Pharmaceuticals & Biotech. share price target

Strong for Lupin, Cipla, Laurus; soft for others LPC should report a strong quarter due to Ranexa/Tamiflu seasonality. Cipla is likely to be steady but can surprise positively on India seasonality. We expect a muted quarter from ARBP (strong INR, Apotex cost); higher R&D;/SGA cost would also impact SUNP/DRRD. US sales are forecast to rise 4% QoQ (26% for LPC, 2-4% for Cipla, DRRD and SUNP, but 6% for ARBP). DIVI's positive momentum should sustain and we expect better QoQ results from Laurus. The...

Top picks: DRRD, JUBILANT, LAURUS This will be the second consecutive quarter with double-digit top-line growth for our coverage universe, aided by a 9% YoY fall in the Rupee, stabilized generic price erosion and improved launch momentum in the US. However, on a QoQ basis, we expect a ~2% decline in the top-line due to a weak season for acute-heavy companies and substantial inventory adjustment in SUNPs India business post discontinuation of a contract with AML (promoter owned entity). Specialty spend by bigger pharma companies like SUNP/ LPC, and a seasonally weak quarter for companies like Cipla/ Alkem will weigh in on profitability. At an aggregate level, EBITDA margin and earnings are expected to remain flat QoQ (+100bps/-7% YoY).

Lonza call takeaways: China's API dominance receding We hosted the Lonza Group on an investor conference call to gain greater insights into the API shortages stemming from China environmental, social and corporate governance (ESG) issues. Lonza is a Swiss-based company with revenues of US$ 5.5bn and a world leader in the manufacture of active...

Top picks: Dr Reddy's, Jubilant, Dishman Depreciated rupee, normalized generic price erosion, seasonally strong quarter in the US and focus on cost optimization will enable Indian pharma companies to post better numbers in 3QFY19. We expect our coverage companies to deliver ~8% YoY top line growth, 21% EBITDA margin (flat YoY) and 12% YoY earnings growth. This will be the second consecutive quarter with positive sequential growth in the US business, aided by softening of pricing pressure, exit of many US based companies from commodity products and the presence of a flu season. India branded revenues are also likely to grow 10% YoY and 4% QoQ. The sequential growth is solely driven by a jump in SUNPs revenues post inventory adjustment in 2QFY19. As articulated in our Jun-18 sector note, the pharma sector is recovering from US market woes and has started growing sequentially. With a few companies still in investment phase for their specialty businesses, earnings growth is still slower than anticipated. The cost rationalization efforts taken by SUNP, DRRD, CIPLA and LPC can help counter this incremental spend.

Top picks: Sun Pharma, Lupin, Alkem, Dishman This will be the fifth straight quarter with a positive sequential top line growth for our coverage companies. With ~9% fall in rupee and stabilizing US base business, coverage EBITDA margin is likely to increase 130bps QoQ (20.2%) in 2QFY19. On YoY comparison, the universe growth would remain subdued at 6.7% and margin to decline on a high base of 2QFY18 (affected by GST restocking). With US regulatory issues getting resolved, consolidation at manufacturer level continues in the US, and withdrawal of non-profitable products by key US generic companies, we believe Indian companies should start reporting substantial improvement in their operational performance from 3QFY19.

Aurobindo has entered into an agreement to acquire Sandoz' (generics/biosimilars arm of Novartis) US dermatology and oral solid businesses (300 products including generic and branded products and three plants) for a consideration of US$900 million. The transaction will be financed entirely by debt. According to the management, the transaction is expected to be accretive to normalise EPS from the first full year of acquisition. The acquisition is expected to be closed in CY19. The acquisition is at 1x (after adjustment) of sales, which is one of the...

The pharma results were a mixed bag as Indian formulations growth was strong on expected line but US growth was below expectation. On the margins front, the results were mixed as favourable currency benefits were mitigated by Chinese sourcing pressure and APIs that are pegged with crude prices. On the geographical front, the challenging environment in the US generic pricing space continued to impact overall US growth. However, excluding US and Brazil (country specific issues) most other geographies reported strong growth on the back of new launches and favourable...

As defensives tend to rally in the year before election results, we have successfully captured IT and FMCG sector.