Cipla, Lupin shares surge in morning trade on bourses

Shares of drug firms Cipla and Lupinsurged in morning trade on the bourses today after news reports surfaced that Japan's biggest drug-maker, Takeda Pharmaceutical Co, is in talks to buy either of their pharma businesses.

Cipla opened on a bullish note at Rs 283.90 on the Bombay Stock Exchange and then rose by 1.84 per cent to Rs 287.75. On the National Stock Exchange, the stock opened at Rs 283 and then rallied to a high of Rs 287.60, up 1.91 per cent from its last close.

In a similar fashion, shares of Lupin reacted positively to the news, surging by 4.47 per cent to a high of Rs 457.40 on the BSE and rising by 3.37 per cent to Rs 452.80 on the NSE.

Marketmen said the surge in the stocks was largely due to news reports that Takeda has begun talks with both drug-makers.

As per the report, Takeda is very keen on a large buy-out in the country, but there is no certainty that the talks will lead to a conclusive deal.

The surge in both counters was in sharp contrast to the sentiment in the broader market, with the benchmark indices trading in negative terrain.

The Bombay Stock Exchange benchmark Sensex fell by nearly 93 points to 16,405.50 in the first few minutes of trade today, while the wide-based National Stock Exchange Nifty index shed 28.55, or 0.55 per cent, to 4,920.35.

Cipla, Dr Reddy's under DCGI scanner for selling banned drugs

The country's drug regulator has sent show-cause notices to Cipla and Dr Reddy's Laboratories for selling drugs banned by the government and is planning similar action against a few other top drug makers.

In June, a team of drug inspectors found large stocks of three banned medicines in 85 chemists during surprise inspections conducted in Delhi and Bhiwadi in Rajasthan to clamp down on drug makers and chemists selling banned medicines. The Drug Controller General of India, or DCGI, sent the notice a few weeks back.

"Dr Reddy's has asked for more time to respond while Cipla is yet to answer to a few more queries," said a health ministry official, who did not wish to be named as investigations are underway.

A Dr Reddy's spokesperson said it has withdrawn its gatifloxacin brand immediately upon notification on the ban of the drugs.

DCGI is awaiting responses from all the companies concerned. If the responses are unsatisfactory, it will start prosecutions against the firms by October. If found guilty, officials concerned of the respective firms faces a two year jail term under the country's laws.

During the raid, chemists were selling brands of three banned medicines - diabetes drug rosiglitazone, antibiotic gatifloxacin and bowel disorder medicine tegaserod. These brands include those of Sun Pharmaceutical, Dr Reddy's Laboratories, Cipla, Torrent Pharma and Macleods Pharma.

The chemists and drug outlets were asked not to dispose off stocks of prohibited drugs. The Drug Controller General of India has already initiated actions against the chemists and are now probing the role of companies in the violations.

In the past, there have been instances of drug makers and chemists flouting the health ministry's order by selling drugs which have been banned by the government.

A Sun Pharma spokesperson said the firm fully complies with all applicable circulars issued by the regulatory authorities, including those imposing ban on drugs. Spokespersons of the other three firms declined to comment.

Cipla receives demand notices from NPPA for Rs 73 cr

Drug firm Cipla on Tuesday said it has received fresh notices from National Pharmaceutical Pricing Authority (NPPA) for Rs 73.16 crore for overpricing of two drugs.

The company has received further demand notices from the government demanding an amount of Rs 47.70 crore in respect of the drug Salbutamol and an amount of Rs 25.46 crore in respect of the drug Ciprofloxacin, Cipla said in a filing to the Bombay Stock Exchange (BSE).

"These demands are contrary to the orders of the Hon'ble Supreme Court of India and the company has received legal advice that entire amount demanded by the Government is not tenable and sustainable," the company said.

Leading pharmaceutical firms Cipla and Ranbaxy are among those which have been pulled up by the NPPA for overcharging.

According to the information available on the NPPA website, as on October 31, 2010, the total estimated overcharged amount, including interest, by various pharma companies since the inception of the NPPA in 1997 stood at a whopping Rs 2,208.35 crore.

But so far, the Authority could recover a paltry Rs 202.20 crore from this and is fighting litigations in various courts with the companies to recover the rest of the sum.

The NPPA was established on August 29, 1997 as an independent body of experts with the task of fixing and revising drug prices, both bulk drugs and formulations, to ensure their availability.

