Graphic: Satish Kumar/Mint
Graphic: Satish Kumar/Mint

US growth rate may weaken, continue to play spoilsport for Indian pharma

  • Analysts are factoring in a y-o-y revenue growth of about 11.5% in the Sep quarter, the slowest in the past four quarters
  • In the first quarter (Q1), almost all domestic pharma companies registered negative growth rates in their US businesses

All is not well with pharma companies in the overseas markets, particularly the US. This is expected to reflect in lower sequential growth rates in the second quarter (Q2) of FY20.

In the first quarter (Q1), almost all domestic pharma companies registered negative growth rates in their US businesses. Competition in some of the base drugs launched earlier has been intensifying. As a result, sales volume growth has been slow.

Additionally, lack of new launches in the US market could further drag down revenue growth. “US business should be weak for almost all companies with a sharp dip in approvals in Q2, compliance issues, lack of meaningful launches and competition in base portfolios," said analysts at Emkay Global Financial Services Ltd in a recent report to clients.

Domestic markets, however, could lend a helping hand to overall growth rates. In Q1 FY20, most companies had reported domestic growth rates of more than 10%, barring Cipla Ltd and Cadila Healthcare Ltd, which posted single-digit growth.

Hence, domestic growth rate is expected to remain strong for most pharma companies, particularly those in the respiratory ailments segment that have an edge over others.

“With respect to domestic markets, the growth is likely to favour companies with a larger presence in acute therapy as a heavy monsoon together with flooding situation has led to a surge in occurrence of infectious diseases. Emerging markets (EM) growth has been affected by adverse pricing regulations and the impact should be seen in subsequent quarters, too," said a recent report by Nirmal Bang Securities Pvt. Ltd.

Operating margin growth may also remain weak. A key contribution to margin growth was to come from speciality products. However, in Q2 FY20, the ramp-up in speciality product sales has been less than desired for most pharma companies. Besides, the research and development (R&D) expense is likely to increase this quarter, after companies cut back spending on R&D in Q1.

Hence, analysts expect Ebitda margin growth in Q2 to weaken. In fact, analysts are factoring in revenue growth of just about 11.5% year-on-year in the September quarter, which is the slowest in the last four quarters, while Ebitda growth is expected to be just 7.8% year-on-year. Ebitda is earnings before interest, taxes, depreciation, and amortization.

Select domestic pharma companies, such as Dr Reddy’s Laboratories Ltd, could buck the trend due to their strong domestic portfolios and an increase in new launches this season. But for most other pharma firms, investors may not have much to look forward to.