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Representative image (Photo: AP)
Representative image (Photo: AP)

Tailwinds to domestic growth may add more potency to pharma’s Q3

  • One must watch for commentary on the US market operations, which will set the tone for the sector for the rest of the year
  • No sharp improvements in revenue are likely from Indian companies with operations in the US, though, due to limited launches

The pharmaceutical sector’s third-quarter (Q3) results could be mixed. However, the strong recovery seen in the domestic market in Q2 holds the key to the fortunes of pharma stocks.

In the home market, a few firms with large operations in acute and respiratory diseases could see the momentum continuing in Q3. Companies having operations in the chronic segments could also report decent revenue growth.

In the global market, companies with a better drug pipeline in the US are expected to register gains. The US market has noticeably changed in the past year, even though pricing pressures have eased.

No sharp improvements in revenue are likely from Indian companies with operations in the US, though, due to limited launches.

Dr Reddy’s Laboratories Ltd, Lupin Ltd and Sun Pharmaceutical Industries Ltd are expected to record gains in both the home and US markets, according to analysts. Some of their launches are expected to make further inroads into the US market. For others, lack of meaningful launches could drag down overall growth rates in the US market.

(Graphic: Satish Kumar/Mint)
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(Graphic: Satish Kumar/Mint)

The recent observations of the US Food and Drug Administration on some manufacturing units of leading Indian pharma companies are a dire overhang. The observations could slow launches in the US and hamper the pharma sector’s recovery in India.

Besides, given the overall increase in research and development spends, and mounting costs, the squeeze on overall Ebitda (earnings before interest, tax, depreciation and amortization) will be evident.

“Given weak US sales, we expect the Ebitda of the pharma companies we cover to decline an average 1.7% year-on-year and 6.7% quarter-on-quarter. In dollar terms, the US business is likely to be flat y-o-y and q-o-q, due to fewer meaningful launches and absence of one-off opportunities. Domestic formulations sales, at 10-12%, is likely to be steady," said analysts at Elara Securities Ltd in a note.

Still, the worst may be over in terms of valuations. The Nifty Pharma index gained about 1.54% last month, showing that investors are warming up to the sector. One must watch for the commentary regarding the US market operations, which will set the tone for the rest of the year.

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