Under the Drugs Prices Control Order of 1995, the NPPA is empowered to fix and regulate the prices of medicines, produced by using 74 out of about 500 commonly used bulk drugs, kept under statutory price control.

Under this provision, the Authority can prosecute any drug maker found overcharging under the Essential Commodities Act and can recover the amount along with interest.

NPPA slashes prices of 8 popular drugs by up to 85%

The country’s drug price regulator has reduced prices of eight medicines sold by leading pharma companies such as Cipla, Sun Pharma and Unichem by up to 85%, in one of the sharpest price cuts over the past few years.

The National Pharmaceutical Pricing Authority (NPPA), a few days ago, slashed the maximum price at which these eight medicines could be sold after its market survey found that companies were selling them at a huge premium compared with their manufacturing and sale cost.

NPPA prescribes a price ceiling for drugs containing any of the 74 chemicals that are under price control to contain the cost of medication for consumers.

The prices of seven of these eight brands have been fixed by the drug price regulator for the first time. The maximum price for Cipla’s popular combination antibiotic, Ciplox TZ, has been cut by 74% from Rs 100.73 to Rs 25.7 (excluding taxes) for a 10-tablet strip.

Hemant Bakhru, an analyst with brokerage firm CLSA, said the Ciplox TZ price cut will adversely impact operating profit and bring down Cipla’s earnings per share by 1%. “The impact will be felt from end of this fiscal,” he said. Cipla is the second-largest player in the domestic drug retail market.

As per industry estimates, Ciplox TZ, along with parent brand Ciplox, rakes in about Rs 100 crore for Cipla, though Ciplox, which is among Cipla’s largest-selling brands, accounts for more than half of this.
The price of Rexcin Pharmaceuticals’ popular burn ointment, Silverex AV cream, has been slashed by around 85% to Rs 25 for a 20-gm tube.

Most are combination drugs:

The prices of Sun Pharma and Unichem’s combination blood pressure medicines—Spironolactone +Torsemide—have been halved and will now cost Rs 21 and 24 for 10-tablet strips, respectively.

But a Sun Pharma spokeswoman said there will be no impact on the company as its drug sold under brand Aquamide has negligible revenues. The regulator has slashed the price of Cosmo Life Sciences vitamin capsules Lycobal Forte by 88.7% to Rs 8.90 (excluding taxes) for 10 capsules. The other medicines whose prices have been cut include JB Remedies’ Nor-Tz tablets and Okassa Pharma’s Burn Heal cream.

Most of the medicines whose prices have been cut are combination drugs i.e. drugs that have more than one molecule. As per Indian laws, a combination drug that contains an ingredient that is under price control has to automatically conform to the price ceiling mandated by the drug price regulator.

But companies launch these combination brands at much higher prices without taking the mandatory prior-pricing approval. “Many of these products are combination drugs, and companies have for long been using this strategy to escape price control. NPPA should have taken such steps much earlier since companies have already made huge profits,” said CM Gulati, editor, Monthly Index of Medical Specialities, a leading medical journal.

The price revision was part of a notification by the regulator on Monday. The drugmakers have to revise their prices within 15 days of the notification, failing which they could be penalised for overcharging consumers.

St hammers Sun Pharma as USFDA seizes 33 drugs of arm

Mumbai, India: US authorities seized drugs made by Sun Pharmaceuticals’ US subsidiary for violation of manufacturing standards, pushing down share

prices of India’s biggest drug company by market value by 12%. US Marshals on Thursday seized nearly 33 drug products, including generic versions of heart, pain and psychiatric medicines, manufactured at three units of Sun Pharma’s US subsidiary, Caraco Pharmaceuticals in Detroit, Farmington Hills and Wixom.

The seizure, which was carried out at the request of the US Food and Drug Administration (USFDA), put immediate halt to the US firm distributing drugs until there is assurance that it complies with the FDA’s current good manufacturing practices (cGMP).

“The action follows Caraco’s continued failure to meet the FDA’s cGMP requirements, which assure the quality of manufactured drugs,” the USFDA said in a media release. “The FDA is committed to taking enforcement action against firms that do not manufacture drugs in accordance with our cGMP,” Janet Woodcock, director of the FDA’s Centre for Drug Evaluation and Research, said in the statement.

