Pricing pressure, high costs dent pharma companies’ margins

A slump in domestic and US businesses, coupled with increased investment in research and development (R&D), has put a squeeze on pharmaceutical companies’ profit margins. These firms have also guided for muted growth in the current financial year due to continued headwinds in key markets.

Sun Pharma’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margins nearly halved on a yearon-year basis to 17.1 per cent in the first quarter of FY18, while Lupin’s margin came down by 1,100 basis points to 21 per cent in the same period. Aurobindo Pharma and Dr Reddy’s Laboratories, too, have seen a decline in Ebitda margins on lower sales.

While the companies continue to see price erosion in the US market owing to consolidation in distribution channels and intensified competition, domestic sales came under pressure in the first quarter because of goods and services tax (GST) implementation. Except Glenmark, all other top companies saw a decline in domestic sales on account of destocking by distributors ahead of the GST roll-out on July 1.

The strengthening of the rupee against the dollar by about five per cent, too, contributed to the decline in revenue and margins.

At the start of the current financial year, Lupin had indicated that FY18 would be a challenging year. Now, the drug maker has trimmed its margin guidance for the year to 21-23 per cent from 26-28 per cent.

In a post-results conference call, Lupin managing director Nilesh Gupta mentioned higher-than-expected pricing pressure on diabetes drug Glumetza, rupee appreciation, and GST impact as factors for the revision in margin guidance.

Sun Pharma has guided for single-digit revenue decline in FY18 and 20-22 per cent Ebitda margin in the second half of the financial year. “We are aware that this is not what investors expect from us, and we will try to improve,” the company’s managing director, Dilip Shanghvi, said in a conference call after the results.

Increased operating expenses and R&D costs also impacted margins. Domestic companies are investing heavily to build a pipeline of speciality and complex drugs, and these added costs have had a negative impact on margins.

“We have a strong pipeline of products. We have three to four high-quality dermatology launches this year. We have another three to four products where we are second generic. From a revenue perspective, we feel pretty good about the US market,” said Glenmark managing director Glenn Saldanha in a recent interaction.

Sharvil Patel, managing director of Cadila Healthcare, said the GST impact on sales was wearing off but some teething issues would take time to resolve. “We will wait for this quarter to gauge the impact of GST on the domestic market,” Patel said.

Cadila has readied a pipeline for the US, and the company expects to launch at least 40 products in that market in FY18. “There is pricing pressure in the US market due to consolidation and higher number of approvals. We expect high singledigit to low double-digit price erosion to continue in the US market. However, our volumes are steady and our existing business is growing. Further, with the steady flow of launches, we expect our US business to be stable,” he added.

Torrent Pharmaceuticals said there was no slowdown in demand in the domestic market and, therefore, the impact would wear off in the coming quarters. Similarly, Alembic Pharma believes that while domestic sales might not reach pre-April levels soon, recovery is already in motion.

“We expect year-on-year growth in the domestic market between July and December,” said R K Baheti, director of finance, Alembic Pharma. Alembic's domestic sales came in at ~236 crore for the first quarter of FY18 as against ~299 crore for the same period last year.