Earnings support expected for pharma

This will be a relief for the sector, which is battling regulatory pressures at home and in the US

For a sector facing multiple headwinds, especially on the regulatory front, the March quarter results are expected to come as a breather. Boosted by a number of limited competition products, earnings growth for top pharmaceutical companies is expected to jump 60 per cent as compared to the year-ago quarter. Ironically, almost all the gains are expected from the US market, perhaps the biggest headache for pharma firms.

A lack of product approvals in this market led to the product pipeline drying up, and strict USFDA (US Food and Drug Administration) action on Indian plants created uncertainty on manufacturing and product-approval process. These led to the sector's de-rating, with pharma's premium over Sensex shrinking from 65 per cent at the end of the December quarter to 55 per cent now. Adding to the bad news are restrictions on the domestic front, as well as the Indian regulator's move to ban many fixed-drug combinations and monitor the nutraceuticals market.

Strong earnings growth will bring some relief. Edelweiss Securities estimates the sector's revenue to grow 17 per cent year-on-year and net profits to grow by 67 per cent. Adjusted for the one-offs, earnings growth is pegged at a strong 24 per cent.

While last year's low base (when profits fell by about 20 per cent) is expected to help, earnings growth for the March quarter will clearly be driven by high margins and limited competition products. The latter includes sales of Gleevec (anti-cancer) for Sun Pharma, which Credit Suisse estimates to be $200 million; Glumetza (anti-diabetes) for Lupin - both launched at the start of February. Further, Dr Reddy's and Torrent will benefit from Nexium (anti-acidity) sales, while Abilify (anti-psychotic) sales are likely to boost the March quarter performance of Torrent and Aurobindo Pharma.

The performance in the domestic market is expected to be stable, with top companies reporting a growth of 13 per cent year-on-year versus 12 per cent in the December quarter and 10-12 per cent in year-ago period. While weakening of local currencies in South Africa, Brazil, and Russia is a negative, the fall of the rupee against the dollar could offset this.

Credit Suisse estimates that FY17 revenue forecast for key companies will be strong. It expects Sun to give a forecast of 20 per cent revenue growth, while Cipla and Glenmark are pegged at 20 and 30 per cent, respectively.