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New approvals lack bite; DRL key beneficiary

In this report we look at FDA approvals in Q1 so far to gauge the traction in US business as new product approval remains key to sustainable growth within the context of benign price erosion. Compared to some of the previous such checks (most recent in Nov’23), data suggests aggressive filers like Aurobindo and Zydus are notably absent when it comes to gathering meaningful approvals. On the other hand, Dr Reddy's and to some extent Gland have got decent approvals in April and May that can support base business ex Revlimid in the case of former. Mid-sized and small players like Alkem, Torrent, Alembic and Ajanta have had a lackluster quarter with no major approval. This is in continuation of what we wrote in Nov’23, about lack of any large or meaningful approvals coming in for small and mid-sized players (except possibly Strides and Caplin in this iteration). While we understand US environment remains supportive in the form of lower price erosion, it may turn for worse relatively quickly; hence fresh approvals assume importance, and which is missing in most of the players. Below we summarize some of the key approvals and impact/outlook for respective US businesses in Q1.

* Aurobindo – Unusually weak quarter for new approvals as none of the ~8 approved ones likely to be a major contributor in Q1; Eugia base business and Revlimid could be key drivers in such a case.

* Alembic – Mix of derma, onco tablet approvals but none exciting; Sacubitril Valsartan approved but unlikely to be launched anytime soon

* Alkem, Ajanta & Torrent– No major approval and expect US performance to be driven by volume gains if price erosion remains stable QoQ; Alkem has launched Suprep in Q1 which would act as a support.

* Dr Reddys’ – A better approval quarter after a fairly long period as DRL got 4 CGTs (competitive generic therapy or <3 generics) which should aid US on top of Revlimid performance.

* Lupin – Mirabegron (Q4 approval) and generic Oracea (Doxycycline) should drive US performance and expect amongst highest sequential growth rates in US amongst large generic companies

Q1 FY25 US business outlook – existing business assumes significance

We expect generic companies like Dr Reddys’ and Lupin to clock a better US performance QoQ as 1) DRL is supported by several CGT approvals and 2) Revlimid was off to a seasonally weak start to CY24 that should reverse or stabilize in Q1 3) Lupin has Mirabegron launch and Oracea approval that would drive growth apart from Spiriva. In the rest of the generic plays, expect existing business to assume significance as none of the companies (IPCA too has started with ordinary set of approvals) have pocketed any meaningful approvals.

Overall view – Torrent investment thesis intact; Alkem, Indoco preferred bets to play likely acute rebound in H1

Torrent continues to be a preferred pick as smaller NLEM share implies lack of WPI linked price hike impact to be minimum while efforts to grow US and Brazil shoulder the growth burden away from domestic business. Also, post Q4 results, we had upgraded Alkem as reckon 10-11% domestic growth on weak base of FY24 is achievable with optional margin upside if Pen G prices head lower. In the same vein, Indoco’s top Azithromycin brand is likely to rebound on back of better acute season; stability in US and key approvals in Europe should aid earnings making it attractive at ~15-16x FY25 EPS.

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