OPEN APP
Home / Companies / Company Results /  High costs, US competition crimp pharma earnings
Listen to this article

NEW DELHI : The BSE Healthcare Index has declined by over 16% year-to-date, compared with a 4-5% fall in Sensex, showing plummeting investor confidence in pharmaceutical companies following the outbreak of the covid-19 pandemic.

Underperformance of the pharma sector was primarily on the back of cost pressures due to rising raw material prices, which in turn impacted profitability. The US business of most companies was not yet out of the woods, even as they continued to face high competitive intensity, which impacted margins and earnings growth. Though the outlook for the domestic pharma businesses remains good, companies having a high base last year are feeling the heat.

Tepid growth of pharma companies in May indicates that the pressure will continue for the near term. The Indian pharma market (IPM) fell 3.3% from the year ago in May, after falling 4.8% from the year ago in April. The fall was led by a high base. Higher off takes of acute segment products in the year-ago were due to the spread of covid-19, which led to extraordinary year-on-year growth of 47.8% in May 2021.

A report by India Ratings and Research (Ind-Ra) said the 3.3% fall in revenue in the domestic market was led by a sales volume decline in acute segment therapies, such as anti-infectives, vitamins and respiratory products, due to the higher base effect of May 2021, and inventory corrections.

The pressure may continue in the near term. Ind-Ra said last year’s high base will continue to impact growth in the first quarter of FY23.

Notably, the base also remains high for FY22. FY22 IPM had witnessed 15% year-on-year sales growth, higher than the 8-10% witnessed over FY18-FY22.

In fact, performance of pharma companies in Q4FY22 continued to show the impact of rising costs. “Q4FY2022 was a weak quarter for pharmaceutical companies under our universe, marred by higher cost pressures as elevated raw material and freight costs drove down margins" said analysts at Sharekhan. Higher pricing pressures in the US (for select segments price erosion was in double digits) also added to margin pressure, they added.

Pharma companies were under pressure from surging costs for the third consecutive quarter in Q4 FY22. Costs of key ingredients rose primarily due to the energy crisis in China, logistic bottlenecks caused by container availability, and the covid lockdowns in China, which led to supply disruptions. Furthermore, marketing and promotional spends that had hit a low during covid have now risen to normal levels with the Indian and global markets opening up. This led to a 220 basis points year-on-year decline in operating margins.

Cost pressure on margin will remain, said analysts. Price increases are on the cards which will offset the impact of the price rise in raw material, they added.

For companies with higher exposure to the US market, price erosion due to heightened competition continued to hurt. Analysts are awaiting new product launches in the second half to curtail the impact.

There was a 2% softening in US pricing erosion, which, if sustained, will reduce price erosion from 10-11% seen in FY22 to a more manageable 7% in FY23, said analysts at a foreign brokerage, seeking anonymity.

Ind-Ra expects mid-to-high single digit growth for IPM in FY23 led by the price hikes (around 10% in certain categories), and stronger seasonal trends.

Near-term headwinds are likely to stay, said analysts at Sharekhan, adding that the valuations are, however, reasonable.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Close
Recommended For You
×
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout