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FY23 Review: A year of base reset, gRevlimid, RM inflation

In FY23, our Pharma coverage has delivered Revenue/EBITDA growth of 12%/14%YoY driven by key US launches, healthy India business and easing inflationary pressures. gRevlimid launch benefitted players like DRRD, CIPLA, ZYDUSLIF, NTCPH and SUNP and this is expected to increase in FY24. Ex-Revlimid, US base business remained flat with stable price erosion and we expect it to grow in high single digits in FY24 considering key launches which will drive steady pricing scenario in the US. India business, 2 year CAGR stood at c.14% and we expect double digit growth to sustain over a normalised base as field force ramps up and price hike benefits reflect. EM/ROW performance has been encouraging for most companies despite adverse currency headwinds. Reversal of high cost inventory, easing inflation, normalised marketing spends and R&D spend optimisation will likely improve EBITDA margin in FY24. Diagnostic companies reported double digit non-Covid volumes with higher wellness contribution. Hospitals reported a stellar performance with faster ramp up of new hospitals and margin expansion. In Pharma, we like SUNP, DRRD, BIOS and IPCA while DLPL and Medanta are our top picks in Healthcare.

* US price erosion stabilising, new launches on the horizon: FY23 US sales grew +11%YoY (flat YoY ex-Revlimid) driven by new launches and stable price erosion. DRRD, Cipla, ZYDUSLIF and SUNP reported gRevlimid contribution of USD 292mn / 112mn / 108mn / 37mn (as per JMFe), respectively in FY23. The innovator has guided for USD 6.5bn global gRevlimid sales (vs. ~USD 10bn YoY) implying higher share for generics and new entrants in CY23. We believe the earnings support from gRevlimid is expected to drive the US base business and abate pricing pressure for coming two years. LPC and ZYDUSLIF benefitted from exclusivity launches of gSuprep and gTrokendi respectively which is expected to continue in 1QFY24. US price erosion seems to be settling around high single digits although ALPM remains an exception. DRRD, ALPM, LPC and ZYDUSLIF have multiple launches lined-up in FY24 (25-30) which could drive single digit growth in US business. We believe Cipla and ALPM lack key catalysts over the near-term which continue to weigh on their margins. US FDA inspections are in full swing and accelerating pace of new launches along with stable price erosion will drive single digit (ex-Revlimid) growth for US business in FY24. R&D expenses (ex-BIOS) have grown ~7%YoY, comprising 6.1% of sales (vs. 6.8% in FY22). R&D expenses may rise gradually given the higher specialty and biosimilar spend but not much as % of sales.

* India to grow in double digits in FY24: India formulations grew +6%YoY in FY23 over a Covid base. We believe that IPM will grow in early-mid double digits (volumes to recover) with most companies growing in line or ahead of IPM. NLEM price revisions is likely to be offset by 12% price hike. Within our coverage, we expect companies to grow in double digits led by price growth, field force expansion and new launches. As productivity of field force increases, we expect this to be a key margin lever as well. Anti-diabetic may continue to see a shift towards newer molecules disrupting existing dynamics while cardiac is expected to revert to double digit growth in FY24. Anti-infective, respiratory and pain therapies are expected to sustain double digit growth.

* Healthcare: New trends emerging, Non-Covid growth of ~16% in FY23: With base reset complete, we expect the diagnostic sector to gain more traction as earnings compound hereon. A common trend emerging post pandemic is price hikes in specialised tests (4- 7%), increase in bundled and wellness tests (mid-double digits) and seasonality evening out. All the companies remain focused on aggressive network expansion and believe consolidation in the industry is long overdue. India hospital volumes continue to surge as matured hospital occupancies near peak. ARPOB continues to improve due to better mix, reduction in ALOS and price hikes, the full benefit of which hospitals are yet to realise. Key growth driver for hospitals will be contribution from new beds and faster ramp-up thereby driving healthy operating leverage/ margin expansion.

* Review and outlook: SUNP’s global specialty was USD 238mn in 4Q; Ilumya grew 51%YoY to USD 477mn in FY23. gRevlimid offset Halol Import Alert impact. Ex-Taro exRevlimid margin were ~27%. SUNP’s high single digit revenue guidance is rather conservative. DRRD’s gRevlimid contribution was lower at USD 55-60mn driving lower exRevlimid margins at 19-20%. DRRD plans to launch 25-30 products with Mayne Pharma contributing incrementally to growth. Cipla’s US revenues will remain in USD 190-195mn range as key launches have been delayed due to site non-compliance. Cipla’s near-term catalysts are absent and FY24 margin guidance is flat at 22%. LPC reported healthy US growth driven by gSuprep. LPC’s near term launches are exciting but margin reversion to 18-20% is beyond FY24. Spiriva TAD is now Aug’23 (with inspection). BIOS’ first full quarter of Viatris consolidation render performance non-comparable. Serum deal has been restructured and debt reduction of USD 300mn is in the works. bAspart launch is likely to miss formulary cycle in CY24 with bHumira driving incremental growth wef Jul’23. Generics to grow in mid-teens and Syngene in high-teens. ZYDUSLIF reported a stellar quarter. We expect the earnings momentum to sustain as near-term outlook remains strong. IPCA’s higher revenue/lower margin was due to lower domestic growth. IPCA’s Unichem acquisition has been at a lofty valuation which led to downgrades. TRP’s domestic growth was 16%YoY (13% ex-Curatio) while US ramp-up is still distant. TRP announced their CHC foray and few global oncology launches. ALPM’s margins recovered (lower Aleor write offs) but US business continues to remain under pressure. ALPM impaired US facilities to the tune of INR 11.5bn. Natco’s FY23 revenue/PAT was in line with guidance. Agro-chem will ramp up materially in 1Q with higher grevlimid profit share. API, subsidiaries are expected to grow in mid-teens. Dr Lal reported mid-teens nonCovid growth with better than expected adj. EBITDAM of 25%. As Suburban’s Mumbai lab ramps-up, the drag on margins will reduce. Metropolis’ miss was on account of NACO contract which will optically subdue growth in FY24. We believe their strong network expansion will drive revenue growth and margin expansion in FY25. Vijaya’s change in depreciation method drove PAT beat and earnings upgrade. Their Rajahmundry and Punjagutta centre achieved operational breakeven in 6-9 months and new Tirupati hub is trending on similar lines. Krsnaa’s 25%YoY non-Covid growth was impressive with revenue trajectory likely to be on a linear uptrend. Execution of Rajasthan and ramp up of other tenders will drive further re-rating for the stock. Aster DM is expected to sustain current momentum in India business with update on GCC restructuring being the key driver for the stock. Medanta’s developing hospitals surpassed our expectations yet again with a 31% margin. We expect Patna-led growth and high Lucknow realisations/ margins to drive earnings upgrade.

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