Bright outlook: Drug firms set for Q3 health boost

Domestic drug sales in December indicated that the third quarter of the ongoing financial year is going to result i n earnings growth recovery for the sector. Analysts expect earnings growth to be in the range of 30-40 per cent for drug firms owing to both domestic recovery as well as strong export opportunities.

Edelweiss said it expected 30 per cent profit after tax (PAT) growth for the sector and around 8 per cent growth in revenues for the December quarter. On the other hand, analysts at Phillip Capital estimated a 43 per cent earnings growth year-on-year (YOY) (down 2 per cent sequentially) on the back of a 10 per cent YOY rise in revenues.

Kunal Randeria, analyst at Edelweiss Securities, felt that with easing lockdown restrictions and field force activity picking up, domestic market recovery is in sight.

According to Randeria, companies like Cipla, Cadila Healthcare and Glenmark are expected to report strong growth, driven by their Covid-19 portfolios. “While field force activity has resumed, it remains below pre - Covid-19 levels,” he said.

Analysts like Randeria pointed out that while Nifty Pharma has generated 60 per cent returns in the past one year, the strong earnings momentum is needed to sustain the pharma rally.

On the exports front, Phillip Capital said that Covid-led disruptions in key markets like European Union (EU) and the US have not only boosted export opportunities for Indian pharma, but also improved the pricing trend. A case in point is Sun Pharmaceuticals' increased contribution from speciality portfolio (particularly the over 50 per cent contribution of Ilumya and Cequa).

Cadila Healthcare, too, has seen over 30 per cent growth in the complex specialty drug category (mesalamine potfolio. Drug is used to treat irritable bowel disease). Lupin has launched albuterol (a respiratory drug) in the US. (see chart)

However, no major US launch is in sight and the flu season, too, is weak. For some firms like Cadila Healthcare and Cipla, Edelweiss analysts feel their domestic revenue growth would be strong — around 10 per cent YOY for Cadila Healthcare, and 13 per cent for Cipla.

Another important aspect to watch out for in December is the operational cost. As Motilal Oswal analysts pointed out, operational costs will be higher for the domestic formulations segment, impacting the overall profitability of pharma companies sequentially. This is because with the field force back in business, marketing and sales costs would increase.

Motilal Oswal analysts feel that with more clinics opening up and rising out-patient consultations, the overall outlook is positive in the Indian pharma market.

The domestic pharmaceutical market ended 2020 with a positive prognosis, clocking 8.5 per cent growth in December. This is a sharp revival from November ’s 1 per cent, owing to revival in volume growth. For the calendar year 2020, however, growth rate slowed to 3.1 per cent compared to the previous year, when it had clocked 9.4 per cent growth. Sheetal Sapale, president, marketing, AIOCD AWACS, a market research firm, said that 2020 had been a challenging year for many industries, but the Indian pharmaceutical market had met this challenge head- on with a positive growth record. “The encouraging trend lines in the past few months are hinting at near-normal revival for most players,” said Sapale.