Pharma sector’s profitability likely to decline

Lower demand for API and normalisation of operational expenses expected

Pharma, which has been one of the very few sectors that have performed well in the past quarter, may not be able to sustain the performance in the coming quarters. While domestic sales will improve with lifting of the lockdown, moderation in API demand and normalisation of operational expenses will affect profitability.

The healthy performance of Q1 FY21 is attributed to the strong revenue growth in the API business and lower operating expenses. The API business revenue grew 31 per cent year-on-year basis and 18 per cent q-o-q in Q1FY21 as demand from global and Indian formulation players remained robust, aided by higher pricing opportunities, according to India Ratings and Research.

Indian API players benefited due to the thrust on supply chain continuity from customers and better inventory management in view of supply disruptions from China and the run up in the prices of API. Increased stocking by different channels also supported growth.

However, the growth in the API business will taper off in the near term as companies normalise their buying patterns. IndRa also expects a price correction as the sudden demand normalises.

Further, operating expenses, primarily led by the 19 per cent q-o-q decline in the selling expenses, too would normalise. The restricted movement of medical representatives and other cost savings like lower promotional expenses due to the lockdown led to the operating expenses declining 8 per cent y-o-y and 19 per cent q-o-q in Q1FY21 and had aided profitability.

According to Fitch Ratings, focusing on optimising direct costs and reducing fixed costs, including those related to travel and sales and marketing, helped many companies report resilient margins in Q1FY21.

Post-lockdown, as competitive pressures rise, companies will eventually revert to in-person engagement with prescribers. Though the companies had cut some expenses with manpower rationalisation and expense curtailment, the overall sustainable cost reduction is unlikely to exceed 10-20 per cent finds Ind-Ra.

However, Fitch Ratings believes that sales will rise after a gradual easing of the lockdown measures that caused disruptions across most markets in

April-June. The gradual easing has led to a rise in doctor visits and elective procedures since May in key markets. This will benefit sales, particularly in acute therapy areas.

Nevertheless, sustained price erosion in the US generic pharmaceutical market continues to weigh on profitability.

“Focus on conserving cash by limiting capex and R&D spending in the near term will support their financial flexibility in the current environment,” finds Fitch.