Pharmaceuticals have long been considered a defensive sector for investors during times of uncertainty, especially during a pandemic like Covid-19. The sector did live up to those expectations.
During the first quarter of FY22, which coincided with the second wave of the pandemic in India, sales of domestic formulations soared as people stocked up on medicines. The low base of the first quarter of FY21 also amplified year-on-year growth.
The S&P BSE Healthcare index gained 22 percent since April 1, 2021, twice as much as the benchmark Sensex, which rose 11 percent.
Domestic formulations make-up for slowing US generics business
“Aggregate earnings of pharma companies under our coverage in 1QFY22 were in line with our estimates. Aggregate sales were up 15 percent YoY to Rs 540 billion (estimate Rs 530 billion),” brokerage firm Motilal Oswal said in its recent review report of Q1 results. EBITDA grew 9 percent YoY to Rs 128 billion (estimate Rs 124 billion), the brokerage added.
Motilal Oswal attributed the higher-than-estimated numbers to strong growth in domestic formulation sales, led by heightened demand for Covid-19 treatment drugs and a low base a year earlier.
Aggregate other expenses, as a percentage of sales, rose 40 basis points YoY to 22.6 percent, while employee costs declined 130 basis YoY to 17.7 percent in the first quarter of FY22.
The numbers would have been better had it not been for lower sales of generic drugs in the US. Indian companies saw a high single-digit price erosion in the US generic drug market, coupled with continued weak demand for the acute portfolio of products during the quarter.
India Ratings and Research noted that the high incidence of price erosion was led by manufacturers/distributors looking to liquidate large inventories due to Covid-19-led uncertainties, fewer abbreviated new drug application approvals that led companies to bid aggressively on existing products, and aggressive pricing by small players to gain market share.
What to expect in the second quarter
With the pandemic easing across India, except in a few states, companies expect sales in the Covid-19 portfolio to moderate in the second quarter even as sales of non-Covid-19 drugs increase.
“In Q2FY22, there will be moderation. Remember, we have grown on a low base. This level of growth is unsustainable,” Kedar Upadhye, Cipla’s global chief financial officer, said in a recent interview to Moneycontrol. “Our attempt would be to continue the momentum. Things are looking good. Activity is back in the market, our field force is now fully engaging with customers and channel partners.”
On the US front, companies expect the second quarter to be another weak one. Stocks such as Aurobindo Pharma, Dr Reddy’s Laboratories, Lupin and Cadila Healthcare are under selling pressure.
“We expect the second half of FY22 would be action-packed in terms of new launches. We expect to maintain 10-12 percent growth of our US business,” said R Ananthanarayanan, managing director of Strides Pharma Sciences, which derives about half of its revenue from the US.
Ind-Ra said it expects a durable growth outlook in the US market to emerge over the near to medium term.
“During FY21, Indian companies calibrated their R&D investments towards complex molecules, which are expected to witness a lower impact of price erosion compared to plain vanilla oral solid products. RoCE of Indian companies also improved, aided by improved profitability in the US business, which, however, may not sustain in the near term. Ind-Ra expects new product approvals led by US Food and Drug Administration starting physical inspections and clearances, the pricing discipline will return to the market,” the rating company said.