Mumbai / New Delhi: India’s listed drug firms are expected to post medium to strong growth in revenues on the back of improved operations, exports and depreciation of the rupee during the October-December period but the growth in net profit will be depressed, according to a Mint poll of five analysts.
The factors contributing to lower profit growth are rise in costs, mark-to-market losses, low margins from global markets, and comparatively lower income from pharmaceutical services and research and development, or R&D, licensing deals.
Net zero: A scientist at a Ranbaxy laboratory in Gurgaon. Drug companies will benefit from rupee depreciation but the impact will not be huge as a large part of raw material is imported. Scott Eells / Bloomberg
Mark-to-market is an accounting practice of valuing financial assets in accordance with their market value and not the cost at which they were acquired.
There is a consensus among five brokerages—Citigroup Global Markets Inc., Quant Broking Pvt. Ltd, Motilal Oswal Securities Ltd, Angel Broking Ltd and Prabhudas Lilladher Pvt. Ltd—that sales growth of drug makers will be in the range of 21-22% over the year-ago quarter, driven by strong performance of top and medium players. This performance was mainly led by launch of a slew of products in the regulated markets. Increased revenue from contract research and manufacturing services and rupee depreciation also helped.
The net profit, estimated to be down by 7-8% over the corresponding quarter in the previous year, has been impacted by foreign exchange losses, consolidation of low-margin businesses, setbacks in projected revenue from research deals, and a slowdown in the domestic formulation business along with low margin from the export markets.
Also See Mixed Pattern (Graphic)
The rupee depreciated by 3.6% against the dollar in the October-December quarter. While depreciation of the local currency benefits the exporters as they earn more rupee per dollar and euro, those who have foreign exchange liabilities in the form debt suffer when the local currency depreciates as they need to pay more rupee to repay their loans.
Overall, companies will benefit from rupee depreciation but the impact will not be huge as a large part of raw material is imported.
According to Sarabjit Kour Nangra of Angel Broking, the rupee depreciation will impact results in mark-to-market losses for companies with foreign currency loans and foreign currency convertible bonds such as Ranbaxy laboratories Ltd, the country’s largest drug maker by revenue, Wockhardt Ltd and Orchid Chemicals and Pharmaceuticals Ltd.
The overall sales growth, substantially contributed by exports, are driven by Sun Pharmaceuticals Industries Ltd, the country’s largest drug firm by market value; Dr Reddy’s Laboratories Ltd, the second largest exporter; Biocon Ltd, a leading bulk drug exporter, and Lupin Ltd, a large antibiotic manufacturer.
On the other hand, companies such as Ranbaxy laboratories, Ipca Laboratories Ltd, and Glenmark Pharmaceuticals Ltd, among others, will drive down the profits, according to reports of these brokerages.
Glenmark’s net profit is likely drop from the year-ago quarter when it had earned Rs179 crore from a new chemical entity out-licensing deal. Ranbaxy will be impacted by a US ban on 30 of its products. The US food and drug administration, or FDA, had in mid-2008 banned these products manufactured at Ranbaxy’s two plants in India because of non-compliance with quality norms. In addition, the translation loss on account of foreign currency liabilities would impact Ranbaxy.
Cadila Healthcare, Orchid and Wockhardt too will be impacted as they will have pay more rupee for their foreign currency loans but the quantum of losses is expected to be lower than the preceding quarter as the rupee deprecation was lower in October-December.
Cipla’s revenue is likely to grow by 17%, led mainly by a 29% growth in exports. However, its net profit is likely to record 29% decline due to a high base of last year and partly impacted by foreign exchange losses on forward covers. Firms take forward cover to protect themselves against currency fluctuations.
According to these brokerages, GSK Pharmaceuticals Ltd, the Indian arm of world’s second largest drug maker GSK Plc., will have a single-digit profit growth as 26% of its products fall into price control. Under drug price control order, the government caps drug prices and the firms are not free to fix the prices in accordance with production cost.
Dr Reddy’s is expected to gain handsomely from the launch of generic Imitrex—used for treating migraine—in the US, and its winning government supply order in Germany. It is expected to have $50 million from Imitrex sales. But the profit will be low as margins for authorized generic are low, according to the report of Quant Broking.
Quant’s Kirit Gogri expects mixed results from this sector in the third quarter. The companies, despite challenging global economic environment, are expected to perform relatively better, he said.
According to one analyst, who didn’t want to be identified, the pharma sector’s performance “would not be too different from what we have seen in last few quarters”. The weak local currency should help and the margins should be better but companies such as Dr Reddy’s, Glenmark, Ranbaxy and Cipla, which operate in Russia and Latin America, will face some pressure as their products have become more expensive in those markets because of depreciation of currencies, the analyst said.
Ranbaxy’s results will likely be affected by the impact of the US ban while Dr Reddy’s should benefit from the launch of Imitrex. Piramal Healthcare Ltd may run up a forex loss, but the third quarter should be better for the company, the analyst added.
Graphics by Sandeep Bhatnagar / Mint