Currency volatility impacts pharma companies' earnings

Firms with more exposure to emerging markets likely to be hit harder; demand uncertainty adds to challenge

The continued weakness of emerging market (EM) currencies remains a cause of concern for Indian pharmaceutical companies, which earn 20-25 per cent of their revenue from these markets.

Dr Reddy’s Laboratories (DRL) and Glenmark Pharmaceuticals earn about 20 per cent from these markets, mainly Russia and Latin America, while Cipla earns 14 per cent of revenue from South Africa.

 

While the rupee weakened 4.25 per cent against the dollar last month, other EM currencies depreciated far more in the period. The Russian rouble and South African rand are down 8.6 per cent and 8.8 per cent; Brazil’s real is weaker by 10.7 per cent. Year on year, the real and rouble have depreciated 71 per cent and 85 per cent against the dollar.

While rupee depreciation is a positive for pharma companies, which are net exporters, the persistent weakness of other currencies is worrying. The first quarter results of Glenmark and DRL were impacted by the rouble depreciation and revenue from Russia and other markets declined 20-25 per cent.

Analysts believe delays in drug approvals in the US market and currency volatility would also have a bearing on earnings in the next few quarters.

“We remain cautious on the regulatory uncertainties and the EM currency fluctuations that can delay the earning recovery materially,” Barclays Equity Research said.

“Relative to the earlier periods, there has been a considerable amount of weakening of the rouble, said DRL, in an e-mailed response. “However, the management continues to be completely focused on driving growth in local currency. Overall macro economic uncertainties did have a negative bearing on the volumes, as evident in the first quarter numbers. However, the situation has since improved and growth for July-August is encouraging. We are committed to the geography and are confident that a major part of the turbulence will be behind us in the coming quarters.” It said 30 per cent of its net rouble exposure was hedged.

Drug maker Lupin said it was de-risked from the recent currency volatility. “At a broad level, the slide in the rupee will help exporters achieve better realisations. At Lupin, we are net exporters. We have been extremely prudent in hedging our exposures and this enables us to be well placed to benefit from this bout of depreciation,” said Ramesh Swaminathan, chief financial officer.

“Overall, the recent currency movements are a mixed bag for Indian generic pharma companies,” said Emkay Global Financial Services, “with clear winners, namely, Aurobindo, Divi’s, Lupin and Sun Pharmaceutical, while it would pose challenges for Cipla, DRL and Glenmark, due to their higher earnings dependence on emerging markets like Russia, Venezuela and Africa. The challenges in EMs are likely to be not only due to currency movements but also due to uncertainty over the demand environment.”