Pharmaceuticals - PhillipCapital

INSTITUTIONAL EQUITY RESEARCH

Pharmaceuticals

Q2FY18: Muted show to continue

9 October 2017

INDIA | PHARMACEUTICALS | Results Preview Top result picks: Positive : Glenmark and Cadila Healthcare Negative : Cipla, Dr Reddy’s Lab and Sun Pharma Indian Pharma will continue weak operational/financial performance, as the top‐two profitable businesses – domestic formulations and US generics – continue to see adverse impact from GST implementation and as pricing pressure remains. However, few interesting launches (gRenvela/gLialda) will help companies to report better performance in Q2FY18. The PC pharma universe should see a 29% decline in earnings on a flat (‐3% yoy) revenue base caused by +400bps contraction in operating margins. Key dismal performances: (1) SUNP and LPC – due to high base of exclusive opportunity and US price competition, (2) BIOS, because of unabsorbed overheads at its new insulin plant in Malaysia, and (3) CIPLA due to GST impact. CDH and GNP are likely to deliver stronger earnings growth led by new product launches.

Companies Aurobindo Pharma

BUY

CMP, Rs

744

Target Price, Rs

900

Biocon Ltd

BUY

CMP, Rs

350

Target Price, Rs

540

Cadila Healthcare

NEUTRAL

CMP, Rs

500

Target Price, Rs

470

Key themes for Q2:

¾

Cipla Ltd

NEUTRAL

CMP, Rs

585

Target Price, Rs

580

¾

US generics sales to see high base effect as well as pricing pressure: US sales will face a high (yoy) base due to exclusive opportunities in Q2FY17 (gGleevec for SUNP, gGlumetza for LPC). Additionally, price competition continues to increase on enhanced ANDA approvals and channel consolidation, which will hurt the growth and earnings efficiency of companies’ US generic operations.

9 9 8 8 8 8 8

Divis Labs CMP, Rs

BUY 863

GST implementation still denting domestic formulations: At about 50% of total Indian pharma, this segment is its most profitable revenue stream. Inventory destocking by trade channels in Q1FY18 hurt the growth of domestic formulations. We believe companies’ domestic business will to see slow recovery, which will result in muted growth (‐5% to +6%) in Q2. GST should reduce Q2 operating margins because of trade discounts.

¾

Glenmark Pharma

BUY

CMP, Rs

613

Target Price, Rs

830

Stable currency to support performance: Leading currencies (vs. INR) were relatively stable in Q2 – USD at +1% qoq, EUR at +4.6%, and GBP at +4.2%. All other major currencies (RUB, ZAR, BRL) moved a bit favourably. Hence, we do not expect any major negative surprise because of this parameter.

Companies to watch – Q2FY18 expectations 9

Glenmark Pharma: Strong US sales (+16% yoy) will help it to report 29% yoy earnings growth. Cadila Healthcare: A robust 42% jump in US business caused by gLialda launch (under exclusivity) will help it to report 12% yoy earnings growth. Aurobindo Pharma: Immune to GST as it has no domestic formulation presence. Muted (+2%) growth in both sales and profits despite challenging environment in the US. Dr Reddy’s Lab: Due to weak performance in the domestic market and in its US business, earnings will decline 15% yoy. Cipla: Negative impact of GST on domestic formulations (40% of sales and highest profits) and muted US performance will drag PAT by 12% yoy. SUN Pharma: High base of gGleevec exclusivity in Q2FY17, weak Taro performance, and GST impact will result in a 59% yoy decline in PAT. Lupin: High base of gGlumetza and gFortamet in Q2FY17 and adverse impact of GST implementation will cause a 33% yoy fall in Q2 earnings. Biocon: Muted Syngene/branded formulations business and unabsorbed overheads at its newly commissioned insulin plant in Malaysia to drag PAT by 37%.

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

Target Price, Rs

1100

Dr Reddy’s Labs

NEUTRAL

CMP, Rs

2374

Target Price, Rs

2550

IPCA

NEUTRAL

CMP, Rs

520

Target Price, Rs

480

Lupin Ltd

NEUTRAL

CMP, Rs

1042

Target Price, Rs

1100

Sun Pharma

NEUTRAL

CMP, Rs

530

Target Price, Rs Surya Patra (+ 9122 6246 4121) [email protected] Mehul Sheth (+ 9122 6246 4123) [email protected]

