Cost pressure likely to weigh on pharma companies' margins in Q4

Indian drug firms are likely to post moderate growth during the fourth quarter of financial year 2021-22 (Q4FY22) supported by the domestic market. However, higher raw material and freight costs, as well as pricing pressure in the US (amid inventory destocking) could weigh on overall performance.

Edelweiss analysts estimate that pharma firms could report around 9 per cent revenue growth while the profit after tax (PAT) could dip by 2 per cent. ICICI Securities analysts feel Ebitda (earnings before interest, taxes, depreciation, and amortisation) would dip 200 basis points (bps) in Q4.

Owing to elevated prices of organic chemicals and solvents caused by the Russian invasion of Ukraine, persistently high API and key starting material (KSM) prices from China (up 7-8 per cent sequentially in Q4) and near normal advertising and promotional spends for the Indian market – analysts at IIFL Securities feel Ebitda margins will remain under pressure.

India-focused drug firms are expected to fare better. IIFL Securities noted in its report that it expects aggregate revenue growth of 10 per cent and Ebitda growth of 9 per cent in Q4 (for the 17 pharma companies under its coverage). However, India-focussed players will likely deliver revenue and Ebitda growth of 13 per cent and 15 per cent YoY, respectively.

The Indian pharma market witnessed 9.6 per cent YoY growth in value terms in Q4 (IQVIA). Volume growth stood at 5.5 per cent YoY. “We expect the covered companies to report similar primary growth,” ICICI Securities noted.

Acute segments have shown strong growth partially due to omicron variant (anti-infective grew 15.3 per cent YoY; respiratory grew 38.2 per cent YoY). The Chronic segment is expected to slow down due to high base — 7.1 per cent YoY growth in neurology and cardiovascular segments each, 4.8 per cent in anti-diabetic segments.

On the whole, analysts feel domestic companies will fare well with growth in the low teens as markets gradually open up (Ipca, Ajanta Pharma and Torrent Pharmaceuticals likely to do well among peers). At the same time, price erosion in the US continues with limited launches.  

Among Indian firms, Edelweiss feels that Cipla (respiratory) and Sun Pharma (specialty) are better placed to tide the price erosion.

Hospitals and Diagnostics

Declining demand for Covid-19 treatment would have an impact on the hospitals and diagnostics companies – hospitals are gradually returning to ‘normalcy’, and international patient footfalls have started to grow. Edelweiss said it expects diagnostics to return to pre-Covid growth in the coming quarters.

HCG is better placed due to its oncology focus, analysts pointed out. “Among hospitals, we expect HCG to be better placed given its oncology play, which was less impacted during Covid. That said, we expect revenue decline of 1 per cent QoQ with an Ebitda decline of 4 per cent QoQ and margin of 16.8 per cent margin (-50 bps QoQ),” Edelweiss noted.

Apollo Hospitals is likely to witness an 18 per cent YoY growth in the pharmacy business, but its overall occupancies are down 60 per cent or so, analysts said. As for Fortis Healthcare, the diagnostics business (SRL) margins are likely to fall to 21 per cent.

IIFL Securities says while diagnostic companies would have partly benefitted from the third wave of Covid, the organic non-Covid revenues for Dr Lal Pathlabs, Metropolis, and Thyrocare are expected to grow by 20 per cent, 13 per cent and 11 per cent on a 2-year compound annual growth rate basis in Q4. IIFL expects Apollo Hospitals to deliver a YoY revenue growth of 28 per cent, but sequentially it is expected to post only 1 per cent growth in revenues.