New Delhi : The BSE Healthcare index has lost over 16% as compared to 4-5% fall in the Sensex, reflecting the fall in investor confidence in pharmaceutical companies following the outbreak of the Covid-19 pandemic.
The poor performance of the pharma sector was mainly on account of cost pressures due to rising raw material prices, which in turn impacted profitability. The US business of most companies was not yet over, even as they faced high competitive intensity, which affected margins and earnings growth. Though the outlook for the domestic pharma business remains good, high-based companies have been feeling the heat last year.
The sluggish growth of pharma companies in May indicates that the pressure will remain in the short term. The Indian pharma market (IPM) fell 3.3% in May from a year ago to 4.8% in April. The decline was led by a higher base. Higher sales of products from the acute segment a year ago were due to the spread of COVID-19, which led to an extraordinary growth of 47.8% year-on-year in May 2021.
A report by India Ratings and Research (Ind-Ra) said that the 3.3% decline in revenue in the domestic market is due to fall in sales volume in acute segment treatments, such as anti-infectives, vitamins and respiratory products. May 2021 base effect, and inventory correction.
The pressure may continue in the near future. Ind-Ra said last year’s higher base will continue to impact growth in Q1 FY23.
Notably, the base for FY22 also remains high. FY22 IPM witnessed sales growth of 15% year-on-year, which was higher as compared to 8-10% in FY18-FY22.
In fact, the performance of pharma companies in Q4FY22 continued to show the impact of rising costs. Sharekhan analysts said, “Q4FY2022 was a weak quarter for pharmaceutical companies under our universe, impacted by higher cost pressures on account of raw material and freight costs.” Higher pricing pressure in the US (price erosion was in double digits for select regions) also increased margin pressure, he said.
Pharma companies were under pressure due to rising costs for the third consecutive quarter in the fourth quarter of FY22. The cost of key materials increased mainly due to the energy crisis in China, logistical constraints due to container availability and the COVID lockdown in China, leading to supply disruptions. In addition, marketing and promotional expenses which were reduced during COVID, have now returned to normal levels with the opening up of the Indian and global markets. This resulted in a 220 basis points decline in operating margin year-on-year.
Analysts say cost pressure on margins will continue. The hike in prices is on the cards which will offset the impact of increase in raw material prices, he added.
For companies with more investments in the US market, the price drop continued to hurt due to increased competition. Analysts await new product launches in the second half to minimize the impact.
Analysts at a foreign brokerage, who asked for anonymity, said US pricing was down 2%, which, if continued, was higher in FY12 from the 10-11% seen in FY12. a manageable 7%.
Ind-Ra expects mid-to-high single-digit growth for IPM in FY23 on the back of a price hike (around 10% in some categories) for IPM, and strong seasonal trends.
Analysts at Sharekhan said the near-term is likely to be unfavourable, however, the valuation is fair.