Nomura Group expects pharma firms to report decent earnings; picks Zydus Lifesciences, Alkem Lab, Medplus

Global brokerage Nomura Research is overall bullish on the fourth-quarter (Q4FY23) earnings of pharma companies under its coverage as it believes price stability in the US and a reduction in cost pressure are likely to support the sector.

The report stated that the March quarter is traditionally a seasonally weak quarter for India's pharmaceutical companies.

In the brokerage's pharma coverage universe as a whole, it anticipates revenue growth between 3% and 13% quarterly (q-o-q) and annually (y-o-y). According to its estimation, the growth of earnings before interest, taxes, depreciation, and amortisation (EBITDA) is at -7%/36% q-o-q/y-o-y, while the change in adjusted net earnings is expected to be -15%/37% q-o-q/y-o-y.

The brokerage anticipates a sequential fall in EBITDA margin of 100 basis points but an annual gain of 383 basis points.

From a Q4FY23 results perspective, the brokerage is positive on Zydus Lifesciences Ltd, Alkem Laboratories Ltd, and Medplus Health Services Ltd and has a 'buy' rating on the stocks.

"In these stocks, we are ahead of street expectations on EBITDA. We see a possibility of earnings upgrades, post Q4FY23 results," said the brokerage in its report.

According to the brokerage, Zydus will probably gain from increased US sales. Alkem is anticipated to have good growth in India, and the management is anticipated to provide guidance for increased EBITDA margin in FY24. Additionally, it anticipates that MedPlus will gain from additional store traction and an ease in competition pressures.

“On the other side, Sun Pharmaceutical Industries Ltd faced headwinds in the quarter with the Halol import alert, higher costs and earnings impact from the Concert acquisition. However, we are positive on the company from a long-term perspective and have a 'buy' rating,” it said.

Let's explore the key trends the brokerage highlighted as being crucial to the sector earnings.

Domestic formulations

Domestic sales were negatively impacted by price reductions for medications on the National List of Essential Medicines (NLEM) in Q4FY23. According to brokerage calculations, each company will see an overall loss of sales between 1.0 and 4.0%. An extra effect can result from companies having to make up for decreased inventory prices by compensating the trade. The anti-infectives industry, where over half of the market is now under price control, is where the price reduction has had the biggest impact.

"We expect on year growth was negatively impacted by a high base (Omicron demand) and NLEM price cuts. The NLEM price cuts could impact growth by 1-4% for companies. The impact is likely to be higher for Zydus (Buy), Cipla (Buy), Alkem (Buy), IPCA, (Neutral), and Dr Reddy’s (Buy) and lower for Sun Pharma (Buy) and Torrent (Buy), in our view," said the brokerage.

However, the increased demand for anti-infectives and respiratory medications brought on by the spike in viral illnesses during the quarter somewhat offsets these effects. Chronic therapy, especially anti-diabetes therapy, is still growing slowly.

Formulation exports

According to export data, exports to the US are up 2% both sequentially and annually. Most managements with whom the brokerage has recently spoken claim that the price environment in the US market has stabilised.

"In the US, the intensity of price erosion has eased, as per our interactions with company managements, indicating the worst of the erosion is behind us. In the quarter, companies should benefit from product-specific opportunities, e.g., Revlimid and Trokendi, in our coverage universe. We expect Zydus to record the most improvement in sales sequentially," said the report.

The market is still competitive, the broker continued, but price erosion is occurring at a slower rate currently than it was in 2022. For companies in its coverage universe, new launches and the depreciation of the INR should promote year-over-year growth.

Active Pharmaceutical Ingredient (API) sales

"API, solvents/organic chemicals and freight costs have started to ease, but remain materially higher than pre-COVID levels. We expect management commentaries on EBITDA margin for FY24 to be sanguine," said the brokerage.