Indian pharmaceutical companies reported improved numbers for the second quarter, but the sector may not be out of the woods just yet. Revenue growth in the September quarter was helped by improvements in the domestic pharma market. Reflecting the improvement, the Nifty Pharma index gained 4.3% in the past one month compared to the 3.7% rise in the Nifty 500.
Domestic formulations saw healthy growth of about 13.5% year-on-year in the second quarter. An extended monsoon led to an increase in growth of health issues in monsoon related diseases. Volume growth was also upbeat, with some new launches bolstering the domestic formulations business.
However, volume growth may taper off after the seasonal “acute season" ends. “Domestic formulations recovered on the strong acute season but volume growth challenges remain given supply channel disruption. Industry players believe 3-4% volume growth versus 4-5% in the past and 8-10% Indian pharma market growth against 12-13% in the past as the new normal," brokerage firm Axis Capital Ltd said in a note to its clients.
On the other hand, the US market continues to weigh on Indian pharma companies. Thankfully, the price erosion in the generics segment has whittled down to single digits. Besides, revenue growth declined on a sequential basis and may remain muted on slower new launches.
Competitive intensity has increased in the US market. A few Indian pharma companies have managed to weather the market forces due to new launches and product-specific opportunities. But, by and large, the American market continues to remain a challenge for the Indian pharma industry.
Further, growth in the US largely depends on new drug launches. But given the spate of increase in the warnings from the US Food and Drug Administration (US FDA), the number of new launches going forward is a concern and may slow down. “Intensity of the USFDA’s (Food and Drug Administration) regulatory actions remained high with 15 warning letters issued to Indian pharma YTD, and seven since end-Q1FY20" said a report from Edelweiss Securities Ltd.
Nevertheless, cost-efficiency measures, and lower research and development spending supported Ebitda (earnings before, interest, tax depreciation and amortization) margins to a large extent.
For Indian pharma companies, gains in earnings, though, would be selective and driven by better product mix and new launches, particularly in the US.