We expect our pharma coverage universe stocks to record consolidated revenue growth of 17.7% and Ebitda (earnings before interest, taxes, depreciation and amortisation) growth of 15.2% in Q1FY14F. A slowdown in the domestic formulation business and no significant launches in the US are key characteristics of the quarter. The domestic business is impacted by trade de-stocking as the new pricing policy is being implemented.
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Overall, we forecast the domestic business to record a 4.2% year-on-year growth (ex-low base of Sun Pharma in Q1FY13) for the coverage universe. The US presents a high base for Ranbaxy and Cipla due to exclusivity sales recorded in the year-ago period. For Dr Reddy?s and Lupin, the US is likely to a record a quarter-on-quarter slowdown. Sun Pharma , however, should benefit from the continued pricing strength in URL and Taro and the consolidation of Dusa.
We believe net earnings in the quarter will be impacted by significant MTM (mark-to-market) losses and extraordinary items such as Protonix?s liability for Sun Pharma. Excluding these, we estimate earnings growth of 18.6% y-o-y.
We expect the strongest operating performance from Sun Pharma; APHS (Apollo Hospitals Enterprise) and Glaxo are likely to disappoint.
Sun Pharma: Strong operational performance with pricing strength continuing at Taro and URL. With further INR depreciation, we see potential upside risk to the stated revenue growth guidance of 8-20% for FY14. Net earnings are impacted adversely by the Protonix liability.
Dr Reddy?s: The US and PSAI (pharmaceuticals services and
active ingredients) on the high base are likely to record a slowdown q-o-q.
Cipla: We expect a q-o-q improvement in margins, although a y-o-y decline on high Lexapro-related sales.
Lupin: After a blowout in Q4FY13, we expect a moderation with some pricing pressure in Tricor and Geodon. As well, domestic revenue growth should slow materially on the higher base of Q4FY13.
Ranbaxy: We expect base margins to remain in low single digits. Domestic, ROW (rest of world) sales performance and commentary on Diovan are key.
Cadila: India business to maintain the growth momentum; the US is lacklustre due to lack of material significant launches. We anticipate a marginal improvement in margins from Q4FY13 lows.
Glaxo: Weak growth and margin contraction as supply constraints continue and channel de-stocking takes place.
Glenmark: Specialty sales in India and semi-regulated markets to drive growth. We expect flat margins sequentially as lower employee costs are likely to be compensated by higher R&D expense.
Apollo Hospitals: A slowdown in growth recorded in Q4FY13 should sustain.
Jubilant Lifesciences: Margin likely to remain under pressure with price correction in ethylprednisolone.
Sequential improvement likely: For our coverage universe stocks, we expect y-o-y growth to remain robust in the US and ROW markets, to an extent aided by currency depreciation. Growth in the Indian market should be subdued due to trade de-stocking and disruption in sales in Maharashtra. In our view, the base effect is adverse for Cipla and Ranbaxy, which gained from US exclusivities in the same period last year. The base is favourable for Sun Pharma on low domestic sales recorded in Q1FY13, the impact of the acquisition of Dusa and URL, and price hikes at Taro. Overall, we assess Ebitda growth at 15.2% and adjusted earnings growth (adjusted for MTM loss/gains and extraordinary charges) at 18.6% for our coverage universe stocks.
Significant currency depreciation during the quarter: The INR has depreciated against the most developed market currencies during the quarter. INR also depreciated against some of the emerging market currencies such as Russian rouble, Brazilian real. The sharp depreciation towards the end of the quarter is likely to lead to significant MTM gains/losses, in our view.
Domestic market growth should be subdued: The implementation of the new pricing policy, sales disruptions in Maharashtra and a surprise ban on pioglitazone are events that are likely to have an adverse impact on the domestic market growth rates. For our coverage universe stocks, we project domestic growth rates at 7.8%. Excluding the low base impact on Sun Pharma, we estimate growth at 4.2%. The AIOCD AWACS (pharma market research agency) data suggest no improvement in the domestic market growth. As per AIOCD AWACS, inventory in the channel declined from 38.8 days on April 10 to 30.7 days on June 10, 2013.
Implementation of the new pricing policy: Implementation of the new pricing policy has commenced, with the government notifying the ceiling prices of the first batch of 240 products. In our interactions, companies have acknowledged slower off-take as the trade is reducing inventory levels. Companies would have 45 days to implement the price restrictions. Given the transition to the new pricing regime, we expect growth to remain muted in Q1 and Q2. We expect an adverse impact of the price cuts and stock returns (unsold inventory at old price) in Q2FY14F.
Sales disruptions in Maharashtra: In Maharashtra, the ongoing agitation by the trade channel against the local regulator could potentially impact primary sales for June. Maharashtra accounts for 13% of India sales. For companies under our coverage universe, Maharashtra sales are 11-19% of India sales.