Image Indian pharmaceutical firms are likely to post a decline in earnings growth for the quarter ended 31 March as they take a hit from mark-to-market and foreign exchange losses and regulatory action in export markets.

With top players set to announce results this week—beginning with Wockhardt Ltd on 21 April—the average growth in sales in the sector for the quarter is likely to be less than 11%, compared with 14% for the corresponding quarter last year.

Declining sales: A scientist works in a Sun Pharmaceutical laboratory in Mumbai. The average net profit of the Top 10 listed drug makers in India, including Sun Pharmaceutical, is likely to increase by around 9%. Bloomberg.

The projection is based on a Mint analysis of results previews by five brokerages—ICICI Securities Ltd, Motilal Oswal Securities Ltd, Angel Broking Ltd, Prabhudas Lilladher Pvt. Ltd and Sharekhan Ltd.

The review showed that the average net profit for the Top 10 listed drug makers—including Ranbaxy Laboratories Ltd, Cipla Ltd, Sun Pharmaceutical Industries Ltd, Dr Reddy’s Laboratories Ltd, Aventis Pharma Ltd, GlaxoSmithKline Pharmaceuticals Ltd, Piramal Healthcare Ltd, Wockhardt Ltd, Cadila Healthcare Ltd and Lupin Ltd—will increase only by 8.8%.

Ranbaxy, the country’s largest drug maker, controlled by Japan’s Daiichi Sankyo Co. Ltd, will likely post a net loss, largely on account of forex losses and a ban on sales in the US on a chunk of its drugs.

Increased interest cost on outstanding foreign currency debts, mark-to-market (MTM), losses and a high income base effect from the corresponding quarter last year are the key reasons cited for the decline in profits. Market-to-market is an accounting practice that values an asset or a liability at current market prices and not at cost.

For several companies, regulatory action in the key export markets such as the US and Europe, coupled with shrinkage in the domestic markets is expected to have had an adverse impact on revenues.

“Operationally, the growth will be strong for Indian pharma companies. The numbers from January to March have been pretty good for the Indian market at least,” said Hemant Bakhru, a pharma analyst with the Hong Kong-headquartered stock broking firm CLSA Ltd. “The export margin will benefit due to the depreciation of the rupee, though concurrently there will be forex losses for companies like Ranbaxy, Biocon (Ltd) and Cipla.”

“With the rupee depreciating by 6.5% in the quarter-on-quarter comparison, many pharmaceutical companies would face MTM transnational forex losses on outstanding foreign currency loans and hedges,” said Motilal Oswal’s preview on pharma earnings.

For example, Ranbaxy and Jubilant Organosys Ltd are likely to report significant MTM losses on foreign currency loans and hedges, though the exact quantum of such losses will depend on the closing rupee-dollar exchange rate on 31 March, the Motilal Oswal report said.

The expected growth of the pharmaceutical companies is lower than that seen in the previous quarters due to a general slowdown in the domestic market—which moderated to 10.8% in this quarter compared with 12-14% in the preceding quarters—and the high base of the year-ago quarter for companies such as Sun Pharmaceutical and Glenmark Pharmaceuticals Ltd, said an earnings analysis by Sharekhan.

During the January-March quarter of 2008, revenues of Sun Pharmaceutical and Glenmark were boosted by their exclusive marketing rights in the US. For Glenmark, a one-time milestone payment that it received from licensing its original research molecules was added towards overall revenue in that quarter. This time, however, there are no such gains.

Sun Pharmaceutical’s revenue from the US market was boosted in the 2008 January-March quarter by its six-month exclusive right in the US generic market for three drugs—Oxcarbazepine, Pantoprazole and Ethyol.

Glenmark, too, had recorded a high margin in the year-ago quarter due to the receipt of milestone income and Oxcarbazepine exclusivity in the US.

In the quarter under review, Sun Pharmaceutical’s US sales, however, were affected following the US drug regulator’s action against its US subsidiary Caraco Pharmaceutical Laboratories Ltd. The regulator held up all new drug approvals for Caraco, though its sales by sourcing products from India remained unaffected.

In the case of Cadila Healthcare Ltd and Torrent Pharmaceuticals Ltd, Sharekhan said, rising staff costs and foreign exchange losses on trade receivables would cause margin pressure.
Ranbaxy will also see declining US revenue and the impact of the import alert will be felt this quarter. For Sun Pharmaceutical, Caraco will be weak since there have been no fresh drug approvals for the company in the US, said Bakhru of CLSA.

The higher interest and depreciation costs (due to acquisitions and/or expansion in capacities) would also affect profits of Cadila, Orchid Chemicals and Pharmaceuticals Ltd, Ipca laboratories Ltd and Opto Circuits India Ltd.

According to another pharma analyst in Mumbai, who didn’t want his firm or himself to be identified, companies with a presence in India and the US will do well but those with high exposure in emerging markets will continue to feel the pinch of trade-level destocking and cross-currency fluctuations.

“Overall, it will be a mixed quarter. Aggregate numbers will not be impressive because three large companies—Ranbaxy, Glenmark and Sun Pharma—will report lower numbers,” he said.