Q3 Pharma preview: Fewer launches, currency impacts performance

While the December quarter is expected to be muted for the sector, analysts expect growth to bounce back on US traction and strong domestic performance

Alack of meaningful product approvals in the US and adverse movement in emerging market currencies will impact the earnings growth of major pharmaceutical companies in the October-December quarter.

With the exception of Cadila and Cipla, earnings growth for most other pharma majors would be below 15 per cent this year. Cadila will benefit from price increases in the US, while inhaler sales in European Union markets are expected to boost Cipla.

Analysts at ICICI Securities say the consolidated US sales of seven pharma majors are likely to see growth of no more than six per cent, year on year. They cite the lower sales growth to a high base, more of competition in existing products and a slowing in product approvals by that country;s Food and Drug Administration (FDA).

The US market accounts for 45-60 per cent of revenue for majors such as Sun Pharmaceutical Industries, Dr Reddy’s, Lupin and Ranbaxy. Sun Pharma, for example, is expected to get impacted due to lower product approvals and market share loss in there.

For the broader universe of 16 companies, the research firm says revenue growth at 10 per cent over a year is the slowest in many quarters. Growth would have been still lower, had it not been for a robust show from the Indian formulations market. The latter was struggling with issues related to pricing but has recovered, reporting 11 per cent growth in November. Analysts say growth is expected to sustain at double-digit levels, on the back of price increases and new product launches.

For Sun Pharma, while domestic sales are expected to grow 20 per cent, given a predominantly chronic therapy portfolio, overall sales will be impacted due to its weak US performance. There were no new product launches and the company saw market share erosion in key products. Analysts at Nirmal Bang believe there will be a sequential decline in the sales of Taro, its subsidiary there, expected at $245 million.

For Lupin, while adverse currency movement (South Africa, Japan) will impact its numbers, the launch of anti-inflammatory drug Celebrex is expected to cushion the impact. The South African currency has depreciated 10 per cent and the Japanese yen is down 12 per cent. Credit Suisse analysts say the margins would be 50-55 per cent, as the company is sharing (authorised generic) profits with Pfizer. The December quarter could also be impacted as this is the first one after the acquisition of Mexican company Laboratories Grin.

Dr Reddy’s is expected to be impacted by the rouble’s depreciation. Analysts expect the Russia and CIS revenues to fall 15 per cent over a year before. Operating earnings’ margins are also expected to be lower, given a higher base and research & development expenditure. Analysts expect some of the impact of the rouble depreciation on the financials to be offset by the launch of immunosuppressant Sirolimus and anti-viral Valcyte drugs in the US market.

Revenue growth for Cipla is expected to come from a robust 20 per cent rise in domestic sales and 10 per cent improvement in export. Traction from the inhaler launches will be a key factor to watch in the quarter. Supply of the active pharmaceutical ingredient of Celebrex to Teva could provide a kicker.

Most analysts are bullish on the prospects of the sector, given the low competition and niche products for the US market, as well as continued strong showing in the domestic market.