Pharma sector to benefit from US business

Among the large-cap stocks, Cipla, Aurobindo Pharma, and Cadila will report better performance driven by their US businesses.

Mumbai: Pharmaceutical companies are expected to deliver double digit revenue growth in the first quarter and large-cap stocks are expected to benefit from improved earnings from their US sales and low base effect, said brokerages in their preview for the sector.

With the currency remaining stable during the April-June quarter and US FDA-led regulatory actions also decreasing, brokerages remain optimistic about a pharma recovery.

“This will be the third consecutive quarter with double-digit top line growth, aided by improved base businesses in the US and domestic business growth of 11 per cent year on year,” HDFC Securities said.

“We believe the buoyancy in operational performance is coming back. However, the speed of recovery will also be dependent on the ramp up happening in the specialty space of the US business, which will lead to sharp operating leverage for large-cap companies like Sun Pharmaceutical Industries and Lupin over FY20-21. Management commentary post 1QFY20 will be crucial. On the regulatory front, the US FDA has evidently become more stringent but major companies are keeping up on the back of diversification,” HDFC Securities said.

Among the large-cap stocks, Cipla, Aurobindo Pharma, and Cadila will report better performance driven by their US businesses. Within mid-cap pharma companies, Alkem Laboratories, Abott India, Alembic Pharma are likely to deliver superior performance led by India revenues, said HDFC Securities.

The low base effect is likely to help large-cap companies exporting to the US market, analysts said.

“We expect 1QFY20E to be another stable quarter with strong US growth (low base effect) and high single digit domestic market growth. The key leaders are Biocon, Lupin and Aurobindo on account of weaker base. More stable growth is expected from Dr Reddy’s Laboratories, Sun Pharmaceuticals and Abbott. The laggards for the quarter are FDC and Aarti Drugs. Sequentially, we expect Lupin and Cipla to reflect lower margins due to expiry of key exclusivities in the US,” Cyndrella Carvalho, Analyst, Pharmaceuticals, Centrum Broking Research, said.

However, Emaky Global Financial Services analysts feel a broader recovery in pharma sector is still not visible.

“ Q1FY20 is likely to be a weak for the US business, with waning sales from exclusivities, competition in key products and discontinuation of some products. On the other hand, weakness in domestic business has persisted in Q1FY20 as well, even as April 2019 was a strong month. We thus expect most companies to report between 5 and 10 per cent growth in India,” Emkay Global said.

“A broader recovery still remains elusive and we prefer being selective,” Emkay Global analysts said.

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