Muted topline Q3 growth in pharma note ban impact marginal

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.