In Q1FY22  India Ratings and Research (Ind-Ra), pharmaceuticals coverage universe saw strong sales and EBITDA growth on a year-on-year (yoy) basis due to robust growth in the domestic formulations business, led by the last year’s low base (Covid-19 lockdown) and revenue contribution from Covid-19 drugs, while the US business was weak. Overall, the top line grew by 16.1% year-on-year (yoy), and up 8.6% quarter-on-quarter (qoq), led by the healthy performance shown by some of the domestic formulations focused companies. The rest of the world (RoW) and contract research & manufacturing services business have also delivered healthy growth while active pharmaceuticals ingredients (APIs) performance has been muted during 1QFY22

Strong Show in Domestic Formulation Business; up 41.9% yoy and 27.7% qoq: Ind-Ra believes the strong performance of Ind-Ra rated companies in Q1FY22 with domestic business up 41.9% yoy and 27.7% qoq was on account of a) increased interactions between patients and doctors along with a rise in marketing activities by pharmaceutical companies, b) revenue contribution from Covid-19 related products (Remdesivir, Favipiravir, Amphotericin B and Tocilizumab) and supportive therapy such as vitamins/anti-infective/antiviral, and c) lower base in 1QFY21 led by the Covid-19 related nationwide lockdown. As per AIOCD-AWACS, Covid-19 drugs sales stood at Rs 592 billion in MAT July 2021 against Rs 468 billion in MAT June 2021 with a growth of 26.3% yoy. The acute segment benefited due to the use of anti-infective drugs in COVID-19 treatment and hence saw stronger performance than the chronic segment.

With the easing of lockdown restrictions, Ind-Ra expects the Indian formulations business will grow 8%-10% yoy in FY22, driven by the lower base in FY21, higher growth delivered in April and May 2021, the sales contribution from Covid-19 related products and normalised-but-healthy growth seen in June and July 2021.

Strong Acute Therapies Stage Recovery in 1QFY22: A recovery was observed in 1QFY22 in acute therapies such as anti-infective, gastro-intestinal, vitamins, analgesic and gynaecological therapies.

US Generic Business Delivered Weak Performance: The US generic business sales fell 5% yoy and 6% qoq in 1QFY22, attributed to a high single-digit price erosion in the US generic market coupled with continued weak demand for the acute portfolio of products during 1QFY22. Ind-Ra however expects the US market to grow over the near to medium term, based on new launches and calibrated R&D investments approach towards complex molecules which could witness a lower impact of price erosion than plain vanilla oral solid products.

Healthy Growth in RoW Sales: The RoW business sales grew 12.5% yoy, though fell 1.1% qoq, in 1QFY22. Ind-Ra expects the RoW markets to witness volume growth in double digits in the coming quarters, as the vaccination drive accelerates in these markets.

 The analysis is based on the reported segmental results of 13 large pharma companies.

API Business Delivered Subdued Performance in 1QFY22, post-Healthy 4QFY21: Ind-Ra has seen API stocking (1HFY21) and Key Starting Materials supply disruption in the past quarters, leading to API companies’ revenue growth declining 2.4% yoy and almost flattish qoq performance in 1QFY22. Companies are seeing stability in raw material pricing. The supply chain has fairly stabilised now and companies are looking at building higher capacities in this business by taking advantage of the government’s Performance-Linked Incentive Scheme. 

US Price Erosion and Lower Margin COVID-19 Drugs Impacted EBITDA Margins: Ind-Ra witnessed EBITDA growth of 14.8% yoy in 1QFY22, led by improved operating leverage and covid-19 related products sales contribution in India formulations business. Given lower margins profile of Covid-19 portfolio and price erosion in the US business, EBITDA margins remain largely flat yoy at 23.1% against 23.6% in 1QFY21 (4QFY21: 21.2%) which offset strong growth in high margin non-covid-19 domestic business. As there is relaxation in lockdown across the country and reaching normalization of overall marketing activities in domestic business, agency believes there would be an increase in other operating costs related to marketing activities to pre-covid-19 levels.

Ind-Ra expects companies to continue to report EBITDA margin around 20% in FY22.