Q1 preview: US growth likely to boost pharma sector’s performance

The drug companies’ performance in the first quarter of fiscal 2022-2023 will be largely supported by US sales, new launches, US drug shortages and stable prices; Besides India’s healthy performance, analysts said. Most brokerages estimate headline growth in the line at 14-15 percent, with Ebitda growing 24-30 percent or so in the first quarter of fiscal ’24.

Meanwhile, hospitals are likely to report lower occupancy rates and diagnostic companies are also likely to see an impact from the late monsoon.

According to JM Financial Natco Pharma, Dr. Reddy’s Laboratories, Sun Pharmaceutical Industries and Zydus Lifesciences are likely to sequentially increase or maintain their overall Revlimid shareholding, largely driving sales on a lower base. Revlimid is a drug used to treat multiple myeloma and is a class of immunomodulating drugs that work against cancer cells in part by supporting immune system function.

JM Financial analysts further noted that Dr. Reddy’s laboratories will consolidate Mayne Pharma (the main asset is Nuvaring – a contraceptive), which will help the growth of the Hyderabad-based company. Nuvama Research felt that generic Revlimid and specialty sales would partially offset Halol’s effect. On the other hand, Aurobindo Pharma analysts saw volume recovery and input cost advantages.

As for the domestic market, poor monsoon season is likely to spoil sales of Acute Remedy. Analysts felt that this plus the effect of price control may dampen the growth of the India market for pharmaceutical companies in Q1 FY24. Players with a heavy portfolio like Alkem will feel the effect. Nuvarma Research said it expects 8 percent year-over-year growth in the home market — with Torrent Pharmaceuticals (10 percent) and Cipla (9 percent) leading here.

Analysts also expect double-digit export growth excluding the United States, and bulk drug cost easing to help gross margins. Some of those marginal benefits will likely be reflected in the coming quarters. ICICI Securities noted in its report that the drugmaker’s gross gross margin is improving marginally quarter-over-quarter (250 basis points year-over-year) at 64.8%.

ICICI Securities said the surge in occupancy and average revenue per occupied bed (ARPOB) is likely to help hospitals report revenue growth of 3 percent, while earnings after tax of 19 percent, respectively. As hospitals invest in expanding their network, inpatient and surgical cases will help generate cash flow.

Nuvama Research said that while they expect a sequential decline of 200 basis points in occupancy sequentially for both Fortis Healthcare and Apollo hospitals, steady ARPOBs and fast-discharge operations should lead to 11 percent year-over-year growth. “HCG posted its best quarter and continued growth momentum (5 percent quarter-over-quarter),” she said.

“In diagnostics, we expect Vijaya to outperform 16 per cent non-COVID growth year-on-year, which is mainly volume driven. However, Dr Lal Pathlabs reported 11 per cent growth led by 8.5 per cent volumes. and 2.5 percent of achievements,” Novama Research said.

With non-Covid testing doing well, improved pricing and network expansion will drive revenue and margin growth for the diagnostics companies, the analysts felt. Covid-led testing accounted for 4% of Dr Lal’s, 7% of Metropolis Healthcare and 3% of Vijaya Diagnostics’ revenue in Q1 FY23 versus 14%, 17% and 15% respectively in Q4 FY22, As indicated by ICICI Securities.