420

PHARMACEUTICALS Q2FY18 RESULTS PREVIEW

Pharma outlook (Rs bn) Revenue EBITDA EBITDAM (%) PAT

Sep‐17E 298 63 21.3% 35

Jun‐17 qoq (%) 277 8% 50 27% 18.0% 25 43%

Sep‐16 yoy (%) Highlights 308 ‐3% • High base of US business, adverse impact of pricing pressure and GST 78 ‐19% • Adverse impact of pricing pressure and GST 25.5% • Remain under pressure 50 ‐29% • PAT to decline sharply due to high base

Source: Company, PhillipCapital India Research

Company earnings estimates (Rs mn) Aurobindo Pharma Revenues EBITDA EBITDA margin (%) PAT EPS (Rs) Biocon Ltd Revenues EBITDA EBITDA margin (%) PAT EPS (Rs) Cadila Healthcare Revenues EBITDA EBITDA margin (%) PAT EPS (Rs) Cipla Ltd Revenues EBITDA EBITDA margin (%) PAT EPS (Rs) Divis Labs Revenues EBITDA EBITDA margin (%) PAT EPS (Rs) Dr Reddy’s Lab Revenues EBITDA EBITDA margin (%) PAT EPS (Rs) Glenmark Pharma Revenues EBITDA EBITDA margin (%) PAT EPS (Rs) IPCA Labs Revenues EBITDA EBITDA margin (%) PAT EPS (Rs) Lupin Ltd Revenues EBITDA EBITDA margin (%)

Sep‐17E 39,184 9,482 24.2% 5,992 10.3 9,621 2,040 21.2% 934 4.7 27,115 6,074 22.4% 4,001 3.9 36,676 6,785 18.5% 3,434 4.3 9,553 3,019 31.6% 2,124 8.0 35,827 6,112 17.1% 2,790 17.3 23,869 5,609 23.5% 3,074 10.9 7,443 670 9.0% 185 1.5 40,362 8,960 22.2%

Jun‐17 qoq (%) 36,788 6.5% 8,416 12.7% 22.9% 5241 14.3% 9.0 14.3% 9,337 3.0% 1,921 6.2% 20.6% 813 14.9% 4.1 14.9% 22,288 21.7% 2,790 117.7% 12.5% 1,378 190.3% 1.3 190.3% 35,251 4.0% 6,465 5.0% 18.3% 3,187 7.8% 4.0 7.8% 8,212 16.3% 2,448 23.3% 29.8% 1,714 23.9% 6.5 23.9% 33,159 8.0% 3,252 87.9% 9.8% 583 378.3% 3.6 23,630 5,774 24.4% 3,185 11.3 7,130 172 2.4% (246) (1.9) 38,696 7,684 19.9%

378.3% 1.0% ‐2.9% ‐3.5% ‐3.5% 4.4% 289.5%


L/P L/P 4.3% 16.6%

Sep‐16

yoy (%)

Result update highlights

37,755 9,292 24.6% 5,909 10.1 9,400 2,250 23.9% 1,470 7.4 24,035 5,280 22.0% 3,589 3.5 37,150 6,807 18.3% 3,891 4.8 10,054 3,027 30.1% 2,237 8.4 35,857 6,644 18.5% 3,265

3.8% 2.0% 1.4% 1.4%

2.4% • Sales growth low due to muted performance from Syngene and branded ‐9.3% formulations business • Correction in margin due to unabsorbed cost at its new Malaysia plant ‐36.5% • PAT to fall – in line with weak operating performance and higher ‐36.5% depreciation cost (related to Malaysia plant) 12.8% • Sales growth largely driven by strong 42% jump in US business caused by 15.0% gLialda launch under exclusivity. Domestic formulations to continue to take a GST hit 11.5% • Despite continued pressure in domestic business, EBITDA margin to 11.5% expand on exclusive opportunity of gLialda, resulting in EBITDA growth ‐2.2% • Sales decline due to weak domestic sales on account GST and muted ‐0.3% performance in US • Margins to remain flat, despite weak domestic performance, mainly due ‐11.7% to cost‐containment initiatives. Flat EBITDA ‐11.7% • Adjusted PAT to decline due to higher tax incidence ‐5.0% • Decline in sales due to the ongoing impact of import alert and production ‐0.3% disturbance caused by remediation and inspection at Unit 2 • EBITDA margins to see 150bps improvement yoy at 31.6%, despite ‐5.0% remediation costs, due to low‐base effect (impacted by ex‐Gracia). ‐5.0% EBITDA to remain flat ‐0.1% • Flat yoy sales due to continued challenges in US business and the impact ‐8.0% of GST on domestic sales • US sales at US$ 242mn (flat yoy despite pricing pressure) primarily due to ‐14.5% the incremental sales from gVytorin and gDoxil launch • Margin to remain under pressure on weak domestic sales. EBITDA to fall

