Expect earnings to be flat YoY for July-September quarter, after seven quarters of growth: Motilal Oswal report

Our Bureau, New DelhiMonday, October 11, 2021, 08:00 Hrs  [IST]

Increased competitive pressure on the US-based business, coupled with the reduced pace of launches and lower Covid-19 off-take is expected to drag the overall performance of the pharmaceutical sector for the second quarter of the financial year, during when the earnings are expected to be flat on an year on year basis, according to research report of Motilal Oswal Financial Services.

From the peak year on year earnings growth of 48 per cent achieved in the third quarter of fiscal year 2020-21, the year on year earnings growth has been on the downtrend on an aggregate basis for the companies it tracks, said the brokerage firm. Supply chain disruption continues to take a toll on company margins due to increased raw material costs and limited scope to pass this on to the consumers.

However, improved doctor-patient connection in domestic formulation and the revival of non-Covid medicine are expected to offset the drag, to some extent. “Overall, we expect sales to increase three per cent year on year to Rs. 541 billion; EBITDA is expected to decline 2.8 per cent YoY, while PAT would be flat YoY,” it said.

It expects the growth in the domestic formulations segment in the quarter ended September, 2021, to normalise to12 percent YoY at the aggregate level for the companies under its coverage. Therapy-wise, the anti-infectives, gastrointestinal, respiratory and pain segments are seeing strong growth owing to improved patient-doctor interactions and favourable seasonal changes as well as partly on account of the low base of the past year.

The report expects Dr Reddy’s Laboratories to see 20 per cent YoY growth in the quarter, led by a ramp-up in the products acquired from Wockhardt as well as Covid product sales, which was absent during the same period last year. It also expects IPCA Lab, Ajanta Pharma, Sun Pharma and Alkem to grow 18 per cent, 16 per cent, 15 per cent and 14 per cent YoY respectively. For IPCA, the outperformance in pain and analgesics market would be helpful, while Ajanta Pharma will benefit from an all-round strong growth across therapies, especially in ophthalmic study on a low base.

For Sun Pharma, improvement in chronic therapies as well as incremental benefits from the MR expansion, and for Alkem, outperformance in acute therapies, will help to achieve the predicted growth.

With continued pricing pressure in the base portfolio in the US, the US sales during the quarter is expected to decline 2.5 per cent YoY to $1.8 billion. Approval for the companies it covers has also declined to 33 as against 35 during the first quarter. This has reduced companies’ capabilities to offset the higher price erosion with new launches and delays in the US Food and Drug Administration inspection may lead to nine per cent YoY decline, which will be a further impact to the companies.

The power crisis and factory closures in China have resulted in a lot of uncertainty in terms of active pharmaceutical ingredients (API), intermediates and others for which India is heavily dependent on China.

Divi’s Lab and Gland Pharma are expected to outperform their peers in the quarter, it said. For Gland Pharma, the continued ramp-up in rest of the world sales, normalisation of US sales and some sales of Covid products which were absent in the same quarter last year will be beneficial, with an expected earnings growth of 34 per cent. For Divi’s Lab, the continued traction in CRAMS, a ramp-up in the production of investigational Covid drug molnupiravir, and increased capacity utilisation are expected to drive the growth, it added.