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The BSE Healthcare Index has fallen more than the broader indices since its recent highs, losing seven per cent as compared to 3.5 per cent of the latter. This is due to premium valuations and muted US growth in the March quarter.
Analysts at Kotak Institutional Equities note that high-quality stocks such as Sun Pharma, Dr Reddy’s, Lupin and Cipla trade at expensive multiples for FY17, even after factoring in strong earnings growth over FY15-17.
Analysts feel growth in the US for FY16 will be back-ended, as not many have come in this first quarter. Still, any further correction offers an opportunity for investors to take an exposure to the major generic companies, as US growth is likely to come back to 20 per cent levels. Further, domestic growth of most companies is already running at strong double-digit levels for the past couple of quarters, after being muted in 2014 due to the government’s new pricing policy.
In addition to less approvals, the regulatory issues faced by some pharma companies and cross-currency headwinds impacted growth in the CIS and Russia. A high base last year in the US market, which contributes 40-50 per cent of sales for top generic companies, coupled with no new product launches, capped growth in this most profitable and high-growth region.
Sun Pharma’s own portfolio saw no major launches. With higher competition for existing products and pressure on margins, this led to a performance below expectation. At a consolidated level, however, company thanks to subsidiary Taro, it managed to buck the slow growth trend among larger companies, with 22.5 per cent growth in the US. Lupin saw its US sales decline six per cent over a year before and Glenmark saw a 7.1 per cent growth. Even for the year, Glenmark’s US growth was almost flat at 0.6 per cent.
Despite the lack of approvals, Dr Reddy’s, Cadila Pharma and Aurobindo managed a better show. Dr Reddy’s saw its US sales grow 14 per cent, led by a niche product range and limited competition products. Despite no approval, Aurobindo registered 20 per cent growth in the US, helped by integration of the Natrol Pharma acquisition. Cadila Healthcare sales grew a strong 44 per cent, despite only one approval in six months. This was largely helped by an anti-malarial product’s growth, with restrained supplies by others such as IPCA, which ran into regulatory issues. Sales in the US for IPCA and Wockhardt continue to be impacted due to ongoing import alerts.
Cross-currency headwinds impacted Dr Reddy’s and Glenmark in CIS and Russia. While Russia has been an important geography for Dr Reddy’s, contributing to about a fifth of revenue, this share has declined and there was a sales fall of 27.2 per cent in the March quarter. Glenmark also saw its rest of the world revenue fall 36 per cent in the March quarter, primarily led by Russia and CIS.
Amongst the companies facing regulatory issues are Dr Reddy’s Srikakulum facility, Sun Pharma’s Halol Plant and Cadila healthcare’s Moraiya unit.
Analysts at JM Financial expect Divis Laboratories, Torrent Pharma and Cadila Healthcare achieving 20 per cent growth in FY16. Also, Lupin is likely to launch 15-20 new generic products in the US in FY16 and Sarabjit Kour Nangra at Angel Broking expects the region to post a compounded annual growth rate (CAGR) of 20.3 per cent during FY15-17. Analysts at Reliance Securities foresee a smart recovery (26 per cent CAGR over FY15-17) in the US for Glenmark, led by a pick-up in approvals and launches.
Ranjit Kapadia at Centrum Broking expects Aurobindo to post strong growth in the US market due to controlled substances, Abbreviated New Drug Approvals (ANDAs) and the injectable business.
For Dr Reddy’s, Hitesh Mahida at Antique Stock Broking says with a niche basket of ANDAs pending approval, its long-term growth in the US is favourable. Launch of gastro drug Nexium could be another big contributor, with a site transfer filed by Dr Reddy’s from its Srikakulum facility. Lupin is also awaiting approvals for launches.
