pharma sector update

8/13/2019 Pharma Sector Update

1/11

US - Key growth driver for 1QF Y2 014

Pha rma Sector Update

Analyst: Sapna [email protected]

August 22, 2013

1QFY201 4 Results snapshot: 1QFY2014 results of Pharma companies

under our coverage had a mix start to the year with US boosting growth on

one side while ambiguity on domestic pricing policy, pricing pressure in

emerging markets and volatile currency resulted in headwinds. While top-line

growth at 12.6% yoy (we estimated 16%) came in lower than our expectation,

OPM at 22.6% (we estimated 22.4%) and APAT growth at 11.9% (as against

our estimate of 8.9% yoy) highlighted focus on improved operating

performance. Despite high base, improved product mix led to 70bp

expansion in gross margins (63.9% in 1QFY2014 v/s. 63.4% in 4QFY2013and 64% in 1QFY2013). Growth in profitability was aided by lower tax rates

and improved operating performance of Aurobindo, Lupin and Ranbaxy.

US remains spearhead:Exports continued to steal the limelight with 67%

contribution of the total sales, where 41% of the total export contribution is

from US, partially led by currency. Dr Reddys (up 37% yoy), Sun (up 32%

yoy), Lupin (up 27% yoy) and Glenmark (up 14% yoy) remained key

contributors from US. On a sequential basis, Ranbaxy delivered an

impressive performance (up 24% qoq). Aurobindo also delivered robust US

growth post the resolution of USFDA issues.In dian f ormul ations (up 12% yoy ) outperformed industry growth of 7.5%

despite ambiguity around the new drug pricing policy and challenges

pertaining to inventory de-stocking at trader levels. Robust growth was

witnessed in Cipla (up 17% yoy), Glenmark (up 17% yoy), Sun Pharma (up

11% yoy), Torrent Pharma (up 11% yoy), IPCA (up 12% yoy), while Lupin

and Dr Reddys disappointed.

Earnings upgrade: Factoring in the improved growth visibility, we have

upgraded our earnings estimate forCiplaand Ipca labs. Also, we are of the

view that currency benefits will drive Sun Pharmas export earnings.

Guidance: Managemen t commen ta ry rema ined pos itive but w ith a h in t o f

cautiousness. Most companies have guided for double digit sales growth with

steady margin improvement. However, pain is expected to continue in

domestic formulations for another quarter. Exports primarily led by US

formulations remains key growth driver and is expected to be aided by

currency. Nonetheless, companies remain skeptical about the pace of

approvals and intensifying competition in US. Emerging markets performance

is dependent upon cross currency behavior and regulatory conditions (Japan,

Russia, Brazil) and will be key monitorable. High debt companies likeRanbaxy, Aurobindo, Dishman are likely to face pressure due to depreciating

rupee.

Outlook: We expect valuation premium for Indian Pharma v/s. the broader

market to expand, given better earnings momentum and defensive appeal. We

highlight three potential surprises for FY2014E (1) earnings quality in EM; (2)

favorable currency; and (3) expansion of R&D landscape.

We reckon that earnings are more important than P/E expansion and stay

positive on the US story for Indian Pharma. Despite concerns of patent cliff,

there are significant opportunities within the already genericised US market.

Indian firms are moving towards higher margins complex generics as Sun, Dr

Reddys, Glenmark, Lupin have all increased R&D budgets for complex

products in FY2014E.

Top picks:

1. Glenmark (hefty R&D pipeline, strong dermatology franchise in US)

2. Ipca Labs (smart recovery anticipated post re-inspection of Indore SEZ)

3. Aurobindo (strong growth on low base in US)


2/11

Pharma Sector Update

Currency depreciation supporting the sector:INR depreciated sharply against the US$ in 1QFY2014 resulting in gains for most companies under ourcoverage. We continue to believe that the sector remains net beneficiary of depreciating rupee (relying on natural hedges) except for Ranbaxy (has a complex

set of derivatives) and Aurobindo (debt of US$600mn). We summarize the hedging policy and forex impact of our pharma universe as below.:

Exhibit 1: Hedging policy and forex impact on the Indian Pha rma companies in 1Q

Company Forex gain/(loss)

(Rs cr)Hedging policy

Aurobindo Pharma (172.4) No hedging policy, keeps receivables position open

Cadila Healthcare 26.7 No forward cover

Cipla 12.0 Outstanding hedges at US$230mn

Dishman Pharma (5.9) -

Divi's Labs 42.5 No hedging policy

Dr Reddys (13.1) Outstanding cash flow hedges worth US$480mn hedged between Rs56-59 for a period of 18 months and balance sheet hedges worth

