Rising costs may shrink earnings of domestic pharma companies – Times of India

MUMBAI: Domestic pharma companies are facing headwinds from rising input and logistics costs, which could impact earnings over the next few quarters. Already reeling from a jump in costs on account of freight, logistics and raw materials over last few months, the companies now face even higher expenses due to the ongoing geopolitical tensions, shutdowns and supply disruptions from China.
To add to the woes, drug launches in the US — the most lucrative market for domestic firms — have been limited, resulting in muted sales. Overall, the pharma market grew at a robust 12% year-on-year (YoY) in the first two months of Q4FY22, according to research firm IQVIA.
A majority of companies are expected to report a high single- to double-digit revenue growth but with weaker margins due to the pressure on costs, a note from investment group CLSA said. Industry experts said operating margins for companies in the fourth quarter could decline from 100bps to 300bps (100 basis points = 1 percentage point). A muted quarter in the US along with margin headwinds due to cost pressures would result in ebitda (earnings before interest, taxes, depreciation & amortisation) margins declining cumulatively for the industry by 100bps, the note added.
“Biocon is the only company where we expect a mid-20s growth, mainly driven by pickup in its Glargine sales to the US. Cadila Health and Dr Reddy’s are likely to grow 3-5% due to weak US and decline in Russia business respectively. Aurobindo is the only company likely to report a YoY growth decline,” the analyst added.
Over the last two years, vital raw materials imported from China witnessed supply disruptions and huge price hikes since the start of the pandemic. Prices of key starting materials and solvents were likely to cool off by the fourth quarter as production in China was expected to normalise. However, the ongoing geopolitical tension due to the Russia-Ukraine war has led to a sharp rise in crude, impacting all inputs.

“The price of a key ingredient used for a widely-sold antibiotic has skyrocketed around 40% in the last month. Once the inventory is exhausted, we will have to procure it at the steep price,” a company official told TOI.
Larger players like Sun Pharma, Torrent Pharma, Cipla and Abbott India, with a higher branded market exposure and chronic therapy focus, may be better placed to protect margins through gradual price hikes, analysts said.
Further, foreign exchange reversion could help in mitigating the impact for certain companies. “Sequentially, spot average Indian rupee has appreciated against key trading currencies, at -16.6% vs the Russian rouble, -1.7% vs the Japanese yen and -1.5% vs the euro. The Indian rupee has depreciated for the rest of the currencies, namely, 0.4% vs US dollar (75.18), +1.5% vs South African rand, and +2.4% vs LatAm currencies (Brazil, Mexico, Argentina). Dr Reddy’s has the highest exposure to Russia/Ukraine (around 12% of sales), but resilient drug demand, foreign exchange reversion and currency hedges should mitigate the impact,” a note from Morgan Stanley said.