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Summary of Contents
SHAREKHAN
SPECIAL
Q4FY2007 Pharma
earnings preview
Key points
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We remain positive on the Indian
pharmaceutical sector on account of the continued domestic growth,
steady contributions from exports and synergies arising out of
integration of acquisitions. Further, the increased focus on drug
discovery and collaborative research with the global players
enhances the medium-term earnings visibility for the
sector.
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In line with the business trend, the growth of
the domestic market moderated to around 9% in Q4FY2007 from over
15% in the previous couple of quarters. But the ramp-up in the
formulation export segment continues to be robust and the
successful integration of acquisitions (viz Ranbaxy Laboratories'
Terapia, Wockhardt's Pinewood and Nicholas Piramal's Morpeth)
would drive the revenue growth for the sector. Further, Dr Reddy's
Laboratories' 180-day exclusivity for Ondansetron would also boost
the overall industry growth. We expect the pharmaceutical
companies under our coverage to report a revenue growth of 20.3%
in Q4FY2007.
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With a greater number of players entering the
generic space in the USA and the European Union, pricing pressures
are likely to continue. But thanks to the cost-cutting efforts,
improvement in the product mix and larger thrust on branded
formulation business by the local players, stable margins are
likely to be ensured. The pharmaceutical companies under our
coverage are expected to report a 420-basis-point expansion in the
operating profit margin (OPM), leading to a 30% growth in their
net profit in Q4FY2007.
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Research and development (R&D) was the
highlight of the fourth quarter as Indian pharma space witnessed
impressive developments on the R&D front. Sun Pharmaceuticals
de-merged its R&D unit into a separate entity called Sun
Pharma Advance Research Company and unveiled its new chemical
entity (NCE)/novel drug delivery system (NDDS) pipeline
(comprising four NCEs and four NDDS). Alongside, Ranbaxy
Laboratories has expanded its collaborative research partnership
with GlaxoSmithKline Plc (GSK), as per which the Indian company
would identify the new chemical leads and take them up to Phase-II
proof of concept study. The Ranbaxy Laboratories-GSK alliance
would focus on therapies like anti-infectives, metabolic
disorders, respiratory and oncology. As per the deal, Ranbaxy
Laboratories could receive over $100 million in potential
milestone payments for a single product. We expect further
positive news flow on the innovative R&D front from Lupin, Dr
Reddy's Laboratories and Glenmark Pharmaceuticals in the coming
quarters, which would act as a strong growth trigger in the medium
to long term.
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