July dip just a 'short-term aberration'

The dip in sales of domestic formulations in the pharmaceutical industry this July, when these grew at the slowest pace this year, is a short-term aberration, say analysts. They think it is likely to move back to double-digit levels.

Drug sales grew at nine per cent year-on-year in July, on a high base and inventory clearing over the previous quarters. In the June quarter, sales had grown 13.5 per cent. Enam analysts Milind Bhangale and Deepak Khetan say the slowing, especially in the acute therapy segment, was largely due to a late onset of seasonal diseases and the high base of 2010-11. Domestic sales during the middle of last year (monsoon months) had grown at around 17 per cent.

While acute therapy drug sales grew at single digits, those for chronic therapies continue to perform much better. The fastest growing segments in this category such as cardiovascular and anti-diabetic drugs grew at 14 per cent and 17 per cent, respectively, in July.

Many analysts expect domestic growth, led by chronic segments, to pick up in the second half of 2011-12 and report a 14 per cent growth, posting a repeat of the 2010-11 performance. Enam Securities believes the growth will be sustained, due to deeper penetration and higher affordability.

Some are not sure about the bounce-back, especially for companies in the top tier. Monica Joshi of Avendus Capital believes near-term domestic growth for the top pharma players (the select group accounting for 32 per cent of the domestic market) may continue to be hurt by a possible unwinding of inventory, pricing pressure and lower contribution from new launches.

Further, the investments in sales/marketing promotions, rising cost of freight and fuel, coupled with slowing revenue growth, is likely to exert pressure on operating profit margins. Margin pressure will be more for those with higher fixed overheads (capacity expansion, increase in sales personnel), as sales are likely to gather steam only gradually.

If the slowdown persists, analysts believe companies such as Sun Pharma, Cadila Healthcare, Lupin Laboratories and Torrent Healthcare would get a major chunk (42-75 per cent) of their revenues from the high-growth chronic segment, which should be less affected than sales in the acute ailment segment.

Anti-infectives, the largest segment in acute therapies, is experiencing severe competitive pressures.