Sun Pharma owns about three-fourth of Caraco. “Products manufactured at these facilities contribute around 15% to Sun Pharma’s topline and slightly more to the bottomline. So, in the short term, the impact will be around 15%. However, such issues do not get rectified quickly and I estimate that it will take around three quarters to resolve. It will be a stage by stage recovery,” said an analyst, who did not want to be named due to the sensitivity of the issue.

The Sun management, he said, may consider shifting the production base to other sites and look at other acquisitions, which is a time consuming process. “Over all, Sun’s image has been damaged and it will take Sun Pharma some time to regain it. In the meanwhile, it will lose market share that won’t be easy to recover,” he said. The market reacted sharply. The stock lost 18%, its biggest intra-day drop, during the trading hours.

However, it closed at Rs 1,140.45 on Friday, approximately 12% lower than Thursday’s close on the BSE. Caraco shares, on Thursday, plummeted 43% to an all-time low of $2.39 after the seizure. A Sun Pharma spokesperson declined to comment on the issue. However, it’s learnt that the company will host a conference call for investors on Saturday morning.

“While we have not fully determined the impact of the FDA action on our financial condition, we believe that it may have a material adverse effect on our near-term operations. We anticipate working with the FDA to resolve these concerns as effectively and expeditiously as possible. We believe that corrective actions have been made and continual improvements are in process,” Caraco said in a media statement.

Caraco filed 10 abbreviated new drug applications (ANDAs) with the FDA in FY09 and has 29 ANDAs pending approval by the FDA, which includes

four tentative approvals. The action by the FDA, however, has put all future approvals on hold for the company, casting doubt on the company’s future pipeline of products.

Caraco had earlier disappointed analyst with a drop in annual sales and income for FY09. Net sales dropped 4% to $337.2 million for FY09 as compared with $350.4 million for FY08. Net income decreased to $20.5 million during FY09 compared with $35.4 million in the previous year. Sun Pharma is not the only Indian company to be pulled up by the USFDA in recent times.

In September 2008, the FDA banned Ranbaxy from importing more than 30 generic drugs into the US because of manufacturing violations at its two Indian plants — Ponta Sahib and Dewas. In May this year, the FDA issued a warning letter to Lupin related to quality issues at a company facility in India and also sent queries to Cipla about four of its plants during routine inspections.

Caraco contributes almost 33% to Sun Pharma’s turnover. Of the 33 products manufactured by Caraco, three of its top products contribute almost one-third of its total revenue. Generic versions of Ultracet, made from the active pharmaceutical ingredient (API) Tramadol, has limited competition, as it is a difficult product to make and is likely to take the biggest hit. With the seizure of the drugs, the FDA anticipates that there may be a shortage of choline magnesium trisalicylate oral tablets, another product that is manufactured by Caraco.

This is the latest in a series of investigations against Caraco. A May 2008 inspection revealed serious deficiencies in the control of the company’s manufacturing practices. Since January 2009, Caraco has recalled a number of products due to manufacturing defects, including oversized tablets.

Seizures often lead to court orders that require companies to take steps to correct cGMP violations in their manufacturing processes. These steps may include hiring outside experts, writing new procedures and conducting extensive training to their employees.

Research and Markets: Cipla Generics Company Intelligence Report

Cipla was founded in Bombay in 1935, and released its first products in 1937. The company first gained US FDA approval for its bulk drug facilities in 1985. The company has seven facilities in India and is planning an eighth.

Sales for fiscal 2008 amounted to Rs43.4 billion, crossing the US$1 billion threshold for the first time. Revenues to Africa accounted for 34% of the total. Revenues attributed to Cipla's sales of tablets and capsules were worth Rs23.1 billion, a rise of 14.5% over fiscal 2007.

Cipla manufactures APIs and formulation drugs, and its products are sold in over 150 countries. A number of the company's dosage forms and APIs are approved by regulatory agencies including the US FDA, the UK MHRA, Germany's PIC, South Africa's MCC, Australia's TGA, Health Canada and the WHO.

Cipla claims to have been the first local manufacturer to introduce a number of products to the Indian market, including the antiretrovirals zidovudine, stavudine, lamivudine and nevirapine. Other firsts have included propranolol, ondansetron, salmeterol, montelukast, fluticasone propionate and doxazosin.

Cipla gained global recognition in 2001 when it offered to export anti-AIDS drug for less than US$1 a day, and the company remains at the forefront of this business. Cipla has, however, recently run into controversy over its AIDS drug pricing in India and elsewhere.