20.2

‐14.5%

22,241 4,487 20.2% 2,383 8.4

7.3% 25.0%

8,851 1,280 14.5% 471 3.7

‐15.9% ‐47.7%

42,905 10,731 25.0%

• Muted (+6% yoy) US sales to US$ 279mn despite continued US pricing pressure • Flat margins due to pricing pressure in the US resulting in muted EBITDA growth • PAT in line with muted operating performance

• Sales growth primarily on 16% improvement in US sales supported by continued benefit from gZetia sales • Margin to expand on strong US performance and better revenue mix

29.0% 29.0%

‐60.7% ‐60.7% ‐5.9% ‐16.5%

• Sales decline led by weak performance in domestic formulation due to GST‐related impact and no major improvement in exports • Margins to improve sequentially to 9% as remediation cost falls. However, EBITDA will decline • Decline in sales due to high base of gGlumetza and gFortamet exclusivity sales in Q2FY17. Domestic sales to remain muted • Margin to fall 280bps to 22.2% on high base of gGlumetza, resulting in


PAT EPS (Rs) Sun Pharma Ltd Revenues EBITDA EBITDA margin (%) PAT EPS (Rs)

4,750 10.5 68,441 14,715 21.5% 8,013 3.3

3,581 7.9 62,088 10,957 17.6% 5,256 2.2

32.7% 32.7% 10.2% 34.3% 52.5% 52.5%

7,072 15.7

‐32.8% ‐32.8%

79,505 28,680 36.1% 19,354 8.1

‐13.9% ‐48.7% ‐58.6% ‐58.6%

decline in EBITDA • Fall in sales due to the high base of gGleevec exclusivity and weak performance from Taro Pharma. Domestic formulation also likely to be muted yoy • Sharp correction in margins due to high base of gGleevec and weak operating performance from Taro

Source: Company, PhillipCapital India Research

Valuation summary

Aurobindo Pharma Biocon Cadila Healthcare Cipla Divis Dr Reddy's Labs. Glenmark Pharma IPCA Lupin Sun Pharma

CMP (Rs) 744 349 500 585 863 2,378 613 520 1,042 530

___EPS (Rs)___ EPS Growth (%) FY18e FY19e FY18e FY19e 46.1 50.2 16.8 9.0 8.9 12.0 ‐13.2 35.3 18.6 20.4 27.8 9.8 22.6 29.1 80.5 28.4 36.1 48.3 ‐12.8 33.7 87.3 127.5 17.0 46.1 45.7 51.7 ‐1.9 13.2 24.9 37.0 60.4 48.2 44.0 57.0 ‐31.6 29.6 13.7 19.7 ‐50.6 43.9

___PE (X)___ FY18e FY19e 16.1 14.8 39.3 29.0 26.9 24.5 25.9 20.1 23.9 17.9 27.2 18.6 13.4 11.8 20.9 14.1 23.7 18.3 38.7 26.9

EV/EBITDA (X) FY18e FY19e 10.7 9.4 22.3 17.4 19.8 17.5 16.7 13.2 16.7 12.2 15.7 11.7 9.0 7.9 11.5 8.3 14.2 11.2 19.5 14.4

Source: Company, PhillipCapital India Research Estimates

Currencies vs. INR Particulars USD EURO GBP YEN CHF Brzl Real Ruble/Russia Rand/ SA

Yoy (Avg rate) Qoq(closing rate) ‐4.0% 1.0% 1.1% 4.6% ‐4.4% 4.2% ‐11.4% 0.9% ‐2.6% 0.0% ‐1.5% 5.6% 5.3% 3.8% 2.8% ‐2.5%

Source: PhillipCapital India Research Estimates


Average rate 64.3 75.5 84.0 0.58 66.8 20.3 1.1 4.9

Closing rate 65.3 77.1 87.5 0.58 67.4 20.6 1.1 4.8

___ROE (%)___ CAGR Reco. FY18e FY19e EPS (%) 22.5 19.9 12.8 BUY 11.1 13.8 8.4 BUY 23.5 21.2 18.4 NEU 12.9 14.3 52.3 NEU 15.2 16.9 8.0 BUY 10.4 13.5 30.7 NEU 21.3 19.6 5.4 BUY 11.2 14.2 54.2 NEU 13.1 14.9 (5.9) NEU 8.3 10.7 (15.7) NEU

TP % (RS) Upside 900 21 540 55 450 ‐10 580 ‐1 1100 27 2550 7 830 35 480 ‐8 1100 6 420 ‐21


Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY

>= +15%

Target price is equal to or more than 15% of current market price

NEUTRAL

‐15% > to