Pharmaceutical companies are likely to report a moderate or near-flat revenue growth in the third quarter, while the profit for many of them may slip owing to a decline in the US businesses, analysts said.
Pharmaceutical companies are likely to report a moderate or near-flat revenue growth in the third quarter, while the profit for many of them may slip owing to a decline in the US businesses, analysts said. An Edelweiss Securities report said revenue is estimated to remain flat year-on-year, while the EBITDA and the PAT are likely to decline 15% and 19%, respectively. Revenue from the US is expected to decline 11% year-on-year for the sector in constant currency (CC), as faster approvals, heightened competition and sustained pricing pressure will dent growth. During the October-December period, the US Food and Drug Administration (USFDA) granted the highest-ever approvals of 246 in a single quarter, which led to heightened competition and pricing pressure, suppressing overall earnings. The industry is also likely to face pressure going forward due to limited near-term first-to-file (FTF) generic opportunities and pricing pressure on the base business. However, domestic sales are expected to grow 12% year-on-year on a low base. Companies with limited competition launches in the US such as Cadila, Cipla and Aurobindo are likely to report strong numbers in 3QFY18. Companies focusing on the domestic market like Alkem and Torrent Pharma may benefit to some extent from the low base of the year-ago period, which was impacted by demonetisation and the trailing effects of channel re-stocking. Overall, there could be moderate year-on-year growth while the EBITDA margin will remain steady sequentially at 21.9% in 3QFY18, an HDFC Securities report said.
Companies such as Sun, Dr Reddy’s and Lupin while having strong domestic presence will struggle to show growth in the third quarter due to the absence of significant launches in the US market. Regulatory issues for them stifled launches in the US market in recent past and this will reflect in the US numbers. Analysts say since India’s share in the total approved drugs from the USFDA is over 40%, pricing pressure will be dominant, leading to pressure on the profitability. Divi’s Laboratories, Granules and Jubilant with differentiated or diversified business models like contract research and manufacturing services (CRAMs) are likely to report good numbers due to the absence of the current pressures of being a front-end player in the US market. In terms of future outlook, analysts see increasing challenges in the generics industry in regulated markets. But despite the uncertain environment, there are investment opportunities in companies with lower earnings risk, potential resolution of regulatory issues and support from monetisation of limited competition pipeline over the next few quarters.
“We believe earnings stability after three years of disappointment and improved visibility aided by pipeline will be the key catalysts for the sector going forward. While the comfortable balance sheets provide valuation support for Indian companies vs global peers, we see risk in the domestic market from adverse regulations before elections,” said a JP Morgan report. The domestic market was a positive area of focus for investors giving confidence on growth recovery despite regulatory hiccups in the last year. While growth is expected to improve post the volatility related to GST implementation in 1HFY18, there is risk of adverse regulation disrupting growth in 2HCY18/CY19. Besides, price erosion is likely to accelerate further with the generic industry profit pool declining at 8-9% CAGR for the next three years. A Credit Suisse report said pricing pressure should accelerate as approvals increase further by 50% over the next two years. As a result, the US generic market is expected to decline by 5% CAGR and the profit pool to decline by 8-9% CAGR over CY17-20.
Around 60% of the industry profits are driven by low-competition drugs, where a very few generic players are present. This segment is highly vulnerable, with about 40% of new approvals typically coming here. Most Indian firms have high contribution from low-competition drugs, and thus are prone to high price erosion. According to ICRA, slow growth from the US given the relatively moderate proportion of large size drugs going off patent, increased competition leading to price erosion in low-to-mid-teens, generic adoption reaching saturation levels and regulatory overhang along with base effect catching up, the Indian pharma sector is likely to curtail aggregate growth to single digit. The revenue growth from the US during FY2012-17 period experienced a CAGR of 19.3%, though growth from the US came down from 14.4% in FY2016 to 4% in FY2017, with Q4FY2017 and H1FY2018 registering negative growth despite consolidation benefits.