In June 2008, Cipla gained US FDA approval for its zidovudine oral solution, and tentative approval for its lamivudine and stavudine fixed-dose combination tablet.

These generics company reports will help you to understand the dynamic and complex issues affecting the business of leading generic industry players. These informative reports provide an insight into the company, covering the structure of the business, the most recent quarterly and annual financial results, information on the companys active product lines and ANDA approvals, along with a review of major developments, such as M&A activity, strategic alliances, and litigation.

Key Topics Covered:

Executive Summary

Introduction

Recent product approvals

Financial results

Major developments

Mergers, acquisitions and agreements

Litigation

Contact Details

Companies Mentioned:

Akorn

Enaleni

Pentech Pharmaceuticals

Avestha Gengraine Technologies

Morton Grove Pharmaceuticals

Watson Pharmaceuticals

Stada

Hexal

Fujisawa

INDIAN PHARMACEUTICAL INDUSTRY CAPABLE OF DEALING WITH ANY SITUATION

The recent out break of HINI Influenza A virus (swine flu) in different parts of the world has provided an opportunity to Indian pharmaceutical industry to demonstrate its strength in terms of its ability to alter manufacturing ability in short period. Domestic pharmaceuticals industry, which is ranked at the fourth place globally in terms of the volume, is known for their flexibility in production and price advantages, it offers. Indian drug makers claimed that they have enough capacity to produce requisite doses of antiviral drug, oseltamivir, the generic version of Roche?s Tamiflu - the only medicine available to counter H1N1 Influenza A (swine flu), at a short notice. Indian companies had demonstrated that they can supply the drug if needed at less than one-tenth of its international price. Most of the Indian companies are selling medicines at a price of around Rs 300 per strip of ten, whereas Roche, which holds the patent right over Tamiflu, is supplying the same drug at price of more than Rs 3,000 per strip.

Major drug-makers like Ranbaxy, Hetero, Natco Pharma and Cipla had said they have the capacity to provide over two million capsules in the next few weeks.

?Large pharmaceutical firms such as Ranbaxy, Cipla and Roche have capacities to manufacture the number of doses required in the country,? Indian Drug Manufacturers Association Executive Director Gajanan Wakankar told PTI Economic Services. Any domestic company that is currently producing anti-bacterial drug can easily produce the generic version of Tamiflu, with minor changes in their production line, Wakankar said. Gurgaon-based Ranbaxy said it can produce one million capsules in the next few weeks.?Ranbaxy can provide one million capsules in the next few weeks to the Government of India. If further supplies are required, Ranbaxy is in a position to meet the demand in the coming few weeks,? Ranbaxy Laboratories President Ramesh Adige said.

Cipla Chairman and Managing Director Y K Hamied told PTI there is enough capacity in the country to meet the demand. ?If needed, we can produce 1.5 million doses of Antiflu (Cipla?s a branded generic version of Tamiflu) in four to six weeks time,? he said. According to industry experts, the real strength which Indian companies demonstrated during the recent crisis was its ability to change production line in a short period. Another important factor of Indian companies, which is mostly undermined by the developed countries is that, while shifting the production line in a short notice, domestic pharma majors were still able to maintain the comparative price advantage. This strength is also visible from the fact that none of the government official and other health organization have ever expressed fear about the lack of availability of medicines in case of emergencies.

Whereas health officials and other agencies working in developed countries had expressed fear that in case of largescale outbreak of the virus, there is going to be shortage of medicines. As the local industry might not be able to produce the drug in such large quantity and it would take at least 10-15 weeks for them to shift the production line.

Indian pharmaceutical companies are also pressing hard for the government to allow them to sell the drug in the retail market, industry sources said.

The current directive from the government restricts companies from making the drug available in the open market through chemists and pharmacies that are either standalone or part of a private hospital.

?We can sell only to government hospitals or directly to the government. This is not enough, as it will not reach a large audience. If we have to sell directly to the government it has to be via a tender process,? a senior official of one of the oseltamivirproducing companies said.

Industry observers say that the government?s rationale behind the decision is to ensure that people do not stock up the drug and misuse it.

An official at another drug company that also makes the generic version of tamiflu said that although there is a possibility of panic buying even by people who do not need it, that is unlikely in the current scenario.

Health ministry joint secretary Vineet Choudhary reiterated that the drugs would continue to be supplied through government hospitals and health centres and will not be available in retail market.

