US pricing pressure to keep pharma companies' growth under check

However, the rupee depreciation against the dollar is expected to benefit export-oriented companies

Pharma companies are likely to report sequentially flat EBITDA growth for the third quarter (Q) of the financial year (FY) 2016-17, impacted by pricing pressure and higher research and development (R&D) expenditure, a report said.

"We expect our pharma universe to report sequentially flat EBITDA growth in 3QFY17, largely led by pricing pressure and higher R&D expenditure. Also, increased US regulatory scrutiny is resulting in higher remediation expenses and de-risking of key products. This, in turn, should weigh down on operating margins," brokerage firm Motilal Oswal said in a report.

In its expected quarterly performance summary, the report said that the top pharma companies are expected to report 0.7 per cent quarter-on-quarter sales growth at Rs 38,137 crore in December 2016 quarter. The EBDITA may see a marginal decline of 0.6 per cent at Rs 9,245 crore in December quarter.

After a strong first half of FY17, the domestic pharma business is expected to face headwinds from seasonal weaknesses and demonetisation. Although the chronic segment may benefit at the margin due to demonetisation, the acute segment may see some impact in the near-term, the report said.

The depreciation of rupee against the dollar is, however, expected to benefit export-oriented companies.

The average rate of the rupee against the US dollar has depreciated by 2.3 per cent year-on-year (Y-o-Y) over the past year — 67.46 in 3QFY17 vs 65.95 last year. However, USD/INR had been flat sequentially. It is thus, unlikely to result in any significant MTM impact for companies with large forex debt and derivative exposure, it said.

Brexit was also expected to have a negative impact on companies from the Q2 of FY17. However, we note that most Indian companies have limited exposure to the UK market (1-2 per cent of sales). Also, post-Brexit vote, it is still unclear whether or not Indian companies will have to conduct separate trials for approval in the UK and other EU markets.

Separate trials would mean additional cost for companies, however, this is not expected to happen at least for next two years, the report said.

Among domestic pharma companies, Glenmark is expected to exhibit strong growth in the US, led by Zetia FTF and a series of other generic launches. Aurobindo may report stable US sales, driven by key launches including Crestor. On the other hand, Sun Pharma and Lupin Labs may continue witnessing a sequential decline in the US business on the back of competition in key products, the report said.

Dr Reddy's Lab is expected to report subdued numbers in the Q3 of FY17, with revenue declining 6.1 per cent Y-o-Y to Rs 37.2 billion and profit after tax down 22.4 per cent to Rs 4.5 billion.

This is primarily due to the lack of new launches in the US and increased generic competition in gVidaza, Motilal Oswal said.

Among MNCs, Sanofi is likely to report better numbers, while GSK should face some pressure from the ongoing supply issues. The pace of approvals has picked up at the USFDA. However, lack of key approvals, higher R&D spends and regulatory concerns in the domestic/US markets are likely to keep growth in check, the report said.