Pharma companies seen reporting weak numbers

Pharmaceutical companies are expected to report a weak fourth quarter as they had to grapple with issues like higher remediation cost on US FDA-ticked facilities, lower generic drug prices in the US and the demonetisation impact on domestic sales.

The BSE Healthcare Index underperformed benchmarks Sensex and Nifty 50 by a big margin during the January-March quarter, giving with a return of 3.97 per cent against 12 per cent by the benchmark indices.

Analysts, in their earnings preview, say several negative factors had been at play to restrict the earnings of pharma companies during the quarter.

The lower global growth attributed to currency fluctuations in emerging markets, regulatory issues, severe competition in the US, consolidation of retail chains leading to pricing pressures in the US, slowdown in approvals by the US FDA leading to delays in new launches and a higher base effect would all impact fourth quarter earnings, analysts said.

Praful Bohra and Aarti Rao, analysts, Religare Institutional Research, said, “We expect a muted Q4FY17 for our pharma universe with revenue/profit after tax growth of 4.4 per cent/5.3 per cent year-on-year (YoY). While the demonetisation overhang on domestic growth is fading, we forecast weak US sales growth quarter-on-quarter (QoQ) due to high competition in key products, base business erosion and limited key launches.”

“Margins are likely to shrink QoQ for Dr Reddy’s Laboratories and Divi’s Laborartories on higher remediation costs incurred for facilities under the US FDA radar. For Sun Pharmaceutical, higher sales of Absorica (price hikes plus inventory restocking) and the Benicar franchise (market share gains) would fail to combat Taro base-business erosion, muting growth,” Religare said.

It, however, said most pharma companies would benefit from a 4-6.5 per cent appreciation in emerging market currencies against the INR. Strides Shasun, Cipla and Torrent Pharma would be the key gainers, the report said.

Ranjit Kapadia, analyst, Centurm Research, said,“For Q4FY17, we expect a lacklustre performance… The pharma companies under our coverage are expected to grow 7 per cent YoY in revenues, 8 per cent YoY in Ebitda and 5 per cent YoY in net profit.”

“We expect the pharma sector to continue to face pricing pressure in the US generic market as well as the slowdown in approvals by the USFDA. Pharma companies have suffered due to the consolidation of distribution channels in the US to the extent of 8-9 per cent of their revenues. The major companies have migrated to specialty and difficult to manufacture products for the US market to protect their margins,” Kapadia said, adding:

“The export-oriented pharma companies are likely to suffer due to the strengthening of the rupee by 3.8 per cent during Q4FY17 and the trend is likely to continue. In the emerging markets, Indian pharma companies have suffered due to currency fluctuations and lower purchasing power. Hence, the generic manufacturers suffer from pricing pressure, regulatory challenges and currency fluctuations.”

However, the operational issues of pharma companies seem to have bottomed out and some are likely to report better numbers for the fourth quarter.

Amey Chalke and Siddhant Mansukhani, analyst at HDFC Securities, said, “We believe that operating performance is likely to have bottomed out, and companies like Lupin and Cadila are now receiving a higher number of product approvals post-US FDA clearances for key plants.”

“Lupin, Glenmark Pharma and Cipla are likely to report good numbers in Q4FY17,” they said.

raviranjan@mydigitalfc.com