US drag on pharma majors' margins in Q4; experts see R&D costs rising

Even as profits came under pressure for pharmaceutical majors in the fourth quarter of 2017-18, as revenues showed muted growth, analysts expect research and development (R&D) costs to rise in the coming quarters.

An analysis by Edelweiss showed revenues for pharma firms rose by 4 per cent for the fourth quarter, while profits declined 15 per cent. After four consecutive quarters of decline in the US, the quarter witnessed growth of 4 per cent year-on-year (YoY), while the domestic revenues clocked better growth, at 9 per cent. Of the major corporates, Cadila Healthcare reported healthy operating margins, of over 20 per cent. Sun Pharma - ceutical’s profit rose for the first time in more than a year, beating Street estimates, led by a one-time tax gain and lower raw material costs. Aurobindo, Glen mark, Cipla, Lupin and Dr Reddy’s reported muted numbers.
 

Edelweiss says three tre nds would emerge. One, the sector's revenue would grow in double-digits, led by both the US and domestic markets; second, the rupee depreciation of 5 per cent would provide earning tailwinds. Finally, most regulatory issues are expected to get resolved for Sun, DRL and Lupin in FY19. "We expect a 25 per cent compounded annual growth rate (CAGR) for the sector over FY19-20," Edelweiss said.
 

US pressure

The US is a major market for Indian majors. It accounts for 50 per cent of Cadila Health - care’s top-line, 43 per cent of Aurobindo's, 32 per cent of Sun Pharma's, and 31 per cent of Glenmark’s. Barring Cadila (67 per cent year on year growth) and Vadodara-based Alembic (US generic business saw 45 per), most of the other majors saw a dip in US revenues or muted performance. Torrent Pharmaceuticals saw a nine per cent rise, while Aurobindo and Cipla saw a six per cent rise.
 

Sun Pharma saw US revenue dip seven per cent. However, it saw a rebound on a quarter on quarter basis — up 12 per cent led by partial resumption in supply from Halol unit and new product launches from Taro. Investec Securities felt, “The US will con tinue to remain hypercompetitive and bring down drug prices further, making new launches less lucrative.”

Domestic growth

While the US headwinds continue, domestic market sales have been positive and show signs of recovery after the implementation of the goods and services tax. Torrent saw a 48 per cent jump in its India business during the quarter. While Cipla grew 13 per cent, Cadila five, DRL saw 7.5 per cent, Glenmark 5.5 per cent, and Lupin 10 per cent.