PINC Results Preview – Pharma Sector

For Q4FY2011 we expect our coverage universe revenue to grow in low teens impacted by delay in key product approvals. As a result margins are likely to be dented by higher employee and fixed operating cost. However, we expect strong operating results from DRL and Glenmark. The sector has underperformed the broader market by 5.5% in the last quarter. We continue to maintain our Neutral stand on the sector and prefer Lupin and Glenmark on back of favourable risk-reward ratio.

Delay in product approvals continues to hurt the sector

While much has been talked about the patent cliff in next 5 years, however, delay in ANDA approvals have started hurting the sector. The ANDA approval time now stands at >30 months as compared to 25-30months 1 year back. Further most of the companies are awaiting US FDA inspection/re-inspection of their facilities there by incurring fixed cost without commensurate revenue flow. Now in order to address the issue of delay in ANDA approvals, the US FDA has been contemplating to levy Generic Drug User Fee Act (GDUFA) through which it plans to increase its resources (staff-strength) there by speeding-up the approval process. However, the discussions on GDUFA are still at nascent stage.

Aggressive ramp-up in field force

In order to expand in the fastest growing domestic market most of the Indian companies are ramping up their field force however growth on the revenue front has lagged the high growth on the employee cost there by dragging margins.

Key catalysts for the sector

1) Prudent inorganic strategy (Sun Pharma and Lupin well placed)
2) Announcement of outsourcing contracts with Global pharma companies (Cipla well placed).

Source : Equity Bulls

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