US$350mn hedged at market rate

Glenmark 2.5 -

Ipca Labs (48.0) Hedged 26% of exports at Rs57.1/US$ and ECB worth US$67mn

JB Chemicals (5.5) -

Lupin 30.0 Hedged 35% of receivables for 18-20 months

Opto Circuits - -

Ranbaxy (540.0) Outstanding hedges at US$860mn with US$36mn of hedges maturing every month

Strides Arcolab (12.4) Outstanding hedges stand at US$27mn at Rs55.5/US$

Sun Pharma - No hedging policy

Torrent Pharma (13.0) Hedged US$200-250mn at Rs58-59 per US$

Unichem Labs 5.2 -

Vivimed Labs - Hedges 20-30% of the exports

Source: RSec Research


3/11


Exh ibit 2: Strong opera tional performance and lowe r tax liabilitiesreflect in bottom- line

Adjusted PAT (Rs cr) Apr-Jun

13

Apr-Jun

12

% yoy

growth

Jan-Mar

13

% qoq

growth

Aurobindo Pharma 191 78 146.5 110 73.9

Cadila Healthcare 169 206 (18.2) 280 (39.7)

Cipla 333 350 (4.8) 222 49.9

Dishman Pharma 35 43 (18.6) 34 2.6

Divi's Labs 132 137 (3.8) 192 (31.0)

Dr Reddys Labs 323 327 (1.3) 446 (27.7)

Glenmark 128 135 (5.4) 215 (40.4)

Ipca Labs 120 102 17.6 68 77.0

JB Chemicals 26 23 (12.7) 19 37.7

Lupin 371 264 40.3 482 (23.0)

Ranbaxy 135 381 (64.5) 111 (21.5)

Sun Pharma 1,241 796 56.0 1,012 22.7

Torrent Pharma 120 113 6.4 96 25.0

Unichem Labs 31 28 12.1 32 (2.3)

Vivimed Labs 20 27 (26.6) 17 17.5Total 3 ,367 3 ,010 11.9 3,335 1.0


Exhibit 3: Ope rating leverage improvesP AT



4/11



Exh ibit 5: Lowe r contribution from India reflects in muted Top-line

Net Sales (R s cr) Apr-Jun

13

Apr-Jun

12

% yoy

growth

Jan-Mar

13

% qoq

growth

AurobindoPharma

1,700 1,197 41.9 1,553 9.5

Cadila Healthcare 1,607 1,516 6.0 1,566 2.7

Cipla 2,308 1,932 19.4 1,917 20.4

Dishman Pharma 306 315 (2.9) 345 (11.4)

Divi's Labs 516 468 10.1 650 (20.6)

Dr Reddys Labs 2,845 2,541 12.0 3,340 (14.8)

Glenmark 1,238 1,040 19.0 1,335 (7.3)

Ipca Labs 806 634 27.0 672 19.9

JB Chemicals 229 185 24.0 198 15.9

Lupin 2,421 2,219 9.1 2,537 (4.6)

Ranbaxy 2,633 3,174 (17.0) 2,440 7.9

Sun Pharma 3,482 2,658 31.0 3,071 13.4

Torrent Pharma 903 736 22.8 803 12.5

Unichem Labs 262 263 (0.4) 241 8.7

Vivimed Labs 341 273 25.1 298 14.3

Total 2 1,5 74 1 9,1 52 12.6 20,966 2.9


Exhibit 4: Top-line growth impacted by slowdown in India

India performs better than expectation: Sun (up 11% yoy), Glenmark (up

17% yoy), Cipla (up 16% yoy) and IPCA (up 12% yoy) remained key

performers during the quarter, ahead of industry growth of 7.5%. The growth

is commendable in our view, given the uncertainty surrounding the pricingpolicy and trade challenges related to inventory de-stocking. However, we

feel that 1Q has not fully registered the impact of these challenges indicating

near term pain in subsequent quarters.


5/11


6/11


Exh ibit 10: Robust operational performa nce sequentially led by S un,Aurobindo and Ra nbaxy

O P M (%) Apr-Jun

13

Apr-Jun

12

% yoy

growth

Jan-Mar

13

% qoq

growth

Aurobindo Pharma 17.2 10.3 691.7 14.3 284.8

Cadila Healthcare 14.4 20.4 (601.2) 16.0 (156.9)

Cipla 22.2 26.3 (409.4) 19.0 320.6

Dishman Pharma 25.8 27.9 (211.7) 26.2 (44.3)

Divi's Labs 38.0 40.7 (268.1) 40.1 (211.9)

