After dipping 3.3% and 6.3% y-o-y in September and October in the back of New Pharma Pricing Policy (NPPP) implementation, the overall volume growth in the pharmaceutical space has started to rebound. Post a 2.5% y-o-y growth in volumes posted during November’13, the overall volume growth at 4.1% does provide some respite.
The respite also comes from the fact that sales from stockist to retailers for the India Pharma Market (IPM) increased to 8.2% year-on-year (from 6.9% in November 2013) analysts at Nomura suggest. This also indicates that the impasse over NLEM that has been keeping domestic sales of most pharma companies under check is being sorted out.
Among individual companies, IPCA Laboratories, Glenmark Pharma and Sun Pharma outperformed their peers in December 2013 with gross domestic sales growth of 28.5%, 20% and 14% respectively, as per AIOCD AWAC data.
However, Sun Pharma’s growth was outstanding given the high base. Sun Pharma’s domestic sales during the September 2013 quarter – at around Rs 950 crore – were more than double of Glenmark’s Rs 418 crore and almost four times of IPCA’s 276 crore.
Glaxo and Ranbaxy, on the other hand, still remain laggards – posting a sales decline of 11% and two% respectively during December 2013. The trader’s impasse with the companies on margins for drugs to be sold under NLEM (New List of Essential Medicines) continued with GSK Pharma facing the maximum impact.
Cipla’s domestic growth in this fiscal has remained ahead of the broader market growth. The company clocked in a growth of 12% during December and 10% during the quarter. For Cipla that derives around 45% of sales from domestic market, analysts suggest that the company should be able to sustain these growth rates.
SAION Mukherjee and Lalit Kumar at Nomura observe: “Based on our interaction with company managements and AIOCD data; we factor in acceleration in domestic growth rates for Cipla and IPCA Laboratories in Q3FY14E”.
The road ahead
Despite challenges arising out of the implementation of the new drug pricing policy, the uncertainty over the foreign direct investment (FDI) policy and government measures to tighten the clinical trial process in the domestic market and the increased surveillance of India-based facilities by the US Food and Drug Administration (USFDA), the industry was able to show a fairly good performance in H1FY2014 on the back of a favourable local currency, new product launches in the USA and focus on exports to the other emerging markets.
While most of the policy overhangs have been removed and the after-effects of the new pricing policy are getting absorbed by the industry, analysts suggest that the growth would be stronger for the Indian pharma players in the near-to-mid term.
Analysts say that the growth in the subsequent quarters would be driven mainly by: (1) market expansion in India; (2) the launch of generic products in the USA (drugs worth $16 billion slated to expire during Q4FY2014 and FY2015); (3) ramp-up at new facilities going to production stream; (4) the launch of products under exclusivity or settlements with innovators; and (5) better traction in CRAMS activities.
“We expect revenue growth recovery in Q3FY14, led by the US generics, revival in domestic formulations with volume growth and favourable currency. We expect EBITDA margins to improve 70bps y-o-y to 23%, led by higher US generics growth and favourable currency. Better margins, along with lower interest cost, would result in adjusted PAT (profit after tax) growth of robust 20% y-o-y, higher than revenue growth. We remain Overweight on the sector and our top picks are Dr Reddy’s Laboratories, Cipla, Sun Pharma, Indoco Remidies, and Natco Pharma. We have a Sell on Ranbaxy,” Sriram Rathi, an analyst tracking the sector at Anand Rathi says.