Pharma hopes to reap from new acquisitions, local sales

MUMBAI: Pharmaceutical companies are seen posting a 40-50% growth in earnings for the July-September quarter from the same period last year, driven by improved sales in domestic markets, new product launches in key markets and acquisitions.

Analysts are bullish on the earnings prospects of Ranbaxy and Dr Reddy’s as revenues from the launch of a few generic drugs in June and benefits of recent EPS-accretive acquisitions are expected to reflect on the results.

“Growth for the Big-three generic companies’ (Ranbaxy, Dr Reddy’s, Cipla) will primarily be driven by full quarter sales of simvastatin (Zocor) under 180-days exclusivity (Ranbaxy, for 80mg and Dr Reddy’s, being authorised generic). Also, improvement in the base business would contribute to growth for these companies,” said Motilal Oswal Securities in an earnings preview note.

Also, Ranbaxy’s results would include revenues from the Terapia buyout, while Dr Reddy’s earnings would constitute the recently-acquired Betapharm’s revenues. Operating profit of both these companies are also seen rising sharply on the back of growth in total revenues.

ICICI Securities expects operating profit of Ranbaxy to grow 729% and Dr Reddy’s to rise 144% from the same period last year. However, the brokerage sees operating profit margins of Dr Reddy’s declining, while Ranbaxy’s steadying on the back of low base.

On Dr Reddy’s, ICICI Securities said,”With low-margin authorised generics products (generic versions — Proscar and Zocor) contributing as high as 38% to revenues, EBITDA (operating profit) margin is likely to decline 445 bps Y-o-Y to 16%.” Meanwhile, Cipla’s earnings are likely to be driven by revival in export and sustained domestic market growth. Merrill Lynch estimates Cipla’s July-September net profit to grow 48%, while revenues to increase by 34% from the previous year.

“We expect Cipla’s domestic sales to remain robust and project a growth of 20% Y-o-Y in Q2FY07. We also expect API sales to pick up, particularly after Teva launched generic Sertraline in August ’06 (Cipla has tied up with Teva for Sertraline),” said a BRICS Securities earnings note.

Analysts see Sun Pharmaceuticals to report a 20-25% growth in sales and net profit from last year, driven by exports. “Exports are likely to surge 29% to Rs 220 crore on the back of 30% Y-o-Y growth to Rs 157 crore in dosage form exports powered by full benefit of generic product launches by Sun’s US subsidiary, Caraco, in the past few quarters,” said ICICI Securities.

Meanwhile, some expect Sun’s operating margins to be under pressure during the qaurter.

“EBITDA (operating profit) margins are expected to decline by 160bp to 32.8%; as the company continues to invest in R&D (research and development) spend (11% of net sales v/s 8% in 2QFY06). Costs attached to the recently acquired companies (without any commensurate revenue streams) will also impact EBITDA margins,” Motilal Oswal Securities said.