Pharmaceuticals & Biotech. share price target

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.

Indian Pharma players have been paying different tax rates (ranging 8% to 40%) depending on location of manufacturing facilities (tax free zones), exports through overseas subsidiaries and preference to pay minimum alternate tax (MAT)....

Revenue performance to improve, Low base to drive earnings We expect the companies under our pharmaceuticals coverage to report revenue growth of 17.2% in Q1FY20 with 15.7% growth in profitability, aided by low base with lower single digit price erosion. The US revenues are expected to deliver double digit growth due to favorable currency movement and moderate recovery in base business. In domestic market, better pricing growth and new launches are expected to drive growth in the domestic formulation space. Overall structural trends in the sector give us long-term comfort, based on overall earnings decline is expected to bottom out in the near term. Overall our pharma coverage would post Revenue/EBIDTA/PAT growth of...

Good Q1 for Sun, Alkem, Dr Reddy's; stabilising for Cipla, Lupin We expect a strong quarter for SUNP (boosted by one-time US generic supplies) and DRRD (full quarter of gSuboxone, ramp-up in new launches incl. gPropofol, Isotretinoin, and cost savings). Cipla/LPC should see stabilising quarter after a high US base from gSensipar/ gRanexa stocking. Alkem's EBITDA is forecast to grow 11-12% YoY, while ARBP (Ertapenem competition), DIVI and Laurus could see a lacklustre Q1. The avg USD/INR is...

Top picks: SUNP, ALKEM, DCAL This will be the third consecutive quarter with double-digit top line growth for our coverage universe, aided by improved base businesses in the US and domestic business growth of 11% YoY. 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 SUNP and LPC over FY20-21. Management commentary post 1QFY20 will be crucial. On the regulatory front, the USFDA has evidently become more stringent but major companies are keeping up on the back of diversification. Remain optimistic over pharma recovery.

About Q4 results, excluding one-off inventory adjustment in Sun Pharma's domestic business, Q4 results were better than I-direct estimates on all fronts led by robust growth in US and efficient cost control measures. Adjusted revenues of I-direct pharma universe grew 14.9% YoY to | 46359 crore. Overall US pie reported one of the best results in the recent past driven by 1) volume gains, 2) mitigating base business price erosion, 3) new launches and 4) certain one-time sales besides currency tailwinds. Indian formulations also reported decent growth despite soft season in acute...

Upgrade TRP to BUY: TRP corrected ~15% over the last one month on regulatory concerns over the Dahej facility. The plant has received serious observations from the USFDA, which can potentially lead to an OAI/ warning letter soon. However, the fall in the stock price is unjustified in our view, as Dahej contributes only ~10% to US revenues and pending filings are limited. Downgrade CDH to NEU: The USFDA inspected CDHs key formulations plant at Moraiya, in Apr-19, and issued 14 observations post audit. Our analysis of the form 483 suggests that the risk-reward is not in favor of CDH

We hosted China-based WuXi Biologics on an investor conference call to gain greater insights into market access in China post regulatory reforms, biosimilar market dynamics, biologics outsourcing opportunity, and India's positioning. WuXi is a global leader in the integrated biologics outsourcing space with over 75% market share in China and 4% globally. It works with >200 global partners, including the top 20 pharma/biotech companies, and plans to invest ~US$ 2bn in bio-reactor capacity in the next four years. We provide call highlights below. Expect fair share for new entrants in China: China has become a high priority...