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healthcare | IST

Pharma earnings preview: Q2 likely to be subdued due to regulatory concerns

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The pharma index has been one of the largest sectoral losers in 2019 with a cut of 18 percent year-to-date. The reason for the underperformance has been the recently rising regulatory issues which is likely to eclipse the earnings performance.

The pharma index has been one of the largest sectoral losers in 2019 with a cut of 18 percent year-to-date. The reason for the underperformance has been the recently rising regulatory issues which is likely to eclipse the earnings performance.
Q2FY20 earnings are likely to moderate after three-quarters of a continuous uptrend. Sales are estimated to grow from 9 to 12 percent. U.S. which is the mother market for most companies is likely to grow 10-11 percent annually but slip sequentially by 3 to 4 percent. U.S. sales will be impacted by the lack of new approvals, non–reoccurrence of one time sales.
For the U.S. markets, Dr Reddys will be aided by launches of 5 to 6 drugs such as nerve pain drug Lyrica generic, a sleep agent drug Ramelteon generic and cold and flu drug Mucinex. They would also benefit from sales of injections such as chemotherapy drug fosaprepitant and drug to prevent postpartum bleeding carbostpost.
Sun will see sales from a onetime supply opportunity to a customer that began in Q4FY19 taper off. Estimates range up to a 15 percent quarter-on-quarter decline in U.S. sales $360 million in constant currency for Sun Pharma.
The likes of Cipla will also see slower U.S. sales as sales of drug Sensipar generic slowed due to increased competition. Sensipar generic is used to treat a condition caused by the overactivity of parathyroid glands.
The street will also watch Biocon’s biosimilar sales in the U.S. The company received approval for pegfilgrastim in June 2018 and has been a key driver for its U.S. portfolio. In Q1FY20 biologics revenue was up 96 percent year-on-year. and 8.6 percent quarter-on-quarter to Rs 490 crore. Domestic sales are expected to grow 8 to 10 percent.  India business is expected to be led by sales of acute drugs on account of heavy monsoon.
Companies such as Dr Reddys, Lupin, Sun, IPCA likely to see steady domestic growth. Margins should be controlled despite slower U.S. sales due to cost control. Commentary on regulatory hurdles will be important. Commentary from Torrent, Aurobindo, Glenmark and Lupin all of who have received warning letters in 2019. Commentary will be watched from Cipla on the 12 observations received for their Goa unit.
Lastly, valuation wise, pharma stocks have seen a steep fall as compared to the start of 2019 with most major companies barring Dr Reddys seeing a steep fall.