Indian pharma likely to report tepid earnings growth for Q3 FY17

Image: Shutterstock

The Indian pharmaceutical sector has seen a significant share of market value erode over the last couple of years owing to multiple challenges, most notably those faced in the US, the largest market for generic drugs in the world.

The two main hurdles faced by Indian pharma companies catering to the US are pricing pressure in the due to increased competition and a consolidation in the supply chain, and regulatory scrutiny of the Indian manufacturing units of these drugmakers by the US Food and Drug Administration (USFDA).

These factors are expected to weigh down on the earnings of Indian pharma companies for the October-December quarter of fiscal 2017. Though turnover and profitability may increase for some of India’s biggest drugmakers, the rate of growth is unlikely to match with what has been seen historically.  

Indian pharma companies are expected to report a 12 percent increase in their aggregate turnover for the period under review, but their profit margins are estimated to take a 100 basis points hit, according to a Jefferies research report.

“US business will remain the key focus given regulatory and pricing headwinds. In India, we expect limited impact from demonetisation for pharma,” the report authored by Piyush Nahar and Anurag Mantry said. “The key focus in the results and commentary will be the pricing erosion faced by Indian companies in US and outlook going forward. Some global peers have indicated that pricing is likely to remain under pressure in 2017 also.”     

Another report by domestic brokerage Anand Rathi expects a more modest year-on-year revenue growth of 6 percent for pharma companies in its coverage universe. The collective profit after tax of these companies, according to Anand Rathi, is estimated to decline 28 percent year-on-year, accentuated by a higher base effect due to blockbuster sales of the generic version of a drug called Abilify by companies Alembic Pharmaceuticals and Torrent Pharmaceuticals in the third quarter of the previous fiscal. Moreover, the drugmakers that Anand Rathi tracks have also not had any meaningful launches in the third quarter of the current fiscal, the report states.

The larger generic drugmakers that are in Jefferies’ coverage universe – Sun Pharmaceutical Industries, Lupin, Cipla, Dr. Reddy’s Laboratories, Aurobindo Pharma, Natco Pharma and Strides Shasun – are expected to post a combined turnover of Rs25,356 crore in the December 2016 quarter. Their combined net profit is expected to come in at Rs4,078.50 crore, up 16 percent.

Sun Pharma is expected to report healthy increase in turnover and profit margins aided by the launches of generic versions Glivec and Olmesartan. Analysts will be looking forward to management commentary on the expected timelines for resolution of challenges at its Halol unit, which has come under USFDA scrutinty.

Lupin is expected to report a 200 basis points year-on-year decline in margin due to pricing pressure and new competition in the sale of a diabetes drug that it sells in the US.  Cipla and Aurobindo are expected to have stable quarterly earnings, while analysts are expecting further clarity from Dr. Reddy’s on steps being taken to address the warning letter received from the US drug regulator.

It is the relatively smaller pharma companies, such as Natco and Ajanta Pharma, which are expected to do well in the December quarter. Ajanta announced its earnings on January 24 and reported a revenue of Rs530 crore, up 12 percent over the year-ago period, and an 18 percent rise in net profit to Rs134 crore. Growth was driven by new launches in the US, a market where the Mumbai-based company is looking to aggressively ramp up and robust sales of branded formulation drugs in India, says the Anand Rathi report.

Natco is expected to post a 63 percent year-on-year jump in revenue to Rs450.50 crore for the third quarter of FY2016-17, and an 81 percent growth in profitability to Rs67.20 crore, spurred by earnings from the generic version of Tamiflu.  

With the new presidency in the US in place, Indian pharma companies will also be eagerly watching out for announcements coming from US President Donald Trump, who has vowed to bring manufacturing back to the country by imposing prohibitive taxes on imports. Generic drugs made in India account for as much as 40 percent of such drugs consumed in the US.

Senior executives of the Indian pharma sector, however, think that Trump, who assumed office on January 20, is unlikely to create disincentives for the export of generic medicines from India to the US, since such exports help keep the prices of such drugs in check, leading to lower government spending.