PRICING PRESSURE ON PHARMA TO IMPACT GROWTH

Pharma companies are likely to report sequentially flat EBITDA growth in 3QFY17, impacted by pricing pressure and higher R&D expenditure, a report said. "We expect our pharma universe to report sequentially flat EBITDA growth in 3QFY17, largely led by pricing pressure and higher R&D expenditure. Also, increased US regulatory scrutiny is resulting in higher remediation expenses and de-risking of key products. This, in turn, should weigh down on operating margins," brokerage firm Motilal Oswal said in a report. In its expected quarterly performance summary, the report said that the top pharma companies are expected to report 0.7 per cent Q-o-Q sales growth at Rs 38,137 crore in December 2016 quarter. The EBDITA may see marginal decline of 0.6 per cent at Rs 9,245 crore in December quarter. After a strong 1HFY17, the domestic pharma business is expected to face headwinds from seasonal weaknesses and demonetisation. Although the chronic segment may benefit at the margin due to demonetisation, the acute segment may see some impact in the near-term, the report said. The depreciation of rupee against the dollar is however, expected to benefit export-oriented companies. The average rate of the rupee against the USD has depreciated by 2.3 per cent Y-o-Y over the past year (67.46 in 3QFY17 vs 65.95 last year). However, USD/INR had been flat sequentially. It is thus, unlikely to result in any significant MTM impact for companies with large forex debt and derivative exposure, it said. Brexit was also expected to have a negative impact on companies from 2QFY17. However, we note that most Indian companies have limited exposure to the UK market (1-2 per cent of sales). Also, post Brexit vote, it is still unclear whether or not Indian companies will have to conduct separate trials for approval in the UK and other EU markets. Separate trials would mean additional cost for companies, however, this is not expected to happen at least for next two years, the report said. Among domestic pharma companies, Glenmark is expected to exhibit strong growth in the US, led by Zetia FTF and a series of other generic launches. Aurobindo may report stable US sales, driven by key launches including Crestor. On the other hand, Sun Pharma and Lupin Labs may continue witnessing a sequential decline in the US business on the back of competition in key products, the report said. Dr Reddy's Lab is expected to report subdued numbers in 3QFY17, with revenue declining 6.1 per cent Y-o-Y to Rs 37.2 billion and PAT down 22.4 per cent to Rs 4.5 billion. This is primarily due to the lack of new launches in the US and increased generic competition in gVidaza, Motilal Oswal said. Among MNCs, Sanofi is likely to report better numbers, while GSK should face some pressure from the ongoing supply issues. The pace of approvals has picked up at the USFDA. However, lack of key approvals, higher R&D spends and regulatory concerns in the domestic/US markets are likely to keep growth under check, the report said.

Muted topline Q3 growth in Pharma

The pharmaceutical sector is expected to report a muted revenue growth of 12 per cent and margin decline of 100 bps YoY, led by weakness in US business, in the quarter ended December 31, while note ban will have a limited impact on the key industry, a report has said. "We expect another muted quarter for the pharma sector led by weakness in US business. Inspections by USFDA (health regulator) and pricing in US market will continue to dominate the results. Recent comments from global peers have indicated that pricing scenario will likely remain unchanged in 2017," said the report by global investment banking firm Jefferies. "We expect Indian pharma to report revenue growth of 12 per cent and margin decline of 100 bps YoY. US business will remain the key focus given regulatory and pricing headwinds. In India, we expect a limited impact from demonetisation for pharma," according to the report titled 'Pharmaceuticals Q3FY17 Preview: Headwinds Continue'. Jefferies said the FDA inspections will remain in focus. "Given the re-emerged FDA headwinds for select companies, we expect FDA inspections to remain in focus, especially for companies under warning letters. We expect Dr Reddy's and CDH to see inspection in the near-term and these will be key to watch. Additionally, we will look for commentary from Sun Pharma on Halol resolution." The report said the key focus in the results and commentary will be the pricing erosion faced by Indian companies in US and outlook going forward. Some global peers have indicated that pricing is likely to remain under pressure in 2017 also. Jefferies said it expect Sun Pharma to report 14 per cent topline growth and 280 bps YoY margin improvement led by gGlivec and gOlmesartan. The key to watch will be Taro margins and management commentary on Halol resolution timelines. "We expect Lupin to report 200 bps YoY and 120 bps QoQ margin decline led by pricing pressure and competition in Fortamet. Key to watch will be management commentary on pricing, competition and key launches. We also expect Cipla to report 300 bps YoY margin improvement driven by low base and cost cutting." Dr Reddy's Labs is expected to report slight QoQ margin improvement though well below FY16 levels. Key for the stock remains FDA inspection of facilities and resolution of warning letter, the investment banking firm said.