We expect weak Q1FY17 earnings for our pharma universe on muted domestic sales and lower US revenues, even as favourable EM currencies offer some respite.
We estimate 11%/9%/12% growth in sales/EBITDA/PAT, and 210bps higher margins QoQ given one-off costs in Q4. In a tough business scenario (channel consolidation, delayed approvals, compliance issues), we remain selective and prefer mid-caps (ARBP, GNP, DIVI, CDH) to large-caps.
Æ US biz to be weak for most players: We expect a muted Q1FY17 for our pharma universe due to pricing pressure and lack of material launches in the US, and the NLEM and FDC ban impact in India.
(a) LPC (Gavis consolidation, gGlumetza exclusivity launch to offset a seasonally weak Q1 for Cephalosporins), SUNP (gGleevec launch) and Cipla (Invagen consolidation) to benefit from inorganic and one-off opportunities.
(b) DRRD (headwinds in Russia, Venezuela and weak US sales), TRP/ ARBP (price erosion in gAbilify), and CDH (price erosion in Tamsulosin, HCQS) to post weaker growth.
(c) Strong traction in Sofosbuvir franchise for Natco to be offset by the absence of Venezuela tender business (RCMLe: Rs 800mn in Q4FY16). GNP to see full benefits of Mupirocin price hike in Q1.
Æ Favourable EM currencies a positive: EM currencies such as RUB/ZAR/ BRL have appreciated by 12.1%/4.5%/10.3% QoQ. This bodes well for pharma companies given their high exposure (10-38%) to EMs. Approval momentum remains strong (189 approvals vs. 170 in Q4FY16), but Indian generics (barring ARBP; 23 approvals) are yet to see a ramp-up due to regulatory compliance issues.
Æ Key monitorables:
(a) Sector: Impact of transition to IND-AS.
(b) SUNP: Progress on RBXY merger; USFDA re-inspection for Halol.
(c) Cipla: gPulmicort contribution, gSeretide UK launch update, update on business restructuring.
(d) LPC: Update on 483s at Goa plant, increase in R&D spends.
(e) DRRD: Update on re-inspection of three facilities under warning letter; outlook on Russia/Venezuela.
(f) TRP: Trend in R&D spends; Glochem acquisition, Brazil outlook.
(g) NTCPH: Update on 483s at Kothur plant; traction in Sofosbuvir.
(h) STR: Progress on Shasun integration, institutional biz outlook.
(i) GNP: Debt reduction, ramp-up in US sales.
(j) DIVI: Update on new capex.
(k) ARBP: Traction in recent launches; turnaround of acquired EU business.
(l) CDH: Update on site transfer for key products.