The first quarter performance for the pharma sector is expected to be a mixed bag. There are certain positives in the form of lower input prices, one-time incomes for certain companies and recovery in the global economic situation.
However, there are negatives, such as a 5.6% appreciation in the rupee, delay in approval of drugs and stringent scrutiny by the US Food and Drug Administration (FDA).
Average estimates of leading seven pharma companies by ETIG and eight other brokerages indicate a double-digit growth of 16.3% in net profits during the quarter ended June 2009, against the corresponding quarter in the previous year. Revenues are expected to increase by a modest 6.4% year-on-year (YoY). The net profit margin is estimated to increase by 127 basis points (bps) to 14.9% for the first quarter of the fiscal.
The appreciation in the rupee while having a positive impact in the form of translation gains on foreign liabilities, but it would negatively affect the foreign receivables of most companies in this export-oriented sector.
Most companies, except Sun Pharma and Wockhardt, are expected to report a rise in their revenues and earnings. Sun Pharma's earnings would suffer a YoY drop of 24% on account of lower 'one-time' income from sale of generics in the US during the quarter. Its income would also be impacted by an inventory write-off at Caraco, its US-based subsidiary, which has suffered ban of drugs by the US FDA.
Ranbaxy's operating earnings would remain weak, as the US business continues to see market share losses and limited new launches. Moreover, the company's bottom line is likely to be affected by losses on account of currency fluctuations on its foreign currency convertible bonds (FCCBs) and other derivatives. However, a major support to its earnings comes from the rupee's appreciation, which will result in forex gains for the company.
Dr Reddy's Laboratories (DRL) is likely to post substantial growth in profits due to generic sales from Imitrex and Omeprazole. Cipla is expected to log a stable and healthy growth in revenues and profits, although its earnings are likely to be impacted by the rupee's appreciation.
India and other emerging markets are going to be the growth drivers for many companies in the sector. Companies with majority of the exposure in domestic markets, such as Cipla, Piramal Healthcare and GSK Pharma, are likely to emerge as better performers than their counterparts.
Going forward, the rupee movement, the US FDA's stance towards inspection and approval and richness of the drug pipeline of Indian pharma companies would be key determinants of the performance of pharma companies. Companies with diversified and de-risked business models would prove to be a safe haven for the investors in this scenario.