- Shares of most pharmaceutical companies delivered negative returns for investors in 2022.
- Analysts say this is because the industry is struggling after Covid-19 as the margins reported during FY21 (peak of Covid-19) are not likely to repeat.
- In addition, softer generic prices in the US are also impacting corporate income.
The fortunes of pharmaceutical companies have deteriorated as peak demand abates during the Covid-19 pandemic. High freight costs and pricing pressures in the key US generics market have taken a heavy toll on Indian drug companies’ margins.
However, analysts are confident that companies will regain some of their luster in the second half of the current fiscal year.
After a successful run in the Covid-19 period that brought fortunes for pharmaceutical companies, the dynamics have changed. There is no longer a constant need for drugs and vaccines, and this has led to a slowdown in the industry.
Shares of the majority of pharmaceutical companies have also taken a beating on the exchanges – the decline has been strong so far this year, many in the double digits. Over the same period, the Nifty Pharma index fell 10.98%, while the broader Sensex remained flat.
|Pharmaceutical companies||% change in 2022|
|Sun Pharmaceutical Industries||4.64%|
|dr. Reddy’s Laboratories||-12.77%|
Cost pressure builds after Covid-19
Analysts say drug company performance is on a downward trend due to cost pressures, freight charges and pricing pressures in the US generics market. Note that the US is the most profitable market for pharmaceutical companies. It is the leading export destination for industry, accounting for nearly 34% of total Indian exports in FY22, which grew by 2% in dollar terms. Meanwhile, exports to the rest of the world (ROW) witnessed a 7% decline, according to a report by CareEdge, a rating agency.
With the normalization of Covid-19 related drug costs, the industry suffered a decline in profit margin in FY22 compared to FY21.
“Apart from that, the US generics market saw a strong increase in competition and consequent price erosion, which also impacted the profitability of the Indian pharmaceutical industry during FY22. However, the negative effect of price erosion on profitability was partly offset by the depreciation of INR against USD,” the CareEdge report said.
June’s recent quarterly performance also reflected weakness in the sector. “Quarterly performance was largely weak for our coverage universe, resulting in a sharp margin squeeze and profit decline. Performance was affected by increased cost pressures resulting from high raw material costs, freight costs and higher operating costs led to margin contraction,” said a report from Centrum Institutional Research.
Another reason for the poor performance is a high base due to strong demand for Covid-led products in Q1FY22. “With continued cost pressures, the Indian pharmaceutical space is struggling,” the report said.
Industry outlook continues
Analysts believe the sector will recover. They expect US sales to normalize in the second half of the current fiscal year (FY23).
“We expect the pharmaceutical sector to continue its strong growth trajectory on a disrupted basis. The Indian pharmaceutical market (IPM) is expected to report growth of approximately 10-12% in FY23, and we expect US sales to normalize in H2FY23, with recovery in wave three, followed by inventory improvement,” the statement said. Center Institutional Research report.
However, continued price pressures in the US market have “reduced sequentially, growing by mid-single digits compared to the double-digit price erosion in Q4FY22,” the report said.
Meanwhile, short-term headwinds such as factory inspections by the US drug regulatory agency — the FDA — may drag down short-term performance, but long-term growth prospects remain intact, Centrum analysts said.
“On a full-year basis, CareEdge expects the PBILDT margin (earnings before interest, lease rent, depreciation and taxes) to contract 200-250 basis points from FY22 in FY23, after taking into account the positive impact of asset impairment. rupee. Despite the expected moderation in operating profitability in the near to medium term, the credit profile of pharmaceutical companies is expected to remain strong due to their low reliance on external debt,” according to a report from CareEdge.
$NIFTYPHARMA.NSE – To stay on the radar The first signs of trend change in the pharmaceutical sector are visible… The price has risen from an important level (important since the last 5 years)…. The bearish patterns are slow turning to bullish pattern (see chart)… Bullish patterns seen- Inv. H&S Rounding Bottom Double Bottom with Higher Lows Baseline Technically, the second sign of bullishness will be cross and close above 13200.
— (@PHIstocks) Sep 08, 2022
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