Q3FY23 Pharmaceuticals review- Complex US launches, domestic formulations to the fore

What's buzzing? 

In the backdrop of volatility in earnings due to Covid base effect, US base business pricing pressure and slowdown in CRAMs, the I-Direct Pharma performance was better than expected.  The universe (13 coverage stocks) revenues grew ~13% (against our expectation of 10%) YoY to Rs 51644 crore driven mainly by complex launches in the US by large players, India formulations and APIs. 

Context 

US business (select pack) expanded ~23% YoY to Rs 13640 crore. The growth was supported by 1) Outliers such as Sun (Continued Specialty traction), Cipla (respiratory traction as well as gRevlimid traction), Dr Reddy’s (Continued traction from gRevlimid). On the other hand, oral solids (OSDs) continued to face significant price erosion ranging between mid-single digit to low-teens. Indian formulations (select pack) revenues grew ~7% (10% adjusting for Covid base) YoY to Rs 11411 crore. The growth was driven by new launches and traction across chronic therapy areas like cardiac, respiratory and acute segments such as anti-infectives. Generic API Players witnessed price erosion but the growth was mainly driven by volumes in select APIs. API segment (select pack) overall sales grew 12~% YoY to Rs 4833 crore. On the flip side, CRAMs numbers were mixed with heavy dent in Divi's CRAMs revenues but better than expected prints in Laurus and Syngene. CRAMS segment (select coverage) de-grew by 12% YoY to Rs 2111 crore. 

Our Perspective 

US revenues (besides currency impact) were significantly boosted by gRevlimid and other complex launches even as the base business (mainly oral solids) continued to witness price erosion. This also indicates that we are witnessing optical shift towards more complex launches. Indian Formulations are almost 90% trending at the pre-Covid level with marginal residual Covid impact in the base year. Price hikes, MR optimisation / addition and volume growth is driving the growth. On the CRAMs front, we expect J curve recovery as the Covid opportunities fade and companies are now back to the discussion board for new projects with the innovators. On the margins front things are getting settled with RM cost inflation, energy and logistical costs are softening on a sequential basis.  Sun, Cipla, DRL, Ajanta and Caplin are our preferred Pharma picks.