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Dull Q4FY17 could be a blessing in disguise


20170630ep02According to a report from CARE Ratings on the corporate performance of Q4FY17, the pharmaceuticals and drugs sector in India, growth in net sales in Q4FY17 de-grew by 0.4 per cent, compared with a healthy growth of 8.8 per cent in Q4FY16. The CARE report, based on a universe of 74 pharma companies, shows that many sectors were worse off. For instance, the electronic consumer durables sector saw a de-growth of 21.7 per cent in the same period. Hospitals and healthcare services, based on a study of 17 organisations, growth in net sales in Q4FY17 grew 10.7 per cent, which is good but not as much as the 16 per cent in the corresponding period a year back.

The reasons for the de-growth in sales of the pharma sector are no secret. Some are specific to the sector, like the increasing span of price control, and the shift of at least some sections of the medical fraternity, to prescribing generics. Most government medical colleges and hospitals have started prescribing generics and this will impact institutional sales of some pharma companies. Whether this will even out over time, is anyone’s guess. The US market too is shrinking thanks to regulatory-cum-pricing challenges, points out a Q4FY17 preview report from Sharekhan.

Other factors like demonetisation, have impacted all sectors. And the next few quarters will show slimmer growth rates, with the impact of the roll out of the GST kicking in. Pharma pundits predict a couple of months of destocking, which started impacting sales from April, followed by low supplies until they even out.

The dipping sales revenues and other factors like continued negative rulings from global regulators, have naturally seen pharma stocks taking a beating. But like domestic sales absorbed the demonetisation shock, the sector will ride out the GST roll out. But the challenges in the US market are proving too bitter to swallow. US FDA remediation actions are taking longer to be resolved while price collusion charges by the US Department of Justice, have seen a sharp correction in stock prices from their highs in FY2016, points out the Sharekhan report.

The silver lining is that no one believes this lull will last. Sharekhan continues to remain positive on the long-term prospects of the Indian pharma sector, and is advising investors to stay selective. The reasons are obvious. Medicines come under the non-discretionary expenses category, so while price control will keep sales revenues much lower than the previous years, demand cannot go below a certain level. One hopes that the pharma companies are using the downtime to fix the long-term issues more permanently this time.

Viveka Roychowdhury

[email protected]

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