Stock Fundamentals

Pharma sector: Signs of recovery

Dhuraivel Gunasekaran | Updated on September 09, 2019 Published on September 08, 2019

Sustainability of performance in the coming quarters is critical to the sector

The past few years have been challenging for Indian pharma companies due to strong regulatory headwinds, coupled with pricing pressure in key markets. However, there are some signs of recovery in the overall performance of pharma companies, thanks to improved sales growth in overseas markets and revival in the domestic business.

In the first quarter of FY20, most pharma stocks under the S&P BSE Healthcare index reported a decent set of numbers. Their overall net sales grew 14 per cent while the net profit increased by 48 per cent compared to the same quarter last year.

Large-cap pharma companies such as Sun Pharma, Divi's Lab, Lupin and Aurobindo Pharma registered 15-28 per cent growth in their consolidated net sales (year-on-year) during the quarter, while Dr Reddy's Labs and Cipla put up a tepid show with 1-3 per cent growth in revenues. Growth in net profit of these six companies was widely disparate.

However, the recent performance failed to enthuse investors. Sustainability of the performance in the coming quarters, is critical.

Despite the persisting pricing pressure in key drugs, many companies reported decent growth in business from the US market, thanks to a low base, higher sales volume in existing products and new launches. During the earnings call, many companies indicated that the intensity of pricing erosion has receded notably in the June quarter.

Traction in US business

The US business of Sun Pharma, Lupin, Cipla and Aurobindo pharma grew by 16, 30, 67 and 42 per cent (Y-o-Y) respectively during the quarter. Key generic drugs Ranexa (Lupin), Suboxone (Dr Reddys), Sensipar (Cipla), Lialda (Zydus Cadila) contributed to the growth in revenues.

 

 

 

 

Large players such as Sun Pharma, Cadila, Divi’s Laboratories and Dr Reddy’s, whose approvals were stalled due to regulatory clampdown, have now started launching their products in the US market.

Many of their key facilities like Srikakulam (Dr Reddy’s), Vishakhapatnam (Divi’s Laboratories) and Halol (Sun Pharma), which were under USFDA (US drug regulator) scanner, received a clean chit over the past year. On the other hand, the warning letters issued to Lupin’s key facilities in Goa and Indore formulation plants weighed on its June quarter performance.

Companies such as Sun Pharma, Lupin and Dr Reddy’s that increased investments in research and development (R&D) over the past few years, have started to benefit from the new launches during the quarter.

Given that the competition intensified within the conventional generics space, many pharma majors shifted focus to complex generics and biosimilars. Though higher R&D puts pressure on their margins in the near term, it is likely to pay off over the long run.

Growth in India business

Large-cap companies, barring Cipla, reported decent growth in domestic revenues on the back of healthy volume traction, improved realisations in base business and product launches. Dr Reddys, Lupin and Sun Pharma reported 8-15 per cent (Y-o-Y) growth in India business, while Cipla posted a 12 per cent decline.

Cipla’s domestic revenue was impacted by change of distributors and deferral of dispatches. Cipla has stopped supplying products to around 100 distributors and chose new distributors. The management expects the domestic business to grow in single-digits in FY20.

Improved operating margins

Operating margins for overall large-cap pharma peers improved (Y-o-Y) during the first quarter mostly due to favourable business mix. Operating margin for Sun, Dr Reddy’s, Cipla, Lupin and Aurobindo pharma stood at 27, 31, 25, 21 and 22 per cent respectively.

Published on September 08, 2019

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.