Q1FY18 result preview
We expect healthcare companies under our coverage to report weak set of results for the quarter ended Jun'17, mainly because we see most companies witnessing ~10% decline in revenue from domestic formulations which got impacted by GST implementation. Inventory de-stocking would have impacted primary sales for 20- 25 days during the quarter. The impact on EBITDA and PAT would be higher as India is one of the most profitable businesses and operating expenses would have continued. Further, increased competition and pricing pressure would impact growth in some US focussed companies. We expect weak results from: 1) Sun Pharma due to high base with exclusivity of generic Gleevec and continued pricing pressure in Taro portfolio, 2) Alkem Labs due to high dependence in India business, and 3) Lupin on competition in generic Fortamet and authorised generic launch in Glumetza. Overall, we expect the companies to report 1.1% revenue and 23.5% PAT decline YoY with EBITDA margin drop of 360bps.
* India secondary sales: The Indian pharma market witnessed moderate growth, impacted by destocking before the implementation of GST in July’17, at average 7.7% in value terms during the quarter (source: AWACS). This impact by GST is temporary in nature and normal domestic performance is expected to revert within few months. Secondary sales clearly indicate the value decline of 23.9% and 4.6% YoY and 14.9% and 5.5% QoQ in portfolio under FDC and NLEM, respectively, due to FDC ban and price revision, respectively.
* US generics: We expect Q1FY18 numbers to show moderate growth decline in US sales. Glenmark would gain from continued exclusivity of generic Zetia and Shilpa Medicare from launch of new products in US. Sun Pharma is expected to face pricing pressure in Taro portfolio and base effect of exclusivity sales of generic Gleevec. Cadila would benefit from recent product approvals from Moraiya facility.
* Factors to watch: The key factors to observe in Q1FY18 numbers and management commentary would be: i) GST impact on the domestic business and its normalisation, 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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