The pharmaceutical sector has been a non-performer in the past one year on the stock market, declining by 5.5% from a year ago. From its high point in August, it is down 18.3%. The US market has been the biggest worry for investors. The market situation itself has become tough, with price competition affecting realizations and consolidation of the distribution chain adding to this problem. The pace of new generic drug approvals has not matched investors’ expectations. The biggest problem is that several companies have seen important drug-making facilities fall foul of the US drug regulator.
These problems are not new but investors are increasingly losing patience. There is hope that FY17 may see plants get certified as companies have completed or are close to completing the remediation process. An inspection and a green signal will end their worries and see sales growth recover eventually. The US generic market is critical as it contributes to as much as half of sales for Indian companies, and its share in profitability should be even higher.
Elsewhere, the news is not good either. In India, price controls remain a worry. New drugs are entering the list and, in FY17, the average realizations are down on the existing price list, due to a decline in the Wholesale Price Index (used to benchmark drug prices). Although some companies did report good growth rates during the March quarter, some are concerned about the outlook for FY17. The emerging markets, which were a source of good growth earlier, continue to suffer from volatility, both at the economy-level and their currencies.
However, operating profit margins improved from a year ago, while they remained flat on a sequential basis. Most companies are also seeing a significant step-up in research and development expenses as they shift focus to more complex generic products and spend on their drug discovery programmes, too. That is a risk to profit growth unless sales growth steps up.
There are no quick fixes in sight for the sector. But perceptions about its future can change very quickly once the affected plants are certified as compliant by the US Food and Drug Administration. That not only sets the stage for a recovery in sales growth but restores investor faith in these companies. Companies such as Biocon Ltd and Glenmark Pharmaceuticals Ltd did well in the quarter. Among the bigger ones, Sun Pharmaceutical Industries Ltd and Lupin Ltd did well but Dr Reddy’s Laboratories Ltd and Cipla Ltd did not.