Pharma Q3 Preview | Lukewarm growth expected as US market sales slowdown

Pharmaceutical companies are expected to report modest growth in sales and net profit for the quarter ended December owing to a slowdown in sales in the US market, the biggest contributor to topline for the majority of the listed drugmakers.

Sales of pharmaceutical companies are likely to grow at a muted 6.4 percent in the reported quarter whereas their bottomline is likely to rise by merely 4.7 percent in the same period, an average of estimates by five brokerages polled by Moneycontrol.com showed.

The sector will also be affected by a high base of the year-ago quarter with its impact being felt acutely on the operating performance of drugmakers as analysts expect earnings before interest, tax, depreciation, and amortisation (EBITDA) to grow by just 5 percent in the December quarter. In the year-ago quarter, drugmakers had seen above-trend cost savings owing to COVID-19 restrictions.

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US market will be a letdown for most pharmaceutical companies in the quarter given the lack of product approvals from the US Food and Drug Administration and the emerging price erosion in the market. “We expect the US market to remain steady on QoQ basis with a continued challenging environment, partly offset by seasonality,” said brokerage firm Prabhudas Lilladher in a preview note.

Earlier in the current financial year, Alembic Pharmaceuticals withdrew its full-year sales growth guidance because of the high price erosion faced by its US product portfolio. “...competition is intensifying, FDA is giving permissions or approvals to products, so the competitive environment is actually gaining strength rather than reducing,” Sun Pharma’s North America CEO Abhay Gandhi told investors post-June quarter earnings.

Commentary by management of drugmakers on the pricing environment in the US and the pipeline of future drug approvals will be one of the most tracked aspects when these companies announce their December quarter earnings later this month.

While the US growth may falter, analysts expect the domestic formulation market to do much of the heavy lifting to give topline of the pharmaceutical companies some gloss.

Brokerage firm Motilal Oswal Financial Services expects domestic sales of the drug companies covered by it to grow 9.6 percent year-on-year aided by better traction in non-COVID drugs during the quarter. “Particularly, respiratory, pain, and gastrointestinal are seeing strong growth, led by healthy demand and partly by the low base of the past year,” the brokerage firm said in a preview note.

Operating margins of pharmaceutical companies are likely to be flat-to-negative in the quarter ended December owing to lower contribution of high-margin COVID-19 drugs and increase in costs. Export-oriented drug companies are likely to face the brunt of elevated global freight rates and an increase in the cost of some raw materials during the quarter. Brokerage firm Phillip Capital expects EBITDA margins of drug companies to contract 40 basis points on-year.

Among specific stocks, Sun Pharmaceutical Industries, Gland Pharma, Divi’s Laboratories, and Lupin are expected to be stand-out performers in the reported quarter. Sun Pharma’s specialty chemical business will see more strong growth due to the launch of winlevi drug in the US, while Divi’s will benefit from the Molnupiravir launch.

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