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India performance steady; US remains under pressure
We expect the healthcare companies under our coverage to report a tepid quarter ended Jun'19 with a sequential decline in the US market albeit supported by steady performance in the domestic market. We estimate India business growth in early double digits. Increased competition with faster approvals, delay in product approvals with increasing compliance issues and single-digit price erosion remain the Achilles’ heel for US-focussed companies. We expect the combined EBITDA margin of companies in our coverage universe to be ~20% (up 80bps YoY) supported by revenue growth across markets and cost control measures undertaken by them. Overall, we expect the covered companies to report 13.4% revenue and 10.5% PAT growth YoY.
* India secondary sales: The Indian pharma market witnessed a low growth of 7.0% in value terms for May’19 (source: AWACS). Volumes contributed (0.1)%, prices contributed 5.1% and new introductions contributed 2.0%. Portfolio under FDC witnessed a volume decline of 56.9%, but NLEM grew 1.8%. We expect primary sales growth of companies under coverage to be in low double digits YoY.
* US generics: We expect Q1FY20 numbers to show a 4.4% decline in US sales on QoQ basis. Cadila and Lupin largely contribute to this decline with loss of sales in key products. However, Alembic, Aurobindo and Dr Reddy’s are expected to report sequential growth in US sales with new launches and market share gains. Stringent regulatory hurdles as the USFDA cracks down on non-compliant facilities remain an overhang for new product approvals despite a healthy pending ANDA pipeline.
* Companies to watch: We expect strong results from: 1) Aurobindo on consistent product approvals with ramp-up in injectables portfolio, 2) Lupin due to launch of generic Ranexa along with cost control, 3) Alkem and Alembic on a low base, and 4) JB Chemicals with higher than the industry growth in India and margin improvement.
* Factors to watch: The key factors to observe in Q1FY20 numbers and management commentary would be: i) recovery in India growth for the industry and respective companies, ii) update on USFDA issues plaguing several companies, iii) price erosion in base US business on increased competition, and iv) growth in emerging markets with steady demand.
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