Boost in US sales likely to drive re-rating of Indian pharma companies

Growth in the US market was the reason for the overall revenue rise of many Indian pharma companies
The performance of top Indian pharma companies in the US market for the December quarter (Q3) indicates that their generics business in the world’s largest drug market might be turning the corner. 

Among companies that have reported their numbers, Cadila Healthcare registered its highest-ever sales in the US market with a growth of 46 per cent over the year-ago quarter. Aurobindo Pharma, too, saw its US sales grow 27 per cent year-on-year. Taro (Sun’s US subsidiary) reported 13.5 per cent year-on-year growth after a decline of 6.4 per cent in the June quarter. It was Taro’s Q3 show that saw Sun's stock spurt about 4 per cent (Sun will announce its results on Tuesday).

Growth in the US market was the reason for the overall revenue rise of these companies. Cadila’s US sales (55 per cent of overall) at Rs 1,934 crore, up 22 per cent year-on-year and 46.5 per cent sequentially, came against expectations of tepid growth on a high base of last year. The robust US growth compensated for a decline in Cadila’s domestic sales on the back of product rationalisation. Aurobindo saw its overall revenues grow 22 per cent year-on-year, boosted by US sales that contributed 46 per cent to the top line.

With continued pricing pressure in the US market on the back of rising competition and channel consolidation, growth for Indian companies had suffered during the past few years. Dr Reddy’s Laboratories and Lupin, which had seen their US sales decline in the past, got a respite in Q3. The pace of decline due to pricing pressure has come off now. 

Dr Reddy’s reported numbers did indicate a revival in the US sales, as its revenues from North America (primarily the US), which is about 40 per cent of the overall figure, was up four per cent sequentially. Edelweiss Securities believes that Dr Reddy’s promising complex generics pipeline, strong earnings revival and compelling valuations render it a prime re-rating candidate. 

Lupin, which had seen a sharper decline in US sales, as its diabetes generics portfolio came under pricing pressure, saw just a one per cent year-on-year fall in US sales. On a sequential basis, however, it’s US sales grew 13.5 per cent. The management believes that its base business remains strong and the current quarter run-rate represents the new base. Also, pricing erosion is back to the single-digit levels a against double-digits in prior quarters. 

Though Lupin and Dr Reddy’s both face regulatory issues providing an overhang, the forward prospects have improved with declining pricing pressure.

Sarabjit Kour Nangra at Angel Broking says macro pressure on the growth of companies is out and only company-specific issues are playing out now. Companies with a diversified portfolio had seen a lower strain on growth and profitability compared to those with higher product concentration. For example, Aurobindo – which has a highly diversified portfolio with lesser dependence on any single product – has seen a lower impact of price erosion. Comparatively, Lupin saw a higher impact as its sales were dependent on fewer products. Though Dr Reddy’s had a good portfolio of limited-competition drugs, it felt the heat, more so as product approvals and launches slowed due to regulatory issues. Lupin is currently in the process of resolving regulatory issues related to its Goa and Indore plants. Cadila has been able to resolve regulatory issues and has better near term prospects, say analysts.

Broadly, the year-on-year pain on growth for pharma companies is generally over and sequentially, the sales are looking up, says Nangra. Ranjit Kapadia at Centrum Broking concurs and says that pricing pressure in the US is nearing an end and is at lower single digits.

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