Dr Reddys Labs 19.0 19.7 (65.2) 21.5 (249.2)

Glenmark 20.0 21.1 (114.2) 22.4 (243.0)

Ipca Labs 21.2 22.3 (111.9) 21.2 (0.2)

JB Chemicals 15.0 13.0 198.8 9.6 538.4

Lupin 24.8 19.1 572.4 24.0 73.7

Ranbaxy 8.1 8.1 0.0 6.6 148.7

Sun Pharma 44.0 45.8 (182.2) 41.0 293.8

Torrent Pharma 16.8 20.3 (347.0) 16.1 76.8

Unichem Labs 18.1 17.6 54.7 18.1 0.0

Vivimed Labs 13.4 22.4 (905.2) 15.8 (243.9)

Total 22.6 23.3 (65.8) 22.0 61.0



Exhibit 11: Margin improvement led by robust growth in Glenmark,Lupin, Torrent and Aurobindo

Improved gross margins boost operating performance: Aurobindo, Lupin

and Ranbaxy were notable outperformers given the low base and quick ramp

up in base business. Absence of high margin and FTF products led todecline in margins for Sun Pharma, Cipla, Glenmark. However, the

sequential performance of these companies indicated improved product mix

and higher realizations due to currency benefits. We expect companies under

our coverage to report improved margin performance benefitting from

currency and strong pipeline monetization in regulated markets.


7/11



Interest cost up yoy:Most companies under our coverage showed spike in

interest charges, as foreign currency loans were impacted by depreciating

rupee. The interest cost grew by 10.3% yoy and 32% qoq in 1QFY2014 for

our universe.

Exhibit 12: Foreigncurrency borrowingsspikesinterestcharges


Exhibit 13: Sun, Lupin, Dr R eddys drive growth in US

We note that companies like Aurobindo (283 filings, 191 approvals), Ipca (37

filings, 14 approvals and 8 commercialized) and Torrent (27 pending

approvals) had been filing aggressively to build strong product pipelines in

US. Despite being late entrants, Torrent (limited competition products), IPCA

(branded formulations), Aurobindo (injectables, controlled substances) havebeen executing well on gaining market share in niche product profile in the

US market. We estimate US growth in these companies to grow at a CAGR

of 50% (on a low base) over the next 3 years.

Midcaps start aggressively in US:Sun (benefitted from recent acquisitions

and price hike in key products), Lupin ( growth driven by generic formulations

and branded portfolio was impacted by slowdown) and Dr Reddys (driven by

limited competition products) remained key performers during the quarter.

Further, Ranbaxy impressed with its robust sequential performance in US (up

24% yoy), while Aurobindo also reported double digit growth (USFDA issues

have been resolved).


8/11


Exhibit14: 1QF Y2014 Earnings ReviewCompany G uidance The quarter gone by Key monitorables ahead

Aurobindo Pharma Top-line guided at 20-25% yoy growth with margin

improvement of 200-300bp in FY2014E. US guided

to grow at 30% yoy in US$ terms. Management

focused to bring down debt from 1.3x in FY2012 to

0.7x in FY2014E

Better than expected 1Q, APAT was aided by lower

interest cost and improved operating performance. Strong

traction witnessed in US and ramp up in existing products

Benefit from spin off of injectables

business, debt reduction, key US

launches

Cadila Healthcare Management to assess revenue guidance of

US$3bn by FY2016E. Deferred guidance of 20%

growth in US. Margins to continue under pressure

Poor operating performance, subdued JV performance.

Lower interest rates and tax charges aided PAT

Ramp up in US and India expected in

FY2015E

Cipla Guided for 14-15% sales growth in FY2014E (excl.

Medpro) and indicated that margins would remain

under pressure as R&D and staff costs are expected

to escalate

Strong performance across geographies but margin

expansion remains key concern as it focuses on

establishing its front end business in US

Inhaler launches in regulated m arkets,

lower capex cycle

Dishman Pharma Top-line guided at 10-12% yoy growth; EBITDA at

23% and slight improvement in profitability in

FY2014E

Results in line. Netherlands facility to go on stream from

2HFY2014E

Traction in Carbogen Amcis, SEZ land

sale to drive growth

Divi's Labs Maintained top-line guidance as that of previous year

and continues to remain cautious on margins, as

fixed costs increase

Resolution of power related issues will ease margins.

