he pharma sector is witnessing earnings recovery, with the Street expecting double-digit growth for a third consecutive quarter. Analysts expect sales to grow by around 15 percent in the first quarter of the fiscal year 2019-2020 led by the US market.
US sales are likely to rise around 19-21 percent year-over-year as the base business improving and companies garner more market share in existing molecules. This is supplemented by a few good launches for specific companies such as Cipla and Dr Reddys Laboratories.
However, while the growth is expected to be steady YoY in the US, the street is expecting flat sales on a sequential basis in constant currency.
Domestic growth is likely to be slower due to a high base in Q1FY20. It was 28 percent in Q1FY19. Moreover, the street expects higher competition from generics and the Jan Aushadhi initiative to provide generic medicines at a discount.
On the positive side, the impact of channel inventory correction that impacted sales in FY19 is expected to ease in FY20 aiding domestic sales.
Operational improvement will be watched closely due to higher sales and cost containment measures undertaken by the companies. Cost containment measures included reducing R&D spend and divesting of assets such as Dr Reddys’ sale of 2 proprietary drug brands for $110 million.
Management commentary will be crucial this quarter. The Street awaits updates from companies facing regulatory headwinds such as Cadila’s Moraiya plant, Aurobindo’s latest warning letter, Lupin’s pending issues with its Goa unit and Torrent’s Dahej and Indrad facilities.
Analysts will also watch for guidance from companies and their plans to enter into markets such as China.
In terms of company-specific performance, Sun Pharmaceutical Industries will continue to benefit from a one-time product supply opportunity that began from Q4FY19. Cipla should gain from sales of kidney drug Sensipar generic in the US that it launched at risk.
Lupin will have benefits from the sales of heart drug Ranexa generic and Dr Reddys from anti-drug addiction drug Suboxone.
The performance of Biocon’s biosimilars business on a sequential basis will be watched closely as it was flat in Q4 compared to Q3 last year, disappointing analysts.
In terms of valuations, some of the companies have seen a catch up in the past few days, but the likes of Aurobindo, Biocon, Glenmark and Cadila are still languishing both in terms of a stock price and valuations. – CNBC TV18