Q1 Earnings preview: Pharma to see muted growth due to pricing pressure in US, GST disruption in domestic market
Analysts predict the June quarter to be tough with revenues in the best case scenario moderating to low single digit growth and in the worst case declining about 3-4 percent due to absence of any significant approval, pricing pressure in US, INR appreciation over USD and Euro and destocking of inventory in domestic market due to Goods and Service Tax (GST) roll out.
As Indian drug makers brace for the first quarter earnings in the days ahead, analysts are predicting the Q1 earnings to be muted with revenues moderating to low single digit growth and in worst cases, declining about 3-4 percent.
This is majorly due to absence of significant approvals, pricing pressure in the US, INR appreciation over USD and Euro as well as destocking of inventory in domestic market due to the Goods and Service Tax (GST) roll out.
“We expect the pharma sector's EBITDA margin to come under pressure on a sequential basis due to negative operating leverage from domestic formulations business given GST-related disruptions, lack of meaningful launches in the US and increasing R&D costs,” Kotak Securities said in its report.
ICICI Securities too is expecting same.
“The pharma companies (select pack) will continue to face challenges on the US front (decline 17% YoY) as well as for the quarter in domestic formulations front (decline 15% YoY) mainly due to destocking of inventories in the domestic market led by GST implementation, sharp price erosion as well as high base in the US and rupee appreciation vs all major currencies," it said in a report.
Here are some key factors that may influence earnings of Indian drug makers:
Pricing pressure and rupee strengthening in US market:
One of the key factors to look out for in the first quarter is the extent of price deflation of generic drugs that has eaten into the base business. According to analysts the base business erosion could range anywhere between high single digit to low double digits.
The worrying aspect is that it is accelerating on account of consolidation of the distribution channel and rising competition.
Another concerning issue is the sharp appreciation of the rupee. The headwind may hurt margins of pharmaceutical companies that export drugs.
In the first quarter of 2017, during the quarter, on an average USD depreciated 400 basis points versus INR while EUR declined 600 basis points which implies 15 percent impact on the sector’s profit, said Edeweiss Research in a report.
Sun Pharma, India’s largest drug maker is expected to deliver negative growth due to erosion of base business.
“We expect the quarter to deliver negative growth with decline in revenues with degrowth of 16.79% y-o-y and 2.39% q-o-q due to price erosion in base portfolio in the US and decreasing market of gGleevec will impact the US revenues,” KR Choksey said in its report.
Lupin’s US business, which was riding on the exclusivity of generic anti-diabetic drug Glumetza and limited competition in Fortamet, is expected to be under pressure in the first quarter owing to increased competition. However, the slide will be partially offset by generic oral contraceptive Minastrin, continued growth in Methergine and the new launches of generic antidepressant Wellbutrin.
Dr. Reddy's is expected to have a better quarter in the US, helped by new launches, though a significant portion of growth will be offset by a decline in existing key products. US revenues will continue to see a decline in first quarter earnings on account of additional competition in generic anticancer drug Vidaza and antiviral Valcyte.
Aurobindo Pharma is expected to register a 5 percent growth in the US generic business, led by launches of Epzicom, Mucinex DM and Renvela.
Cadila Healthcare US sales is expected to flat. The company got big approvals including generic Lialda, Namenda, phentermine hydrochloride tablets, and generic Zetia.
Cipla is may see its US business is expected to stable at USD 100 million
Glenmark and Natco are the companies to watch out for given their exclusivity for Zetia (cholesterol lowering drug) and Tamiflu (antiviral), which were launched in December. Generic Zetia is expected to contribute USD 35-50 million for Glenmark, while generic Tamiflu is expected to chip in around USD 8 million.
Cadila Healthcare, part of Zydus Cadila group, successfully cleared US FDA’s re-inspection of its critical Moraiya facility in Gujarat.
In particular, the market will be interested in updates from Sun Pharma’s Halol facility, Dr Reddy’s and Divis commentary on their remediation efforts at plants under US FDA action.
Domestic formulation business
The GST rollout in the quarter has resulted in destocking and some supply side disruptions leading to weak growth of the domestic business for the companies.
The domestic formulations sales to decline by anywhere from 6 to 13 percent depending on portfolio and distribution strength.
Sun Pharma, Cipla, Cadila, Alkem, Lupin, Glenmark, Abbot and Glaxosmithkline are some of the companies that have huge domestic formulation businesses.
The impact of the rupee hardening versus currencies such Euro and Pound Sterling may have an impact in the first quarter. However, the relative stability of oil prices helped stem currency depreciation and reduced ongoing macroeconomic uncertainties faced by emerging economies such as Russia, Nigeria, Middle East and North Africa — some of the key markets for Indian pharmaceutical exports.The performance of Lupin in Japan, Dr Reddy's in Russia, Cipla in Africa, Aurobindo and Wockhardt in Europe will be closely watched by the analysts.