We are
positive on the Indian pharmaceutical sector and expect most
companies to report good earnings growth for Q3FY2007, driven by
continued domestic growth, steady contributions from exports and
synergies arising out of integration of acquisitions. We expect
the pharmaceutical companies under our coverage to report a
revenue growth of 22.7% for Q3FY2007.
Despite the
de-stocking impact caused by the anticipatory introduction of
value-added tax (VAT) in Tamil Nadu with effect from January 1,
2007, the branded formulation business in the domestic market
continued its growth momentum in the quarter. The growth momentum
was maintained on the back of aggressive new product launches and
continued focus of companies on the high-growth chronic lifestyle
segments. The companies with a wider domestic presence like Cipla,
Sun Pharmaceuticals, Nicholas Piramal and Cadila Healthcare are
the likely beneficiaries.
On the export
front, the growth is expected to be strong, on the back of new
product launches, especially of products under 180-day
exclusivity. For example, Ranbaxy Laboratories is expected to
derive strong sales from "Zocor" under 180-day exclusivity while
Dr Reddy's Laboratories may witness revenue upsides from the sale
of "Zocor" and "Proscar" under authorised generic terms with Merck
Inc. Similarly, Cipla is expected to strengthen its exports by
supplying active pharmaceutical ingredients (APIs) of "Zoloft" and
"Proscar" to Teva.
With a greater
number of players entering the generic space in the USA, pricing
pressures are likely to continue. The pricing environment in the
key markets of Europe too is likely to be tough with the ongoing
regulatory reforms.
The merger and
acquisition (M&A) focus of Indian pharmaceutical companies has
continued in the quarter, with Ranbaxy Laboratories acquiring
South African Be Tabs and Wockhardt acquiring the Irish generic
company, Pinewood. The integration of past acquisitions is likely
to get reflected in the earnings growth of the pharmaceutical
companies during the quarter. Moreover, we expect the Indian
pharmaceutical companies to continue to widen their geographical
presence and expand product portfolios through inorganic
means.
On the
domestic front, the contentious issues of pricing control, data
exclusivity etc continue to loom over the domestic pharmaceutical
industry. Despite this, the increasing focus on the high-margin
regulated markets coupled with an improvement in the product mix
(moving more towards the high-margin formulation business),
improved cost discipline and shifting of production to tax-free
zones is likely to get reflected in the improving operating profit
margin (OPM) of the Indian pharmaceutical companies. We expect the
OPM of the pharmaceutical companies under our coverage to expand
by 540 basis points in Q3FY2007.
The recent
outlicencing deal of Glenmark Pharmaceutical's anti-diabetic
molecule to Merck KG has reinforced confidence in India's
innovative and research abilities. India's capabilities in drug
discovery research are being increasingly recognised by global
pharmaceutical majors. Lupin's anti-migraine compound entering
Phase III clinical trials further vindicates the capabilities of
the Indian companies to create their own innovative new chemical
entity (NCE) pipeline. We expect further positive news flow on the
innovative research and development (R&D) front from Sun
Pharmaceuticals, Lupin, Dr Reddy's Laboratories and Glenmark
Pharma in the coming quarters.
The strong
cost control initiatives coupled with the synergies derived out of
the integration of acquisitions are expected to drive the earnings
growth of the Indian pharmaceutical companies. The pharmaceutical
companies under our coverage are expected to report a jump of
58.9% in their net profit in Q3FY2007.