CEOs are optimists - its how they sleep at night. And in their Q3 earnings calls, most management were upbeat about the outlook for Q4.
But now with the results season, we get to compare promises with reality. Lower-than-expected earnings from heavyweights like Infosys and HDFC Bank have already sent jitters across the market.
This week, we look at analyst predictions for the pharma sector: expected Q4FY22 earnings, and how the rise in input costs, the Russia Ukraine war and other headwinds are likely to affect company bottomlines.
In this week’s Analyticks:
- Pricing pressure in the US market will hit pharma company margins in Q4
- Drug makers with high market share in domestic formulations set for strong growth
- Promising players: Screener for stocks that saw revenue and profits jump in the last quarter, and are rising ahead of Q4 results
Let’s get into it.
Cost pressure, price erosion in US market will compress pharma margins in Q4
Analysts are expecting muted growth for pharma companies in Q4FY22, predicting an average Q4 revenue growth of 7%, and profit growth of 3% YoY.
This tepid profit growth estimates are due to an increase in input costs and intense competition in the US businesses, which are likely to keep margins under pressure.
In addition, the Russia-Ukraine war will impact the topline of companies such as Dr Reddy’s Labs and Indoco Remedies, which get considerable revenues from Russia and Eastern Europe.
Lower revenue growth in the saturated US formulations market will drag overall revenues of pharma companies in Q4FY22.
With the US market losing its sparkle, pharma companies are turning to India to improve their growth opportunities. Indian Pharma Market (IPM) grew 3.9% YoY in Q4FY22. Though product volumes fell 3.3% YoY, it was offset by an average price increase of 5.3% and new domestic product launches.
Price hikes for scheduled drugs makes Indian market more lucrative
India's drug pricing agency, National Pharmaceutical Pricing Authority (NPPA) allowed a price hike of up to 10.7% for price-controlled drugs in April 2022. As a result over 800 drugs, including painkillers, antibiotics, and anti-infectives, which are under the national list of essential medicines (NLEM) will see a price rise. Companies with high exposure to NLEM products like Cipla (30% of its India formulation sales) and Dr Reddy’s Labs (31% of its India formulations sales) will benefit from this price hike in FY23.
On the US formulation business front, analysts expect a muted quarter owing to continued price erosion and limited successful new launches (barring Lanreotide for Cipla and Vasostrictfor Dr. Reddy’s). The US Food and Drug Administration’s (USFDA) drug approvals play a major role in the profitability of pharma companies as margins are usually the highest immediately after approvals and product launches. This is applicable especially for new drugs. Cipla managed to receive five USFDA approvals in Q4FY22 while Sun Pharma and Dr Reddy’s received two approvals each.
Drug makers focusing on India will perform better in market share
Companies like Dr Reddy’s Labs and Aurobindo Pharma, which get significant revenues from the US market, are expected to post muted growth in Q4FY22. Dr Reddy’s revenue growth will be hampered by the ongoing crisis in Ukraine as it gets over 10% of its revenues from the Commonwealth of Independent States (CIS).
Trendlyne’s Forecaster for Aurobindo Pharma expects a revenue fall of 3% YoY to Rs 5,888.9 crore as a result of its heavy reliance on US formulations business, which is intensely competitive. In order to foray into the higher-margin domestic formulation business, Aurobindo Pharma acquired Veritaz Healthcare for Rs 171 crore on March 28, 2022.
Cipla stands out in the pharma pack in US business growth. Brokerages like ICICI Securities and Axis Securities see Cipla’s US business revenue rising 16.5% YoY in Q4FY22 to Rs 1,167 crore in Q4 on the back of strong growth in its respiratory franchise, led by Albuterol inhaler and Arformoterol Tartrate solution.
In the domestic market, Cipla is the market leader in the respiratory segment, which grew 27% YoY overall in Q4FY22. Cipla's revenue is expected to rise 10% to Rs 5,126.5 crore and profit to rise 40% YoY to Rs 577.6 crore in Q4. Analysts see high profit growth mainly due to its product mix shifting towards more remunerative businesses.
Another company that has considerable market share in the Indian formulation segment is Sun Pharma – the largest Indian pharma company. This drug maker is expected to continue its growth momentum in Q4FY22 both in terms of revenue and profit. Analysts expect Q4 profit growth of 90% YoY to Rs 1,711.7 crore on the back of 12% growth in domestic formulations to Rs 2,991 crore.
Revenues from India and the US together form a major part of total revenues for branded and generic formulations companies. Pharma companies are now trying to diversify their revenues by focusing more on emerging markets. However, different regulatory systems in countries pose a hurdle in launching new products at a fast rate, and its going to take time to win market share in these regions.
Screener: Stocks rising ahead of results, with 15%+ YoY growth in previous quarter revenue and net profit growth
Ahead of results, some stocks are showing strong buying interest from investors. This screener shows ten stocks in the Nifty 500 that rose at least 10% in the past month, ahead of earnings. These companies also posted 15%+ topline and bottom-line growth in the previous quarter.
Among the ten stocks, two of them are from the metals and mining sector - Vedanta and Hindustan Zinc. The metals and mining sector is on revival mode since the start of FY22, with export opportunities rising for Indian companies. Metal companies are seeing a steady rise in EBITDA earnings over the year, thanks to rising prices in steel, aluminum, and zinc. Indian steelmakers also look set to gain from increasing metal prices, as supply chain disruptions continue.
You can find some popular screeners here.
