SynopsisSoftening raw material costs, NELM price hike and improved valuations play positive roles.
The pharma sector has faced multiple headwinds in the last few quarters. However, the sector’s outlook appears to be improving as raw material and logistics costs are seeing a softening trend which will help reduce operational costs. Analysts expect price erosion in the US market to reduce to a single digit in 2022-23, which will help support the profitability. Param Desai, Research Analyst, Prabhudas Lilladher, says: “US base business will stabilise in coming quarters with meaningful pick up from second/third quarter with high-value new launches.
Domestic growth should recover from the second quarter. However, margins will remain soft in near term, given the elevated cost of goods sold and higher overheads”. Valuations are also turning stable. According to a Motilal Oswal report, the sector’s 12 month forward PE of 24 times is at a 3% discount to its 10-year average. In August, the Indian pharmaceutical market (IPM) grew 9.7% y-o-y—the third consecutive month of healthy growth. This was led by price hikes, steady volume growth and new launches.
Chronic and sub-chronic therapies grew by 13.9% and 13.6% respectively, while acute therapies grew by 10%. Most therapies (dermatology, gastrointestinal, pain, ophthalmology, neurology and gynaecology) saw recovery. A Kotak Securities report expects IPM to report 11-12% y-o-y growth in 2022-23 aided by pricing and recovery in non-covid volumes. The sector will also benefit from NELM price hikes. In April, pharma companies were allowed to hike prices under NELM by 10.76%, in sync with WPI. Analysts say full impact will be seen in second quarter.
However, the sector will also see increased risks especially for Indian companies with exposure to US generics as USFDA inspections are rising. Any adverse observations can lead to a delay in the launch of new products. Despite regulatory headwinds, a Sharekhan report says pharma companies are better placed to harness opportunities as they are competitive globally and hold sizeable share in most markets. It adds that the long-term growth prospects of the sector remain bright with increasing preference for specialty/complex generics and injectables, healthy growth in IPM, which is expected to deliver double-digit growth in 2022-23 and emerging opportunities in the API space. We list four pharma companies with good analyst recommendations and double-digit one-year price potential.
ERIS LIFESCIENCES: The company reported 14% y-o-y growth in revenue in the first quarter supported by growth in standalone business and the Oaknet acquisition. It continues to grow at a decent pace and is steadily increasing its market share. The strategy to foray into new therapy areas and increased penetration into existing areas is expected to support future growth. Eris aims at more than 20 launches (antidiabetes) in the third quarter. According to an Anand Rathi report, strongly emerging therapies in dermatology (Oaknet), CNS and women’s health and robust growth in cardiometabolic therapies is expected to drive 28-30% revenue growth in 2022-23.
SUN PHARMACEUTICAL INDUSTRIES: The specialty generics company reported good numbers in the first quarter supported by strong momentum in the US and emerging markets businesses. The US generics business was helped by new launches and increasing market share in existing products. Domestic business thrived on healthy growth in top brands.
The management has guided high single-digit to low double-digit revenue growth for 2022-23 and expects growth across all business segments. Though there are concerns about cost escalations, it is expected to be offset by price hikes. Robust momentum in the global specialty portfolio, normalisation of chronic treatments post covid and strong pricing power are key growth catalysts.
AJANTA PHARMA: The company reported revenue growth of 27% y-o-y in the first quarter driven by growth across geographies. The domestic business was backed by new product launches, market share gains and price increases. The management has indicated that the price erosion in US business has subsided and rupee depreciation against the dollar will improve US business growth.
It has guided EBITDA margins of 26-27% in 2022-23. Focus on new drug delivery system, front-end marketing, operating leverage, healthy return profile and balance sheet are other strongholds. A Dolat Capital report expects branded generics businesses of India, Africa and Asia to have a combined revenue CAGR of 15% over two years.
: The company’s first-quarter numbers were above estimates. The performance was supported by synthesis segment which grew 196% y-o-y. API sales is expected to normalise. The management has retained revenue guidance of $1 billion for 2022-23.
According to a Sharekhan report, the
demand outlook supported by capacity expansion and addition of new therapy areas in the non-ARV space would enable Laurus to expand its product basket and lead to higher volumes which in turn could drive market share gains in future.
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