June quarter earnings of pharmaceutical companies have left a sour taste for investors, with the Nifty Pharma index falling about 7% since the results season began in mid-July. But the underlying trends indicate continuing recovery in the key US market. Indian companies gained volume market share capitalizing on drug shortages. With growth in the domestic drug market rebounding in July, sustainability of the positive momentum is crucial now.
Of course, not everything is hunky-dory. A below-par performance in India and other emerging markets, and prospective delays in launches of big-ticket products have, in fact, soured investor sentiment lately.
But US revenues of large companies, such as Sun Pharmaceutical Industries Ltd, Dr Reddy’s Laboratories Ltd and Lupin Ltd, remained strong. Sun Pharma and Lupin clocked healthy double-digit growth in US revenues for the second consecutive quarter. “Overall, the US pie continued to register growth on the back of volume gains, waning base business price erosion, new launches and certain one-time sales, besides currency tailwinds,” analysts at ICICI Securities Ltd wrote in a results review note.
Sales in India, which lagged in the June quarter, were showing signs of a recovery. Domestic sales grew 13% in July after two months of weakness.
Jefferies India Pvt. Ltd cautioned that the government’s push to generic drugs can weigh on domestic growth. “While the Jan Aushadi scale is still small at around 1% market share, it is gaining traction. The scheme would be a medium-term threat to sector margins/valuations if the government increases focus and spend,” it said in a note.
Even so, given the companies’ focus on branded products and new therapies, total sales in the domestic market are estimated to grow steadily. Combine this with improvement in US revenues and cost-cutting, and analysts expect earnings to stabilize or improve from hereon.
“Financially, things are looking much more stable,” added ICICI Securities. “However, resurfacing of regulatory issues raised by the US Food and Drug Administration and the looming generic generics (Jan Aushadi) threat in the domestic formulations would continue to weigh on sentiments.” – Livemint