SHAREKHAN SPECIAL
Q4FY2007 Pharma earnings preview
Key points
- We remain positive on the Indian pharmaceutical sector on account of the continued domestic growth, steady contributions from exports and synergies arising out of integration of acquisitions. Further, the increased focus on drug discovery and collaborative research with the global players enhances the medium-term earnings visibility for the sector.
- In line with the business trend, the growth of the domestic market moderated to around 9% in Q4FY2007 from over 15% in the previous couple of quarters. But the ramp-up in the formulation export segment continues to be robust and the successful integration of acquisitions (viz Ranbaxy Laboratories' Terapia, Wockhardt's Pinewood and Nicholas Piramal's Morpeth) would drive the revenue growth for the sector. Further, Dr Reddy's Laboratories' 180-day exclusivity for Ondansetron would also boost the overall industry growth. We expect the pharmaceutical companies under our coverage to report a revenue growth of 20.3% in Q4FY2007.
- With a greater number of players entering the generic space in the USA and the European Union, pricing pressures are likely to continue. But thanks to the cost-cutting efforts, improvement in the product mix and larger thrust on branded formulation business by the local players, stable margins are likely to be ensured. The pharmaceutical companies under our coverage are expected to report a 420-basis-point expansion in the operating profit margin (OPM), leading to a 30% growth in their net profit in Q4FY2007.
- Research and development (R&D) was the highlight of the fourth quarter as Indian pharma space witnessed impressive developments on the R&D front. Sun Pharmaceuticals de-merged its R&D unit into a separate entity called Sun Pharma Advance Research Company and unveiled its new chemical entity (NCE)/novel drug delivery system (NDDS) pipeline (comprising four NCEs and four NDDS). Alongside, Ranbaxy Laboratories has expanded its collaborative research partnership with GlaxoSmithKline Plc (GSK), as per which the Indian company would identify the new chemical leads and take them up to Phase-II proof of concept study. The Ranbaxy Laboratories-GSK alliance would focus on therapies like anti-infectives, metabolic disorders, respiratory and oncology. As per the deal, Ranbaxy Laboratories could receive over $100 million in potential milestone payments for a single product. We expect further positive news flow on the innovative R&D front from Lupin, Dr Reddy's Laboratories and Glenmark Pharmaceuticals in the coming quarters, which would act as a strong growth trigger in the medium to long term.
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