Q3FY18 preview: Likely recovery in India growth
We expect healthcare companies under our coverage to report recovery in revenue growth for the quarter ended Dec'17. This would be mainly on account of low base last year in the domestic business impacted by demonetisation. However, we expect EBITDA margin decline of 280bps YoY due to continued pressure on US business and increased R&D spend despite delay in key product launches. The margin and PAT decline would be due to poor performance in Glenmark, Lupin and Sun Pharma. Increased competition and pricing pressure would continue to impact growth in US focussed companies. We expect weak results from: 1) Sun Pharma due to continued pricing pressure in Taro portfolio and FDA issues at Halol plant, 2) Lupin due to competition in generic Fortamet and Glumetza, and 3) Glenmark due to weak US growth on high base with Zetia exclusivity. Overall, we expect the companies to report 5.5% revenue growth and 6.7% PAT decline YoY with EBITDA margin drop of 280bps.
* India secondary sales: The Indian pharma market witnessed moderate growth, as the industry recovers from restocking post the implementation of GST, at average 7.3% in value terms for Oct-Nov’17 (source: AWACS). Secondary sales clearly indicate the value decline on YoY basis of 15.8% and 5.1% while growth on QoQ basis of 9.2% and 1.9% in portfolio under FDC and NLEM, respectively, due to FDC ban and price revision, respectively.
* US generics: We expect Q3FY18 numbers to show moderate growth to decline in US sales. Sun Pharma, Lupin and Glenmark are expected to face pricing pressure in base business. Natco, Cadila and Shilpa Medicare would benefit from product approvals. Stringent regulatory hurdles as USFDA cracks down on non-compliant facilities remains an overhang for new product approvals despite a healthy pending ANDA pipeline.
* Factors to watch: The key factors to observe in Q3FY18 numbers and management commentary would be: i) Growth of domestic business post GST and on low base due to demonetisation, ii) update on USFDA issues plaguing several companies, iii) continued pricing erosion in US business with consolidation of the buyers and increased competition, and iv) growth in emerging markets after stabilisation of currencies and any working capital issues in these markets.
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