Oseltamivir is an antiviral drug that is used in the treatment of both Influenzavirus A and Influenzavirus B. It is a neuraminidase inhibitor and acts as a transition-state analogue inhibitor of influenza neuraminidase, preventing progeny virions from emerging from infected cells. The importance of early treatment is that the protein inhibition is more effective within the first 48 hours. Keeping this in mind, industry observers feel that making the drug available only in government hospitals will make access to medication difficult for people.

A low risk, high-growth option

While negative news flow may be an overhang for the stock in the short term, Cipla’s growth rates are likely to be boosted by formulation exports.

A partnership-based distribution model, presence across international markets, high margin formulation business and expansion should ensure higher-than-industry growth rates for Cipla. The company, which is the leader with a 5 per cent market share in the domestic pharma space and is a major player in respiratory, anti-infective, cardiovascular and gastroenterology segments, accounts for more than three fourths of the anti-asthama inhaler and anti-AIDS drug market in the country. With strong growth in the domestic and export formulation businesses, sales are expected to grow by 20 per cent over the next few years. Though the medium-to-long-term story picture is intact, the stock had seen some correction in the recent past (recovering later) due to issues related to the takeover of its South African distribution partner and the US FDA’s observations on its manufacturing sites.

The US FDA issue

Three of Cipla’s bulk drugs and formulations manufacturing sites-Goa, Kurkumbh and Bangalore-were inspected by the US FDA and a 483 was issued. The 483 is a form containing US FDA’s observations of non-compliance with current Good Manufacturing Practices.Though the FDA action is not serious in nature and a number of drug majors have been issued the same, it could snowball into a bigger problem if Cipla fails to address the concerns raised by the US regulatory body. The company markets its basket of 118 products through its 17 tie-ups in the US with the geography accounting for a 10 per cent of total sales. More importantly, FDA approvals are needed for supply of anti-AIDS drugs to the African region (accounts for a third of the company’s exports and roughly 17 per cent of sales or Rs 700 crore) under the US President’s Emergency Plan for AIDS Relief (PEPFAR) programme. While the Cipla management has said that the company is taking adequate steps to sort out the issue, any delays on this count could impact its exports to the US as well as Africa.

ON A STRONG FOOTINGin Rs croreFY08FY09FY10ESales4,2185,2706,011Growth y-o-y (%)18.025.014.0OPM (%)20.024.122.0Net profit701767984EPS9.19.812.8P/E24.924.317.8

E: Analyst estimates

Cipla Medpro

Cipla distributes its drugs in the South African market through its local generic partner Cipla Medpro with which it has a 20-year supply agreement but does not have any equity stake in the company. The issue in contention is the hostile bid for Cipla Medpro by another South African generic player, Adcock Ingram. With the Indian supplier (Cipla) opposed to the hostile takeover and threatening to go solo in marketing its drugs if Adcock Ingram forces the issue, Cipla’s revenues from South Africa (5 per cent of sales or about Rs 200 crore) could be at risk. Analysts say that since Cipla follows a partnership model (also that Africa is an important geography for growth) it is highly unlikely that it will choose to terminate the deal in case Adcock Ingram takes control. Similarly, thanks to its large basket of anti-retroviral (anti-AIDS) and other drugs, the new partner (if Adcock takes over) may also want to negotiate a compromise rather than risk a break-up.

Growth prospects

Cipla’s unique business model of partnering generic players worldwide has helped it to grow its exports at a fast clip and at low cost. An increasing formulation business (currently 80 per cent of sales) will help the company improve its margins. The partnership model, which gives it a wide geographic presence quickly, and increasing formulations pie are evident in the sales growth experienced in FY09. Net sales were up 25 per cent to Rs 5,270 crore, while operating margins were up 401 basis points to 24.1 per cent due to better product mix and forex gains. While domestic sales have grown by a healthy 15 per cent, exports aided by a 40 per cent jump in formulation sales have grown by a robust 31 per cent. The share of exports to total revenue, which has increased to 55 per cent from 51 per cent last year, is likely to increase as the company expands its presence beyond its core areas of the Americas, Europe and Africa which currently contribute about 80 per cent of exports.

Investment argument

Despite the FDA and the Cipla Medpro issues, the share price of Cipla has risen 17 per cent over the last one month. In addition to its steady growth in domestic and exports markets, the conclusion of an Rs 2,000 capex programme in the current fiscal should help in aiding sales growth, reducing tax rates and increasing cash flows. In addition to formulation exports, the launch of inhalers in the European market could also push up revenues considerably. At Rs 239, the stock trades at 16 times its FY10 earnings estimate of Rs 15, and can be considered at dips.

