Pharmaceuticals 1Q Preview – No Major Launch + High Base = Modest Quarter :: Morgan Stanley Research,

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India Pharmaceuticals
1Q Preview – No Major
Launch + High Base =
Modest Quarter
Quick Comment – Tough yoy comps and lack of
major drug approval during the quarter will likely
drive down overall sector performance, we believe.
We estimate 11% sales growth (flat qoq) and 390bp
OPM compression to 20.5%, together resulting in 11.2%
de-growth (down 13% qoq) in profits for our coverage
universe. Excluding the one-offs for Ranb and Sun last
year, we expect 19% and 16% sales and net profit
growth, respectively.
Company-wise assessment: Variability in Sun’s
results are likely to be driven by the extent of Taxotere
sales in the US and Taro’s performance. DRL will likely
show a sequential de-growth in view of one-time D-24
sales in the previous quarter. Lupin, too, will likely report
sequential de-growth in view of the Salix payment last
quarter and Suprax seasonality. We expect Ranb to
have tough qoq/yoy comps and just one to two months
of Aricept in Jthe une quarter. Cipla could report strong
numbers depending on the Indore SEZ ramp up. We
expect BIOS and Glaxo to report in-line numbers.
What to watch out for: 1) Ranb’s commentary on
FDA/DoJ issues and Mohali SEZ site inspection by the
US FDA. 2) DRL’s update on near-term launches (D-24
OTC, Arixtra, Augmentin, Amoxil) and two industrial
accidents. 3) Sun’s execution on its high F2012
guidance of 28-30% sales growth and outlook for
generic Taxotere. 4) Lupin’s update on its OC portfolio
and Suprax liquid form. Overall, the quarter should
absorb the impact of high domestic inflation (9-10%) and
forex changes – 1-2% qoq/yoy average INR
appreciation vs. USD; 4%/11% qoq/yoy INR
depreciation vs. EUR; and 4%/8% qoq/yoy ruble
appreciation vs. USD.
Investment thesis: Our stock preference in the group is
DRL, Lupin, Sun, Ranb and Fortis (all OW). We remain
EW on Cipla, GSK, and Biocon. The group is trading at
20x F2012 EPSe with an implied PEG of 1x.