Pharmaceuticals: Robust Outlook for Q4FY06 by Merill Lynch

Robust Outlook for Q4FY06.
We expect sector performance to be robust for the March quarter with average sales growth of 25% YoY EBITDA growth of 48% YoY and PAT growth of 58%YoY. Q4 Sector highlights.
Strong YoY domestic market growth. Our expectation of strongdomestic market growth for most pharma players in Q4 is largely driven by the bounce-back from a low base in the previous corresponding quarter which was impacted by VAT-led de-stocking at the distributor level.
EBITDA margin improvement due to higher exports in both CRAMS and generics business. We note that this is also being helped by the lower base in the previous corresponding quarter for certain companies like Reddy’s.
Continuing high SG&A/ R&D spend. Like in the previous quarters,most companies focusing on front-end US operations like Ranbaxy, Reddy’s, Cadila will continue to incur higher SG&A and R&D spend during the quarter; however the impact of this spend in terms of approvals/launches is expected to be felt only from mid 2006.
No change in generics pricing environment. The gross margin trend of three major companies – Ranbaxy, Dr. Reddy’s and Caraco (Sun Pharma) – will likely be a strong indicator of any change in US generic pricing
environment for the quarter.
We expect similar level of price pressure in US in Q4 as in Q3.

Click here to download the report. (pdf file – 113kb)
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