Indian Pharma Primed For Growth

Firms hope to capture a share of the $100 billion worldwide market for generic drugs.

Pharmaceutical firms are defying a broad-based slowdown in Indian exports. Growing demand for cheap, generic drugs is proving a particular boon, reflected in a 46% year-on-year rise in exports to the U.S. during December, the last month for which finalized data are available.

Despite rapid growth, Indian pharmaceutical firms have attracted less recognition for their success than their counterparts in the information technology (IT) industry:

--In part, this is because the world of pharmaceuticals is less transparent than that of the Fortune 500 companies targeted by the IT outsourcing industry.

--Reputations have also been tainted by a series of brushes with developed market regulators, notably the November 2008 ban on U.S. imports from two of the largest facilities run by market-leading firm Ranbaxy.

Yet the country's pharmaceutical industry (Indian Pharma) has occupied a number of niches in foreign markets, even as the home market grows rapidly. Most expect their domestic market to grow at around 20% this year and to maintain their operating margins, which are often close to 50%. The most successful companies are becoming serious competitors and collaborators with the largest international pharmaceutical firms.

Generics push. Apart from Ranbaxy (acquired by Dai-Ichi Sankyo of Japan in 2007) and another market leader, Matrix Pharmaceuticals, Indian Pharma has shown considerable independence and entrepreneurialism. It is marked by the desire of Indian firms to acquire companies operating in profitable niches around the world rather than to be acquired themselves. A key thrust for most of the medium and large firms is to capture a share of the worldwide market for generic drugs, which is valued at more than $100 billion, most notably in the lucrative U.S., European and Japanese markets:

--More than 30 Indian companies compete in this area, alongside rivals from countries such as Israel (most notably Teva), and from regions like Eastern Europe and Latin America.

--These companies have gained substantial experience in less regulated markets in parts of Africa, Asia and Latin America, producing off-license drugs originally produced by the large international firms.

--They are seeking greater access to the North American market through U.S. partners and, increasingly, through their own U.S. subsidiaries.

While the U.S. Food and Drug Administration is now more vigilant about malpractice by Indian firms, it has not substantially slowed the growing number of approvals that are being processed for generic drugs developed in India.

Major players. Indian Pharma has also spawned its own contract research outsourcing industry, particularly focused on the research necessary for clinical trials. This is an area of rapid growth. Clinical trials outsourcers now have their own global presence, each serving producers with increasing levels of precision, reliability and efficiency:

--A study by the Organisation of Pharmaceutical Producers of India suggests that this industry will expand from $400 million in turnover during 2007-08 to $1.3 billion in 2011-12 and $3 billion in 2015.

--One large research company, Advinus (which is associated with the Tata conglomerate and has strong international links), recently announced a tie-up with one of the largest clinical trials companies, GVK Biosciences, part of the GVK Reddy group.

--These are fairly new firms, but most others have built their balance sheets over some time. The oldest is Cipla, a 65-year old company with historical associations with Mahatma Gandhi that has developed a new strategy for getting retrovirals and other acute disease treatments cheaply into developing countries, despite opposition from the large international drug firms.

Backed by a large and underserved domestic market, and with massive growth potential in generics exports and research outsourcing, Indian Pharma is primed for substantial expansion. Its firms will see strong growth and good operating margins this year, both in the domestic drug market and in most of their multiple international ventures.

Pharma companies headed for slower earnings growth: analysts

Mumbai/New Delhi: Indian pharmaceutical firms are likely to post a decline in earnings growth for the quarter ended 31 March as they take a hit from mark-to-market and foreign exchange losses and regulatory action in export markets.

With top players set to announce results this week—beginning with Wockhardt Ltd on 21 April—the average growth in sales in the sector for the quarter is likely to be less than 11%, compared with 14% for the corresponding quarter last year.

Declining sales: A scientist works in a Sun Pharmaceutical laboratory in Mumbai. The average net profit of the Top 10 listed drug makers in India, including Sun Pharmaceutical, is likely to increase by around 9%. Bloomberg

The projection is based on a Mint analysis of results previews by five brokerages—ICICI Securities Ltd, Motilal Oswal Securities Ltd, Angel Broking Ltd, Prabhudas Lilladher Pvt. Ltd and Sharekhan Ltd.

