Indian pharma sector’s quarterly performance continues to be healthy, but unlikely to sustain

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Stable EBITDA margins on a quarterly basis as revenues increase gained momentum. EBITDA margins expanded around 300bp yoy during both 2Q and 1HFY21

Indian pharmaceutical companies may not sustain the healthy operating margins reported during 2QFY21 and 1HFY21 tough the quarterly performance of them is on a healthy ground said a report.

As global buyers of Indian active pharmaceutical ingredient (APIs) curtail their purchases due to channel filling in past quarters, the API business will decline on a quarterly basis. Other expenses could also sharply jump, said a report in India Ratings and Research (Ind-Ra).

“Stable EBITDA margins on a quarterly basis as revenues increase gained momentum. EBITDA margins expanded around 300bp yoy during both 2Q and 1HFY21. The healthy performance during 2QFY21 is attributed to improving revenue growth in key geographies of India and the US with cost optimisation initiatives continuing albeit with lower intensity,” said the rating agency in its report.

The key formulation business in India and the US reported both yearly and quarterly revenue improvement during 2QFY21. The India business growth was led by the increased number of prescriber interactions with patients and increased sales and marketing activities by pharmaceutical companies with unlocking.

“Growth was also led by higher sales of COVID-19 related products and the continued outperformance of chronic therapies,” said Ind-Ra.

The US business growth was led by improving market shares in key products and lower incidence of price erosion in the generic market. RoW markets also witnessed an improving performance, led by higher sales of COVID-19 products and unlock phase in respective countries.

As the unlock phase gains momentum globally and in India, Ind-Ra expects a quarterly revenue improvement in these businesses. The analysis is based on 14 large pharma companies and basis the segmental results reported by these companies.

The strong growth in the API business in the past was primarily attributable to the export business. Indian API players benefited due to the thrust on supply chain continuity from customers and better inventory management in view of supply disruptions from China and the run up in the prices of APIs, said the firm.

Ind-Ra notes that supply chain has fairly normalised now. While these factors will play out gradually over the medium to long term, Ind-Ra expects the growth in the API business to taper off in the near term, as companies normalise their buying patterns.

“The price correction to play a role, as the sudden demand had led to the prices of some APIs increasing significantly which Ind-Ra expects to normalize,” said Ind-Ra.

The decline in the operating expenses was primarily led by the decline in selling expenses during 1QFY21 due to the curtailed travel costs and promotional expenses amid the lockdown. As companies guide towards a significant proportion of the field force now back on ground, expenses will continue to increase, said the rating agency.

While companies have communicated to Ind-Ra that a significant proportion of savings is sustainable with the use of digital tools to reach out to internal and external customers, Ind-Ra opines otherwise, as competitive pressures may lead companies eventually reverting to in-person engagement with prescribers. The quarterly increase in raw material expenses has been a function of higher sales in key geographies.  Gross margins were stable during the quarter, it said.

Recovery was observed in acute therapies such as anti-infective, vitamins and analgesic which contribute only a small part to the consolidated sales. For October 2020, a broad-based recovery across therapies was observed.

Image credit: The Indian Express

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