However, growth is unlikely to pick up in the next 2

quarters until DSN SEZ unit receives approval

Ramp up in export volumes once DSN

SEZ receives approval. Growth to pick

up in FY2015E

Dr Reddys No guidance provided for FY2014E due to

uncertainty in ANDA approval timeline in US,

however, healthy growth expected in other markets

Muted growth barring US and ROW, as Russia continues

to underperform. High R&D costs in compex injectables,

biosimilars in US compressed margins

Approvals in US, as it has one of the best

in class product pipeline

Glenmark Guided for 20% growth led by US and India, expects

EBITDA margins to remain flat at 21%, as R&D costs

expected to increase

US growth was lower than expected witnessing pricing

pressure in base business. Working capital position

deteriorated further to 115 days from 105 earlier

Monetization of R&D pipeline, out-

licensing deals to drive growth

Ipca Labs Top-line guided at 17%, margins at 22%. Indore to

start commercialization by 4QFY2014E

Strong traction in exports led by institutional tender

business led to higher than expected results

Ramp up in US, once Indore SEZ starts

commercialization, pick up in institutional

tender businessContinued


9/11


1QF Y2014 EarningsR eview

Company G uidance The quarter gone by Key monitorables ahead

JB Chemicals Strong margin growth aided by currency Like to like healthy growth (ex. Russia OTC business) and

focused products in domestic market, margins at 15%

surprise positively

Growth in base business and rebuilding OTC

business in other emerging markets makes it a

long term bet

Lupin India guided to grow at 15% , R&D to remain

high at 8% for FY2014E

Slowdown in India and Japan led to dismal quarter with

single digit top-line growth (lowest in past 5 years).

Genericisation in US branded portfolio also poses a risk

Improvement in Irom margins, currency

pressure in Japan, headwinds in ROW markets

and growth in US branded portfolio

Ranbaxy Believe in monetizing Diovan and Valacyte

exclusivity, to improve base business through

impending launches like Ximino, Nexium

Base business grew 10%+ yoy, sequential improvement in

margins is a respite, USFDA ban continues to remain a

overhang

Monetization of key FTFs/Para IV in US, growth

in emerging markets, reduction in huge

derivative positionStrides Arcolab No guidance until AGILA sale process is

completed

Incomparable results as AGILA sale is under transition Receivables of sale proceeds and investor retun

form. Improvement in residual pharma business

Sun Pharma Sustained growth momentum, integration of

DUSA and URL to pep US growth. But

remained cautious of growth led by price

hikes

Quarter led by volume gains in Doxycycline and URL and

DUSA, as Taro reported weak numbers, OPM strong at

44% on a sequential basis. Penalty payout of Rs2,517cr

towards Protonix impacted reported profitability

Ramp up in newer business of URL and DUSA,

inorganic growth will act as re-rating factor

Torrent Pharma Growth in US and emerging markets to drive

growth

Healthy growth in US, ROW and EU led to in-line quarter,

growth in Brazil continues to remain under pressure, core

operating margins improved qoq led by favorable currency

Ramp up in product launches in Brazil and US

along-with capex completion for facility

expansion to boost growth

Unichem Labs Targets Rs1,500cr of revenue over the next

2-3 years, implying 12% growth CAGR

Muted top-line growth due to slowdown in domestic market

and high base. However, favorable rupee aided margins

and bottom-line

Product approvals from US, EM and Brazil in

FY2014E will boost export growth



10/11


OurView

We expect valuation premium for Indian Pharma v/s. the broader market to expand, given better earnings momentum and defensive appeal. We highlight three

potential surprises for FY2014E (1) Earnings quality in EM; (2) favorable currency and (3) expansion of R&D landscape. We reckon that earnings are more

important than P/E expansion and stay positive on the US story for Indian Pharma. Despite concerns of patent cliff, there are significant opportunities within the

already genericised US market. Indian firms are moving towards higher margins complex generics as Sun, Dr Reddys, Glenmark, Lupin have all increased R&D

budgets for complex products in FY2014E

Exhibit 15: Va luation table

C ompany C M P (Rs) Reco* Target (Rs)** N et S ales (R s cr) E PS (R s) P /E (x) EV /EBITDA (x)

