In the June quarter (Q1FY24), the pharma space posted robust revenue growth on account of volume ramp-up, new launches (especially Revlimid), and stabilising pricing pressure in the US base business, said brokerage house Axis Securities in a review note.
The brokerage's pharma coverage universe posted a 20.5 percent YoY rise in revenue for the quarter under review, adding that the EBITDA margin improved by a healthy 581 bps and 234 bps, YoY and QoQ, respectively amidst normalising cost inflation and stabilising prices.
According to Axis, US sales were robust, aided by gRevlimid, new launches, and increased demand for resilient suppliers amid drug shortages. Also, US price erosion has been stabilising due to the benefit from drug shortages which are at an all-time high.
It further stated that field force expansion is likely to drive volume growth in India while softening input costs and lower freights are improving margins.
Outlook
The brokerage believes that the pharma space is back on the growth track. Post the earnings, it has chosen Lupin, Cipla, and Aurobindo Pharma as its top picks in the pharma universe.
Going ahead, Axis believes that low double-digit domestic growth is expected in FY24, while growth in the US market will remain robust thanks to the normalisation of prices in the base business, the continued ramp-up of gRevlimid and new product launches.
In the US business, supply constraints have led most business leaders to point to a sharp decline in price erosion, which is expected to remain low for the remainder of FY24 while in India, growth has been driven mainly by price increases and strong growth in chronic therapies, while all major companies forecast low double-digit growth for FY24, it said.
Further, margins will also improve as raw material and freight costs normalise, US price erosion eases, and a better mix is achieved, however, USFDA inspections remain an overhang, it noted.
Therefore, the brokerage continues to eye on companies that are focused on launching niche products in the US market and a strong product mix (Chronic Portfolio) in the Indian market.
Top Sector Ideas
Lupin: The brokerage has a ‘buy’ call on the stock with a target price of ₹1,200, indicating an upside of over 9 percent. The stock has jumped around 66 percent in the last 1 year and over 50 percent in 2023 YTD. It has gained 12 percent in August so far, extending gains for 5 straight months since April, rising 70 percent in this time. However, it was in the red in Feb and March, down 12 percent in 2 months.
According to the brokerage, the company’s sales grew 28.6 percent YoY to ₹4,330 crore in Q1FY24 mainly on the back of India business, EMEA business, API business, and stable US business. Also, sales of gSuperb, gAlbuterol, gLisinopril and the new launch of Darunivar continue to perform encouragingly in the US, while the base business is seeing low single-digit price erosion, it added.
"We have confidence in Lupin’s business supported by 1) New launches in the US market like Darunavir, Cynocobalamin, Diazepem Gel, Vereniciline, Bromfenac, etc. excluding gSpirva, 2) Double-digit growth in India business as the company has already increased MR to 1,000, and 3) An uptick in the API business as the API industry is witnessing demand revival," it explained.
Cipla: The brokerage has a ‘buy’ recommendation on the stock with a target price of ₹1,380, implying an over 12 percent upside. The stock has added 21 percent in the last 1 year and 16 percent in 2023 YTD. It has risen over 6 percent in August so far, extending gains for the 5 straight months since April, up over 38 percent in this duration. However, it was in the red in the first 3 months of the year, down over 16 percent between Jan and March.
"Cipla reported the highest US business ever of $222 Mn (+26% QoQ), mainly due to better execution in the base business and a higher than expected revenue contribution from gRevlimid. Management expects the average run rate of the US business to be between $210 Mn and $215 Mn in the coming quarters. The company’s India business (excluding Covid) grew 11 percent, driven by chronic therapies, which performed better than expected. The base US business also posted better-than-expected results ($185-$190 Mn). This was due to 1) Only a few distributors buying locally manufactured drugs, 2) Channel readjusting 3) Drug shortages in some segments, and 4) New product launches. gAdvair and gAbraxane could lead to additional revenue in FY25E despite current regulatory challenges. gSynbicort is expected to launch in Q4FY24, and the company plans to launch three more peptides next year (size $30-50 Mn)," Axis said.
Aurobindo Pharma: The brokerage suggests buying the stock with a target price of ₹1,000, which implies a potential upside of over 20 percent. The stock has advanced over 53 percent in the last 1 year and 91 percent in 2023 YTD. It has given positive returns for 7 straight months since February, surging 105 percent in this period. However, it was in the red in January, down around 7 percent.
"The US revenue at $402 Mn was up 8.6 percent QoQ while the injectable businesses in the US reported 5 percent YoY growth, driven by strong underlying business growth as price erosion was negligible in the last quarter. The European business also grew 10.7 percent QoQ, however emerging markets declined 17.8 percent QoQ. The firm has several growth levers in place. These are 1) Generic injectibles, Eugia ($411 Mn sales), which could grow in low double-digits due to value-added approval, 2) The launch of Trastzumab biosimilars in Q2FY24E, 3) The launch of Pen–G injectible in Q1FY25E, and 4) One-time opportunity in gRevlimid in the next 2-3 years," explained the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
