Pharma Companies’ January Quarter Preview

The earnings’ season for the last quarter of FY12 has kicked in with the results announced by Infosys. Meanwhile, we expect the pharma sector to lend a positive momentum in continuation of what had been seen in the past quarter. The good numbers will be aided by the weak rupee, generic launches in the US and growth in the domestic market.

Sun Pharma, during the quarter, launched the generic Zyprexa Zydis and Seroquel. The latter is a limited competition product and its full impact will be seen in the next quarter. We expect good results from its Israeli subsidiary Taro, which also posted good results in the December quarter. In the first nine months Sun Pharma has reported 33 per cent rise in its topline and 31 per cent growth in the bottomline. Exports have shown good growth too wherein its U.S business alone shot up by 47 per cent in this fiscal.

Ranbaxy, after the consent decree of USD 500 million, is seen rising in value in this quarter. The company launched a generic of the blockbuster Lipitor and another product called Caduet in the December quarter. The exclusivity of these products has also impacted this quarter and hence its topline growth will be pretty impressive. At the net level the profits may remain capped as the company is sharing its revenues with Teva Pharmaceutical Industries. Its three ‘first to file’ applications are at risk due to the USFDA’s whip on its three plants and hence the prospective future earnings may be on the bleak side. The company has started manufacturing the generics at its Mohali facility, which is a positive factor for the stock. We expect good topline growth. However, the earnings may be lower than expected. In the last quarter the company had reported loss due to the consent decree.

Another pharma company, Lupin, launched its versions of Seroquel and Geodon during the March quarter. Besides, the company in the earlier quarter had acquired a Japanese pharma company called I’rom Pharma which has a significant presence in the injectable segment. This quarter will see the full impact of I’rom Pharma. The company has, in January, settled litigation against three patents in U.S. As of now the stock is trading at its all-time high but has further upside potential.

Dr Reddy’s Lab (DRL) is enjoying a 180-day exclusivity of generics of Zyprexa and Seroquel at the moment. DRL also launched Ziprasidone Hydrochloride (Geodon) towards the beginning of March 2012. The earlier launches made in September 2012 will also bring in good results. The earnings will also be noteworthy on the back of new launches as well as the exclusivity of the new drugs. The company is also expected to launch a generic of Lipitor in the diluted market of the U.S in the current quarter.

Strides Arcolab, which sold its Australian business in the last quarter, is also expected to come in with good numbers. The company has a huge pipeline of USFDA-approved anti-cancer drugs which are fuelling its growth.

Glenmark Pharma, during the quarter, received many USFDA approvals. Its U.S business has posted 56 per cent growth in the last quarter. Besides, its topline growth of 38 per cent was aided by growth in the specialty as well as generic segments. Its earnings, however, remained lower due to the mark to market losses. This quarter we expect subdued growth in the net profit.

Aurobindo Pharma, which also launched a generic of Seroquel, had been under the radar of the tax authorities in February 2012. In the December as well as the September quarters the company reported loss in the books arising due to its foreign currency loans. In the last quarter the company repaid its foreign currency convertible bonds and hence this quarter may see profits.

The quarter also saw Natco Pharma winning the first compulsory license for an anti-cancer drug. Ajanta Pharma has been trading higher all this quarter and is quoting its all-time high price. The company has reported to the stock exchange of dividend as well as the sub-division of the shares.

Biocon suffered a big setback after its licensing agreement with Pfizer was cancelled. Due to this its share price has crashed by 13 per cent on an YTD basis.

We believe that the earnings of Lupin and Ranbaxy have been discounted by the markets and there may not be any big surprise. Ranbaxy’s revenue-sharing agreement poses a threat to its current market price. The market also seems to have discounted Aurobindo Pharma’s Q4 results. Our pick for the quarter would be Strides Arcolab, Sun Pharma and Dr Reddy’s Lab.