FY14E FY 15E FY14E FY 15E FY14E FY 15E FY14E FY15E

Aurobindo Pharma 172 Buy 240 6,748 7,619 20.6 25.2 8.4 6.8 7.1 5.9

Cadila Healthcare 660 Buy 860 7,011 7,995 39.8 47.8 16.6 13.8 14.3 11.8

Cipla 393 Accumulate 450 9,255 10,587 18.9 22.5 20.8 17.5 15.1 12.5

Divi's Labs 945 Buy 1,226 2,483 2,891 52.4 61.3 18.0 15.4 13.0 11.1

Dishman Pharma 45 Buy 128 1,413 1,548 12.9 15.5 3.5 2.9 3.2 2.6

Dr Reddys Labs 2,047 Buy 2,390 13,191 14,731 106.9 119.5 19.1 17.1 13.6 12.0

Glenmark 516 Buy 670 6,066 6,929 30.5 37.6 16.9 13.7 12.4 10.2

Ipca Labs 625 Buy 715 3,307 3,829 37.4 44.7 16.7 14.0 11.8 9.7

JB Chemicals 80 Buy 105 860 998 12.5 14.8 6.4 5.4 4.5 3.4

Lupin 768 Neutral 770 10,923 12,537 34.0 40.5 22.6 19.0 14.4 11.9

Opto Circuits 24 Neutral 65 2,536 2,900 18.1 20.1 1.3 1.2 2.5 2.0

Ranbaxy 331 Neutral 400 11,284 13,248 23.3 24.7 14.2 13.4 10.1 8.8

Strides Arcolab 794 Neutral 883 1,445 1,026 40.6 29.6 19.6 26.8 15.3 21.5

Sun Pharma 482 Buy 570 13,829 15,662 8.4 22.8 57.4 21.2 18.1 15.5

Torrent Pharma 395 Neutral 462 3,634 4,136 29.9 33.6 13.2 11.8 10.5 8.5

Unichem Labs 149 Buy 232 1,189 1,323 14.6 16.7 10.2 8.9 7.8 6.7

Vivimed Labs 160 Buy 474 1,265 1,435 66.7 78.8 2.4 2.0 3.5 2.8

Source: RSec Research; *CMP as on August 21, 2013; **In case of our Neutral Reco. our Target Price = Fair Value


11/11

General Disclaimers: This research based recommendation (hereinafter called Report) is prepared and distributed by Reliance Securities Limited (RSL) for information purposes only. Therecommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purposes of purchase or sale of any security,derivatives or any other security through RSL nor any solicitation or offering of any investment /trading opportunity on behalf of the issuer(s) of the respective security (ies) referred to herein. Theseinformation / opinions / views are not meant to serve as a professional investment guide for the readers. No action is solicited based upon the information provided herein. Recipients of this Reportshould rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision beforeexecuting any trades or making any investments. This Report has been prepared on professional judgment on the basis of publicly available information, internally developed data, information / data fromsources believed by RSL to be reliable. RSL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliabilityof such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, affiliates orrepresentatives of RSL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information /opinions / views contained in this Report.

Risks: Trading and investment in securities are subject market risks. There are no assurances or guarantees that the objectives of any of trading / investment in securities will be achieved. The trades/investments referred to herein may not be suitable to all categories of traders/investors. The names of securities mentioned herein do not in any manner indicate their prospects or returns. The valuesecurities referred to herein may be adversely affected by the performance or otherwise of the respective issuer companies, changes in the market conditions, micro and macro factors and forcesaffecting capital markets like interest rate risk, credit risk, liquidity risk and reinvestment risk. Derivative products may also be affected by various risks including but not limited to counter party risk,market risk, valuation risk, liquidity risk and other risks. Besides the price of the underlying asset, volatility, tenor and interest rates may affect the pricing of derivatives.

Disclaimers in respect of jurisdiction: The Report is meant for Indian citizens resident in India only. The possession, circulation and/or distribution of this Report may be restricted or regulated in certain

jurisdictions by appropriate laws. No action has been or will be taken by RSL in any jurisdiction (other than India), where any action f or such purpose(s) is required. Accordingly, this Report s hall not bepossessed, circulated and/or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. RSL requires suchrecipient to inform himself about and to observe any restrictions at his own expense, without any liability to RSL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of theCourts in India.

Disclosure of Interest: The research analysts who have prepared this Report hereby certify that the views /opinions expressed in this Report are their personal independent views/opinions in respect ofthe securities and their respective issuers, and that he has/they have no known conflict of interest in providing such views/opinions. RSL or the research analysts may have long/short position(s) in anyspecific security on which views/opinions have been made.

Copyright: The copyright of this Report belongs exclusively to RSL. This Report shall only be read by those persons to whom it is meant. No reprinting, reproduction, copying, distribution of this Report inany manner whatsoever, in whole or in part, is permitted without the prior express written consent of RSL.

Important: These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of which they form part of.

Reliance Securities Limited is a Stock Broker with Bombay Stock Exchange Limited (SEBI Registration Nos. INB011234839, INF011234839 and INE011234839); with National Stock Exchange of IndiaLimited (SEBI Registration Nos. INB231234833, INF231234833, and INE231234833); and with MCX Stock Exchange Limited (SEBI Registration No. INB261234836, INF261234836 and INE261234833)

pharma sector update

Documents