ImageThe pharma sector is expected to be an underperformer during the fourth quarter of FY09. The growth in revenues and earnings is likely to be lower than that observed in the previous three quarters of the fiscal.

High base-year effect for some companies, delay in US FDA approvals, lower demand in the exports market, increase in the receivable days and high interest cost for companies in debt are likely to adversely affect companies’ profits. Some respite is likely to come from the rupee depreciation of around 5% and easing off of raw material costs. With AS11 no longer mandatory, drug makers are not expected to report MTM loss on their foreign exchange borrowings.

Average estimates of leading seven pharma companies by ETIG and five brokerages indicate 43% drop in net profits during the quarter ended March 2009, against the corresponding quarter in the previous year. Revenues are expected to increase by a modest 6% y-o-y. The net profit margin is estimated to drop by 957 bps to 11.4% for the quarter ended March 2009.

While Ranbaxy is estimated to report a loss due to its ongoing issues with US FDA, companies like Sun Pharma, Piramal Healthcare and Dr Reddy’s are likely to report a significant drop in their profits. In absence of exclusivities that were enjoyed during the fourth quarter last year, Sun Pharma is likely to report a drop in revenues and earnings. DRL’s profits are likely to be dented on account of writeoffs by its German subsidiary. Piramal Healthcare is expected to report a drop in profit due to one-time writeback of NCE research expenses in Q4 FY08.

While the pricing pressures in overseas markets of Europe and North America continued, the quarter also witnessed increase in US FDA’s scrutiny of the regulatory compliance practices followed by domestic pharma companies. Many Indian companies are now facing increased inspection and enquiries by the US healthcare agency.

The quarter ended March is the fourth quarter for most pharma companies. Hence, the companies would try to put their best figures forward. While the demand at the retail level is under pressure, it may not be immediately reflected.

This is because companies have pushed up their primary sales at the stockist level. The current quarter ended June may show a better picture of the demand strength in the domestic and export market. Nevertheless, Sun Pharma, Cipla, Cadila Healthcare, Piramal Healthcare and Lupin are companies to look out for.