With saturation in export markets and rising regulatory constraints, will we see a refocus on the domestic market, prodded by schemes like Ayushman Bharat?
One man’s medicine is another man’s poison. So while the falling rupee benefits sectors like pharmaceuticals with a large export component, it has an adverse impact on importers. Which is why it is not a surprise that a recent HDFC Securities analysis finds that the odds are in favour of this sector. A preview of 2QFY19 results of 18 pharma companies under their coverage, predicts that this will be the fifth straight quarter with a positive sequential top line growth for their coverage companies. With an approximate nine per cent fall in rupee and stabilising US base business, coverage EBITDA margin is likely to increase 130bps QoQ (20.2 per cent) in 2QFY19. Companies which have a strong CRAMS portfolio like Divi’s Laboratories, Suven Life Sciences and Jubilant Life Sciences are likely to report strong numbers in 2QFY19, benefiting from the falling rupee.
But year on year, the universe growth would remain subdued at 6.7 per cent, with margins to decline on a high base of 2QFY18, which was affected by restocking due to the roll out of GST. Some good news is in store once the US regulatory issues get resolved (for example, Sun Pharma’s Halol plant). With continuing consolidation at the manufacturer level to continue in the US and withdrawal of non-profitable products by key US generic companies, HDFC Securities believes Indian companies should start reporting substantial improvement in their operational performance from 3QFY19. In fact, it expects pharma stocks to outperform in 2HFY19. Except for DRL, which will witness price erosion in its US base business, the report anticipates improved performance by large generic companies in 2QFY19.
How will government initiatives like the Ayushman Bharat scheme, which rolled out this September, impact pharma companies in India? While such schemes will definitely increase healthcare penetration in India, will pharma companies be likely to see this as a good opportunity? Experts point out that as the profitability of the domestic pharma industry kept reducing over the years, with EBITDA margin dropping from approximately 30 per cent to approximately 18 per cent, domestic pharma companies focused on exports. With saturation in export markets and rising regulatory constraints, will we see a renewed focus on the domestic market, prodded by schemes like Ayushman Bharat? While this is a volumes driven business, with government pushing for lower prices, there are bound to be profits at the bottom of the pyramid.
It’s also common knowledge that some previous high profile initiatives of the government have not been as successful as hoped. One aspect is that the structure has failed to attract the bigger pharma companies. Take for instance the Jan Aushadi stores initiative. Certain pain points in the tendering process have discouraged both MNC as well as domestic pharma companies. The irony is that the same companies are part of the tendering process for major public health schemes like the CGHS, defence and state government schemes. The difference is that the Jan Aushadi tender is a not a rate contract, but a quantity contract, which means that a fresh tender is floated for fresh requirements. Major public health schemes run by other government institutions like the CGHS, etc., are rate contracted for a particular period and have good participation from major pharma companies.
These are aspects which we hope will be rectified as Ayushman Bharat rolls out. At the recently held fourth edition of Healthcare Sabha, a panel comprising senior representatives of both MNC and domestic pharma companies, applauded the spirit behind Ayushman Bharat. They also shared their thoughts on what can be added to the scheme to make it more comprehensive. Do catch the full coverage in a subsequent edition! Booster shot or damp squib, it’s wait and watch for the pharma sector for now.