New Delhi: Analysts are expecting tepid results from the Indian drug firms for the second quarter of fiscal 2008 with product exclusivities in the US coming to an end and an appreciating rupee continuing to erode dollar earnings.
To boot, there are no new revenue drivers in sight that might prop revenues in the future either. While most analysts are gearing up for disappointing results at large from the Rs55,000 crore Indian drug sector—it has been a laggard on the Bombay Stock Exchange (BSE) too, this year—they agree that there will be some gainers as well in the July-September quarter.
One-off opportunities in drug launches and huge foreign currency loans will shield companies such as Ranbaxy Laboratories Ltd, Sun Pharmaceutical Industries Ltd, Lupin Ltd and Jubilant Organosys Ltd. Together, they have raised almost $1.1 billion (Rs4,323 crore) through foreign currency convertible bonds (FCCBs)—against losses on exports. In the current fiscal, unprecedented dollar inflows led to the rupee gaining by almost 13.4% against the dollar to touch nine-year highs of Rs39.46 per dollar.
This makes dollar debt cheaper but that is unlikely to excite markets because it is a notional gain, which investors had witnessed last quarter as well. Just as in the case of winners, there is near consensus among the five analysts Mint polled on who the losers will be. Dr Reddy’s Laboratories Ltd and Cipla Ltd are expected to be the worst hit as their revenues come under pressure and they have no dollar debts to insulate them.
The revenue growth could be in single digit for the sector, with Motilal Oswal Securities Ltd’s analysts Nimish Desai and Jinesh Gandhi stating that the big three generic firms (by sales) could report a 13% decline in revenue. This would be due largely to 38% sales decline for Dr Reddy’s.
The multinational drug makers could report revenue growth of just 4.1% because of carving off of certain units over the last one year. Pfizer Inc. divested its consumer health-care business and GlaxoSmithKline Plc. (GSK) Pharmaceuticals did the same to its animal health-care unit. “Ranbaxy could post robust results but Dr Reddy’s and Cipla won’t do well due to the higher base effect,” said Sarabjit Kour Nangra, sector analyst at Angel Broking Ltd, who finds nothing dramatic in the quarter gone by that could give a substantial fillip to the sector. “The latter two had higher sales last year due to one-time spikes.” This is nothing out of line.
“Business as usual,” is how another Mumbai-based analyst summed the quarter.
Dr Reddy’s was cashing on the US revenues—about 24% of Rs6,509.5 crore revenues in 2006-07—last year as it was the authorized generic partner of Merck & Co. Inc. for simvastatin and finasteride. That spike is going to depress the results in percentage terms. To boot, it’s exclusivity on nausea drug, Zofran, ended last quarter. Dr Reddy’s was selling the drug with limited competition in US for the first six months.
A Merrill Lynch & Co. Inc. report, which expects margins to fall in drugs sector, has outlined concerns on Dr Reddy’s German acquisition by saying that they “await visibility on Betapharm growth prospects and impact of product transfers to India site”. The German drug mart has seen two rounds of price cuts by the government and plummeting profitability. Cipla, stripped off the foreign exchange (forex) gains, could be the worst hit among its peers with the Mint poll throwing up a net profit fall of 34% over last year. It, too, had a one-time revenue jump last year when it supplied raw materials for drugs that its US partners were selling under exclusivity. Ranbaxy got lucky with its $440 million debt giving it a forex gain of Rs70 crore, according to a Merrill report. It will have money coming in from selling anti-cholesterol drug, pravastatin, in exclusivity period in the US.
Ravi Krishnan contributed to this story.