Tuesday, January 17, 2012

>Pharma Q3FY12 Preview: Large caps Ranbaxy, Dr Reddy’s, Sun Pharma, Cipla, Lupin and Cadila expected to outperform


Large Caps to post robust growth: Large caps (Ranbaxy, Dr Reddy’s, Sun Pharma, Cipla, Lupin and Cadila) under our coverage are expected to cumulatively post a topline growth of 19.3% & Ebitda growth of 44.5% driven by strong domestic market, currency depreciation & launch of blockbuster drugs by Ranbaxy and Dr Reddy’s. We expect Dr Reddy’s to post strong earnings growth led by launch of key products like Zyprexa & Fondaparinux. Ranbaxy’s performance will be driven by launch of one time exclusivities like Lipitor & Caduet contributing to higher margins and growth respectively. Excluding Dr Reddy’s and Ranbaxy EBITDA will grow by 38.4%. We are expecting the base business by both the companies to improve in this quarter.

Lupin’s performance will be driven by strong growth in branded generics & better traction in US generics business led by launch of key products like Ultram, Lo Seasonique. Sun Pharma & Cipla will show a strong growth due to favourable currency movement. Both the companies have not taken any forward covers which we believe will have positive impact on EBITDA margins. We expect Cipla to show strong domestic performance as it has higher exposure to acute segment which is growing around 20%. Cadila will show a modest growth due to slowdown in its consumer business & Europe formulation segment. Traction in US business will be driven by Nesher acquisition & its domestic business will perform on account of Biochem acquisition that has huge exposure to anti infective segment which has shown growth above 15% in this quarter.

Mid caps to report subdued growth: Mid caps under our coverage (Strides, Biocon, and Unichem) will post cumulative topline growth of 4.2% y-o-y. Biocon’s topline growth will be affected due to selling off of Axicorp in Q4FY11. Unichem will show strong performance in export segment on account of commencement of contract manufacturing business from Ghaziabad facility. Domestic formulation business will continue to show degrowth due to ongoing restructuring exercise by the company to improve working capital cycle. Strides will perform in Q3FY12 on account of traction in specialty segment and significant product launches.

Top Picks: Lupin & Sun Pharma are our preferred picks in the large cap space. We believe Lupin has an excellent oral contraceptive (OC) pipeline which will drive the performance as it will be able to garner strong market share. The overall market size of OCs in USA is around 5bn$. Sun Pharma will benefit from key product launches in international markets & huge exposure to chronic segment in domestic market.

In the mid cap space we like Strides Arcolab as its presence in niche sterile space provides long-term growth visibility.

To read the full report: PHARMACEUTICAL