The pharma sector made the biggest gains on Thursday with the Nifty Pharma index up by 3 per cent. Following Cipla and Dr. Reddy’s results announcement and analyst call on Wednesday, the two stocks gained 9 per cent and 1 per cent on Thursday, aiding to the pharma index’s upward march. With this, Nifty Pharma breached (for the first time) the high-point reached two years back in October-2021.

The main positive takeaway for the sector is related to the ease of operating environment in the US, indicated by both the companies.

US business back in focus

Cipla reported US sales of $222 million in Q1FY24 which is 43 per cent y-o-y growth and 9 per cent sequential growth. The limited competition products gRevlimid, gLanreotide and gAlbuterol contributed meaningfully to sales growth along with new product launches. But the company also gained from base business volume growth as supply shortages cropped up in that portfolio in US. Cipla reiterated its earlier high value launch calendar (FY24-25) which supported the up move in the stock price.

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India and South Africa business also reported strong growth driven by Tier-II to VI presence in India and private market growth returning in Africa.

Cipla now expects to operate at 23 per cent EBITDA margins in FY24 which is a 100-bps yearly improvement. The favourable US environment may be the largest margin tailwind along with strength in India and other regions.

Dr. Reddy reported results on similar lines. The company reported US sales of $389 million (+69 per cent y-o-y and +25 per cent q-o-q). gRevlimid may have contributed higher than expected ($100 million plus) and the quarter also consolidated an acquisition made in February (Mayne’s US portfolio of $100 million annually), which contributed to the revenue jump. But Dr. Reddy also reported shortages which led to higher volumes in its base portfolio, aiding the strong show in the US. While product-wise supply dynamics cannot be ascertained, the company expects shortages may sustain in the medium term.

Sales growth in Russia (28 per cent y-o-y) was supported by seasonal tailwinds, while India (4 per cent y-o-y adjusted for brand divestment in base), impacted by portfolio rationalisation, reported weaker growth.

Similar to Cipla’s margin outlook, Dr. Reddy’s also expects to maintain 100 bps higher EBITDA margins in FY24, supported by lower pricing headwinds in US.

Pharma outlook strengthening

Cues on US recovery, margin improvement and capex outlook are available for the sector from the two results.

Factors such as US competitors’ inability to operate in the beaten down pricing scenario and buyers preferring sustainable partnerships may be indicative of a structural shift in US, favouring Indian companies. In our sector call supporting pharma in April this year, limited competition, product mix and expected softening in pricing pressures were highlighted. Commentary by others including Aurobindo Pharma will add or dilute these sectoral expectations. We also highlighted improving outcomes for Indian plants in US FDA audits this year which is adding to lower the overhang in Pharma sector.

Emerging markets (EM) which have been volatile owing to Covid disruption last year may be reporting higher growth on a weakened base. India, which is also a branded market, and EM market should support margin improvement, if US price erosion can be overcome.

Most of the sector participants have developed a high value portfolio led by gRevlimid for several companies, speciality for Sun and respiratory for Cipla and Lupin. This is has led to a strong cash position and expectation of inorganic growth lever for companies. Dr. Reddy and Cipla have war chests of ₹5,000 crores and each with a plan of inorganic growth.

As the results season unfolds, the notion of lower US price erosion may strengthen and support the sector outlook.

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