Cadila, Aurobindo to lead Q2 growth in pharma space

Recovery in Indian market due to re-stocking as well as niche product launches, which will drive growth

After a weak June quarter (Q1), a recovery led by the domestic formulations business is expected to lead to strong sequential revenue growth for Indian pharma majors. Brokerages believe the pharma business of domestic-focussed firms could see 40 per cent growth on a sequential basis. Analysts at Anand Rathi expect domestic formulations of companies they cover to pick up, aided by restocking after a subdued Q1 on the implementation of the goods and services tax (GST) regime. The brokerage estimates revenue growth of 47 per cent on a sequential basis and 11 per cent over the year-ago period, for the companies under its coverage.

Most analysts expect strong growth for the domestic formulations market due to channel re-stocking. Data from trade body AIOCD AWACS indicates that channel inventory increased to 30 days from the level of 17 days recorded just before the implementation of the GST. The normal inventory level before de-stocking stood at 40 days, according to the trade body. The other area of improvement would be emerging markets’ sales. Analysts at Nomura say the revival of economic growth in key emerging markets coupled with stable currencies would translate to double-digit constant currency growth for companies operating in these markets. Companies which have a higher proportion of revenues from emerging markets include Cipla and Torrent, among others.

Among pharma majors, overall growth is expected to be led by Cadila Healthcare, Dr Reddy’s and Aurobindo Pharma. Driven by a 30 per cent surge in US revenues, overall turnover of Cadila is expected to increase by 16-19 per cent over the year-ago period. The growth in the US business, in addition to the faster approvals due to Moraiya plant’s approval by the US Food and Drug Administration (FDA), is expected to be led by Lialda, a drug used in treating ulcerative colitis, among others. Lialda is expected to generate revenues of $35-40 million. Recovery in the Indian market as well as sales in high-margin drugs is expected to reflect in operating profit and net profit growth of 35-36 per cent for the company. 

Similarly, growth for Aurobindo is expected to come from Renvela (which regulates phosphorus levels), Zetia (which lowers cholesterol levels) and traction in the injectables portfolio, believe analysts at Quant Capital. 

While rising product approvals by the US FDA would lead to some pressure on pricing in the world’s largest health care market, analysts believe that a higher proportion of complex and niche products will be beneficial for the sector. Say analysts at Nomura, “Though a small negative surprise on pricing cannot be ruled out completely, we think the rising rate of high-value complex approvals is a positive. We think the complex generics space, presents large opportunities in the US, which could be a material value driver for the stocks. With the FDA intending to help approve complex products, we expect positive commentary on product approvals at the post-results calls.”

The other area which could show an improvement is on the cost front. While R&D costs have been one of the biggest reasons for increased cost structures, the firms believe costs or rise in overheads will be moderate from these levels, thereby helping improve overall profitability.