma is awaiting
approval for 15 ANDAs, mostly sterile, from this site.
ANDA approvals in 4QFY2011
During 4QFY2011, Cadila and Sun Pharma received five
approvals each. DRL received four approvals. Out of which,
DRL launched pantoprazole sodium and Levocitirizine tablets
in the US. These products address a market opportunity of
US $1.8bn and US $238mn, respectively, in the US. Aurobindo
Pharma received three approvals during the period.
4QFY2011 expectations
We expect the pharma sector to close FY2011 with a mixed
4QFY2011 performance. We expect our universe to post 11.0%
yoy top-line growth, despite the 1.4% yoy appreciation in INR
against USD on an average during the quarter.
Amongst large caps, Sun Pharma is expected to post 27.3%
yoy sales growth, mainly because of Taro's integration. Cipla is
expected to post net sales growth of 12.2% yoy and overall net
profit growth of 48.9% yoy. Other players, namely DRL, Lupin
and Cadila, are expected to report 50.6%, 8.2% and 24.2%
growth in net profit, respectively.
Amongst small caps, Indoco Remedies is expected to post 8.5%
yoy and 51.4% yoy growth in sales and net profit, respectively.
Alembic is expected to post strong sales growth of 22.4% and a
whopping profit on a comparative basis.
Amongst the MNC pack, Aventis is likely to post 12.2% growth
in net profit, led by an 83bp yoy improvement in OPM.
Cipla and DRL to outperform
For 4QFY2011, Sun Pharma is likely to post 27.3% yoy sales
growth, mainly due to Taro's integration, which will drive export
formulation sales during the period. On the domestic front,
Indian formulation sales are expected to report a muted
performance. Despite strong top-line growth, on account of
Taro's integration, operating profit is likely to decline by 4%,
with margins likely to be around 28.4%, down 938bp yoy,
resulting in a 16.1% yoy drop in net profit.
Lupin is expected to post 15.9% yoy growth, led by formulation
sales in the export (US and Europe) and domestic markets.
With flat gross margin, OPM is likely to contract by 78bp for
4QFY2011. Net profit is expected to increase by 8.2%.
DRL is expected to post strong results with top-line growth of
15.9% to `1,904cr, majorly driven by the US market, which is
expected to post 44.1% growth for the quarter. The company is
expected to see strong traction in its Indian and Russian
formulation businesses as well. In the PSAI segment, lacklustre
performance is expected for 4QFY2011. The company is
expected to post OPM of 13.8%, up 241bp yoy. We expect DRL
to post net profit of `251cr, up 50.6% yoy.
Cipla is expected to post net sales growth of 12.2% to `1,478cr,
driven by its domestic performance. OPM (excluding technical
know-how fees) is likely to come in at 20.5%, up 522bp yoy,
due to lower other expenses. Net profit is expected to increase
by 48.9% yoy to `268.7cr, boosted by strong performance at
the operating level and lower taxes during the quarter.
We expect Ranbaxy’s net sales to decline to `2,164cr during
1QCY2011, as Aricept (the FTF opportunity) reported
below-expectation sales in 4QCY2010. The company’s
operating profit is likely to dip by 67%, leading to OPM of 11.7%,
due to lower gross margin. We expect net profit of `142.3cr.
Cadila and Indoco to take the lead
Cadila is likely to post yet another strong quarter with 24.0%
growth in net sales to `1,012cr due to robust growth on the
domestic formulation front. OPM is expected to expand by 35bp
yoy to 19.8% due to favourable product mix. Consequently, net
profit is likely to increase by 24.2% yoy to `147.6cr.
We estimate Ipca Labs' top line to grow by 25.4% to `457.7cr
for 4QFY2011. The company is expected to post strong growth
on the export and domestic fronts, reporting growth of 15.2%
and 25.8% yoy, respectively. OPM is expected to increase by
113bp yoy to 18.9%, led by gross margin expanding to 59.0%.
Overall, net profit is expected to rise by 11.9% yoy to `41.7cr.
Aurobindo Pharma is expected to post net sales growth of 13%
yoy, led by formulation exports. OPM is expected to grow by
426bp yoy to 20.6% due to improved gross margin. Overall,
net profit is expected to rise by 20.2% yoy because of higher
depreciation costs, but lower tax outgo during the quarter.
Indoco Remedies is expected to report top-line growth of 8.5%
to `118.2cr, driven by the domestic segment. OPM is expected
to expand by 719bp yoy to 17.3%, driven by growth in domestic
formulation sales. Consequently, net profit is expected to
increase by 51.4% yoy to `12.5cr.
Outlook and valuation
We have a positive earnings outlook for the sector.
The long-term growth drivers for the pharma sector both for
domestic and exports remain intact, which will aid the sector
trade at premium valuations to the Sensex. For FY2011-13E,
we expect our universe companies to report an earnings CAGR
of 21% vis-a-vis 17.6% for the Sensex.
In the generic segment, we prefer Cipla, Lupin, Cadila
Healthcare, Aurobindo Pharma, Alembic and Indoco Remedies.
In CRAMS, there have been indications of a gradual recovery
and ramp-up from most players, though the segment is currently
witnessing some pressure. In this segment, we recommend
Dishman Pharma, as its valuations discount the worst.
Going forward, with gradual improvement in the business,
we expect the stock to be an outperformer.
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