Pharmaceuticals & Biotech. share price target

The novel coronavirus, or COVID-19, pandemic has caused severe supply-side disruptions in various sectors, earnings will be cut by 10-15%.

In a major positive for Aurobindo, the company's general injectable formulation facility (Unit IV) at Hyderabad received an establishment inspection report (EIR) with voluntary action indicated (VAI) status from USFDA despite 14 observations issued after the inspection in November 2019. This augurs well for the company, as it has 46 pending filings (~30% of total pending filings) including 50-60% of pending injectables that are filed from this plant. However, on the flip side, the company's oral solids facility (Unit VII) has received official action indicated (OAI) status from USFDA. Unit...

In a negative development, Dr Reddy's has lost first mover advantage for gNuvaRing in the US. US based Amneal has launched the first generic version of NuvaRing (gynaecology). NuvaRing has US sales of ~US$976 million. We expect gNuvaRing to remain a limited competition market, at least in the near to medium term. Lupin has completed the divestiture of its Japanese subsidiary, Kyowa Pharma, to Unison Capital for ~| 3700 crore. This deal generates net tax cash inflow of ~| 2158 crore. Post the deal, Lupin's net debt will come down...

Sequentially weak profitability as compliance issues pile up Pharma sector is most likely to witness sequentially tepid quarter. We expect domestic business of our coverage universe to grow 11% yoy but decline 2.1% qoq. US revenue is estimated to grow 7% yoy and 4% qoq. Overall we expect our universe to see 6% yoy growth in revenue while combined PAT is expected to remain flat yoy. Combined EBITDA margins are expected to see ~140bps contraction yoy. Sun Pharma is expected to report 7.8% yoy revenue growth due to Cequa launch however PAT is likely to decline 17.5% yoy due to higher R&D;/marketing spend in the US specialty products. Lupin's PAT is expected to grow 8.6% yoy due to the domestic business and gradual ramp-up in Levothyroxine market share. Aurobindo's revenue is expected to grow 9.8% yoy but PAT is expected to decline 6.1% yoy due to competition and higher R&D; spending. Dr. Reddy's is expected to see 11.9% yoy revenue growth while PAT is likely to remain flat yoy. Biocon is also expected to benefit from Mylan's launch of...

In another major development, Suven Life's SUVN-502 (Masupirdine) phase 2a study for Alzheimer's disease failed to meet its pre-specified primary endpoint in proof of concept (POC) study. This is a major setback on this flagship drug. Nonetheless, the future financial impact may be minimal mainly because the company has already expensed R&D; cost in P&L.; On the regulatory front, the USFDA has classified Ipca Labs' formulations facility at Piparia, Silvassa as official action indicated (OAI). The facility had received three observations after the cGMP inspection conducted from...

Q2 FY20E: Revenue growth and margin expansion continues

Ongoing USFDA issues putting break to US business growth; Domestic performance remains strong We expect the companies under our pharmaceuticals coverage to report revenue growth of 11.9% in Q2FY20 with 2.5% growth in profitability, aided by growth in the base business due to waning price erosion and lower base. The US revenues are expected to deliver 11% YoY growth, however on sequential basis we may notice de growth of 4% mainly due to lack of new approvals and nonrecurrence of one-time opportunities at Sun Pharma and Lupin. Regulatory hurdles continue to impact as the sector received six warning letters YTD. With respect to domestic markets, the growth is likely to favour companies with larger presence in acute therapy led by heavy rainy season. Emerging Markets growth has been affected by adverse pricing regulations and the impact should be seen in subsequent quarters too. Overall our pharma coverage would post Revenue/EBIDTA/PAT growth of 11.9%/13.8%/2.5% YoY in Q2FY20. We expect the EBITDA margin of our coverage...

In a recent update, Aurobindo Pharma's Unit-7 has received Form 483 from USFDA with seven observations. The USFDA conducted cGMP related inspection at this unit from September 19-27, 2019. As per media reports, this plant is contributing 25-30% to US revenues. The company has ~33 pending USFDA approvals as of Q1FY20 from Unit VII. We believe the observations are critical and the company is likely to face further remedial action from the USFDA like warning letter or in worst case scenario an import alert. We await further action from the USFDA. Although the...

Corporate tax cut bonanza for healthcare services

The corporate tax cut from 30% to 22% (including surcharge from 34.9% to 25.2%) effective FY20 could spur an 8-15% earnings upgrade for pharma MNCs (Not Rated) and Diagnostic players/hospitals (Not Rated), as well as a marginal 3-4% benefit for Divi's Labs among our Indian pharma coverage.