Pharmaceutical sector soars with 14.3% YoY growth in Q2FY24: Axis Securities report

In Q2FY24, the pharmaceutical sector demonstrated strong performance, reporting a 14.3% YoY and 1.7% QoQ jump in revenue. This is thanks to strategic factors like increased production, impactful new launches, and stabilised pricing pressure in the US business, says Axis Securities.

The Q2FY24 performance of the pharmaceutical sector indicates a positive trajectory, with strategic investments and a focus on niche products in the US market, and a strong product mix in India highlighted as key strategies for sustained success.

The report notes that the Ebitda margin recorded a healthy improvement of 210 bps YoY and 50 bps QoQ, reflecting positive trends amid normalising cost inflation and stabilising prices. The US market emerged as a key contributor to this success, posting robust sales buoyed by the success of recent launches and increased demand for reliable suppliers amid drug shortages.

A noteworthy development highlighted in the report is the stabilisation of US price erosion, attributed to the ongoing benefits from drug shortages, currently at an all-time high. Looking forward, the report indicates that field force expansion is anticipated to be a significant driver for volume growth in India, with growth trends remaining strong in October and November.

The report further emphasises that lower input costs and reduced freights have played a pivotal role in improving margins. Hospitals experienced a seasonally strong quarter, and strategic brownfield expansion is poised to fuel growth without significant dilution in Return on Capital Employed (RoCE).

As the pharmaceutical sector charts its course back on the growth track, Axis Securities forecasts high single-digit domestic growth in FY24. The US market is expected to maintain its robust performance, thanks to the normalisation of prices in the base business and the continued ramp-up of key products like gRevlimid, gSpiriva, and gPrezista.

Despite the optimism, the report notes challenges on the horizon, including USFDA inspections and the potential increase in price erosion post-supply normalization. Axis Securities maintains a watchful eye on companies strategically focused on launching niche products in the U.S. market and those maintaining a robust product mix, particularly in the Chronic Portfolio in the Indian market.

Among the top picks in the Pharma universe, Axis Securities highlighted Lupin, Cipla, and Aurobindo. Lupin Ltd’s US business posted revenue of $211 Mn (+17% QoQ), showing encouraging traction in new launches such as Darunavir and gSpiriva. Gross margins improved by 30bps QoQ to 66.2% due to a better product mix and strong growth in the US and Indian markets. EBITDA was Rs 918 Cr (+7.2% QoQ) with a margin of 18.2%.

Cipla reported the highest-ever US business revenue of $229 million (3.7% QoQ). Its gross margins improved by 243 bps YoY to 65.4%. The India business (excluding Covid-19) grew 11%, driven by chronic therapies. Planned launches, including gSynbicort and one Peptide ($300-400 million) product, are set for H2FY24.

Furthermore, Aurobindo Pharma Ltd’s US revenue at $409 million was up 7.1% QoQ. Injectable businesses in the US reported 2.5% QoQ growth. European business de-grew by 3.7% QoQ, but the Growth markets grew by 16% QoQ. ABRP has several growth levers in place, including generic injectibles, Eugia ($520 Mn sales), and biosimilars.

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