The Q1FY25 earnings report card for the pharmaceutical industry showed strong performance, with only two misses and two downgrades. In a report, InCred Equities said that its coverage companies’ revenue grew by 11.7 per cent on-year and 5 per cent sequentially while the margins expanded by 240 bps sequentially and YoY. “Our broader thesis on the coverage universe remains intact, with the US business largely holding up its strong momentum, reduced raw material prices leading to improved gross margin & sustenance of operating margin, and the domestic business recovery on the cards in FY25F,” stated the sector analysis report by InCred Equities.
Earlier, Motilal Oswal Financial Services had stated that profitability in the healthcare sector was driven by: 1) lower raw material costs, 2) reduced intensity of price erosion in US generics, and c) launch of niche products. Meanwhile, Elara Securities added, for Pharma, earnings growth of around 28 per cent YoY marginally exceeded projections, but performance varied across the sector. “The US generics business remains the primary growth driver, even as CDMO companies face persistent challenges. Major hospital chains showed early signs of growth deceleration and margin pressure,” it added.
Furthermore, talking about the diagnostics segment, Kotak Institutional Equities said the intensity of pricing-led competition has ebbed over the past 1.5 years, thereby driving higher sanity in the market. “Our latest diagnostics pricing exercise across seven cities suggests continued stability in pricing trends, in sync with the higher pricing sanity seen over the past 1.5 years. Even as the pricing differential of listed incumbents with the online players stays elevated at 2-2.7X, an increasingly benign competitive landscape alleviates any major concerns on structural volume growth and margins of Dr Lal Path Labs and Metropolis Healthcare,” it said.
While Thyrocare hiked prices by 4 per cent QoQ across cities, Suraksha lowered prices by 6 per cent QoQ in Kolkata in Q1FY25. After hiking prices in Q4FY24, Metropolis Healthcare maintained its pricing in Q1FY25. Pricing for other incumbents such as Dr Lal Path Labs, Agilus and Vijaya remained unchanged. “We highlight the larger incumbents have raised prices by up to 9 per cent over the past year. Among hospitals and offline players, Lupin reduced its prices by 5 per cent QoQ in Q1FY25, while Medanta hiked their pricing by 5 per cent QoQ in Q1FY25, across KIE’s sample test bouquet. Since raising prices by ~2X in early FY2024, Apollo Hospitals has not taken any significant pricing actions over the past one year. After experimenting with its pricing strategy last year, Aster DM has also kept its pricing unchanged,” Kotak report stated.
New launches & stable price erosion in US sustains positive outlook
During Q1FY25, InCred Equities said that its coverage universe’s US revenue grew by 12.6 per cent YoY (7.6 per cent QoQ) led by new launches, stable price erosion as well as gRevlimid sales. “While gMirabegron was a significant product launch in Q1, benefitting Lupin and Zydus Lifesciences big time, the other US generics-driven companies witnessed gRevlimid-driven growth. We understand that gMirabegron may not see a typical generic competition post 180-day marketing exclusivity while gRevlimid should contribute higher than what it did in FY24,” InCred Equities stated while maintaining that the price erosion during Q1 was in mid-high single digits and is believed to remain stable for the next three-to-four quarters due to continuance of drug shortage.
Lower input costs
During Q1FY25, gross margin and EBITDA margin witnessed healthy improvement, mostly led by benign raw material prices. Going ahead, raw material prices are expected to remain stable at the current levels which, per experts, should keep the gross and EBITDA margins buoyant at the current levels.
Going forward, InCred Equities said, “We remain broadly optimistic on the sector and expect the outperformance to largely continue, with the momentum sustaining in India/US markets as well as on the margins front. We prefer stocks having earnings momentum likely staying strong in the medium term. We remain bullish on Aurobindo Pharma, Ajanta Pharma, Lupin and Zydus Lifesciences, while Divi’s Laboratories can be a dark horse with optionality from the Biosecure Act.”