The review showed that the average net profit for the Top 10 listed drug makers—including Ranbaxy Laboratories Ltd, Cipla Ltd, Sun Pharmaceutical Industries Ltd, Dr Reddy’s Laboratories Ltd, Aventis Pharma Ltd, GlaxoSmithKline Pharmaceuticals Ltd, Piramal Healthcare Ltd, Wockhardt Ltd, Cadila Healthcare Ltd and Lupin Ltd—will increase only by 8.8%.

Ranbaxy, the country’s largest drug maker, controlled by Japan’s Daiichi Sankyo Co. Ltd, will likely post a net loss, largely on account of forex losses and a ban on sales in the US on a chunk of its drugs.

Increased interest cost on outstanding foreign currency debts, mark-to-market (MTM), losses and a high income base effect from the corresponding quarter last year are the key reasons cited for the decline in profits. Market-to-market is an accounting practice that values an asset or a liability at current market prices and not at cost.

For several companies, regulatory action in the key export markets such as the US and Europe, coupled with shrinkage in the domestic markets is expected to have had an adverse impact on revenues.

“Operationally, the growth will be strong for Indian pharma companies. The numbers from January to March have been pretty good for the Indian market at least,” said Hemant Bakhru, a pharma analyst with the Hong Kong-headquartered stock broking firm CLSA Ltd. “The export margin will benefit due to the depreciation of the rupee, though concurrently there will be forex losses for companies like Ranbaxy, Biocon (Ltd) and Cipla.”

“With the rupee depreciating by 6.5% in the quarter-on-quarter comparison, many pharmaceutical companies would face MTM transnational forex losses on outstanding foreign currency loans and hedges,” said Motilal Oswal’s preview on pharma earnings.

For example, Ranbaxy and Jubilant Organosys Ltd are likely to report significant MTM losses on foreign currency loans and hedges, though the exact quantum of such losses will depend on the closing rupee-dollar exchange rate on 31 March, the Motilal Oswal report said.

The expected growth of the pharmaceutical companies is lower than that seen in the previous quarters due to a general slowdown in the domestic market—which moderated to 10.8% in this quarter compared with 12-14% in the preceding quarters—and the high base of the year-ago quarter for companies such as Sun Pharmaceutical and Glenmark Pharmaceuticals Ltd, said an earnings analysis by Sharekhan.

During the January-March quarter of 2008, revenues of Sun Pharmaceutical and Glenmark were boosted by their exclusive marketing rights in the US. For Glenmark, a one-time milestone payment that it received from licensing its original research molecules was added towards overall revenue in that quarter. This time, however, there are no such gains.

Sun Pharmaceutical’s revenue from the US market was boosted in the 2008 January-March quarter by its six-month exclusive right in the US generic market for three drugs—Oxcarbazepine, Pantoprazole and Ethyol.

Glenmark, too, had recorded a high margin in the year-ago quarter due to the receipt of milestone income and Oxcarbazepine exclusivity in the US.

In the quarter under review, Sun Pharmaceutical’s US sales, however, were affected following the US drug regulator’s action against its US subsidiary Caraco Pharmaceutical Laboratories Ltd. The regulator held up all new drug approvals for Caraco, though its sales by sourcing products from India remained unaffected.

In the case of Cadila Healthcare Ltd and Torrent Pharmaceuticals Ltd, Sharekhan said, rising staff costs and foreign exchange losses on trade receivables would cause margin pressure.

Ranbaxy will also see declining US revenue and the impact of the import alert will be felt this quarter. For Sun Pharmaceutical, Caraco will be weak since there have been no fresh drug approvals for the company in the US, said Bakhru of CLSA.

The higher interest and depreciation costs (due to acquisitions and/or expansion in capacities) would also affect profits of Cadila, Orchid Chemicals and Pharmaceuticals Ltd, Ipca laboratories Ltd and Opto Circuits India Ltd.

According to another pharma analyst in Mumbai, who didn’t want his firm or himself to be identified, companies with a presence in India and the US will do well but those with high exposure in emerging markets will continue to feel the pinch of trade-level destocking and cross-currency fluctuations.

“Overall, it will be a mixed quarter. Aggregate numbers will not be impressive because three large companies—Ranbaxy, Glenmark and Sun Pharma—will report lower numbers,” he said.