Brokerages say that the pharma sector that has usually been one of the better performers, is under various pressures of cost and competition which are expected to affect margins

The pharmaceuticals business is among the sectors that are expected to do well in the first quarter of 2010-11, due to its characteristic resilience to inflationary pressure and higher interest rates that have caused an economic slowdown. In fact, the group of pharma companies has outperformed the benchmark Sensex significantly in the three-month period.

But the sector has some drawbacks, with companies like Dr Reddy's and Aurobindo Pharma joining Ranbaxy, Lupin and Sun Pharma on the warning list of the US Food and Drug Administration (USFDA). Other factors like product mix, operational performance and ramp-up of capacity will likely produce mixed results, according to analysts' expectations.

The brokerages consensus for the pharma sector is a 19% year-on-year top-line growth, a touch lower though from preceding quarters. However, according to Angel Broking, margins would decline by 110 basis points, which along with increased tax outgo would lead to flat growth in net profit.

While the benchmark Sensex lost 3% in the quarter from 1 April 2011 to 30 June 2011, the Moneylife Pharma Index, which comprises of 75 companies, rose by a good 8%.

Angel estimates that among the large drug producers Sun Pharma could post a sales growth of over 35% y-o-y mainly on its acquisition of Taro. It expects Cipla to post net sales growth of 15.5% y-o-y. Net sales for Dr Reddy's are projected to grow by 10%, Lupin by 17% and Cadila by 20.5%.

Amongst the small caps, Indoco Remedies is expected to post 21% y-o-y growth, whereas in the pack of multinationals, Aventis is likely to achieve 25% y-o-y growth in net profit, led by 10.3% y-o-y sales growth. The projected Rs53 crore profit estimate is on a low profit base in the previous year 2010-11.

Analysts at KR Choksey say the domestic formulations business will show robust growth of 15%-16% y-o-y driven by new product launches and significant advance into tier II & III cities as well as the rural market. They believe that overall margins would be under pressure due to expansion of the field force, regulatory filings (Para IV/ANDAs (Abbreviated New Drug Application)/DMF (Drug Master File)), pricing pressures in the US due to increase in competition and capacity addition.

According to Motilal Oswal, Sun Pharma, Ranbaxy and Divi's Lab would drive top-line growth in the first quarter of 2011-12 by about 16.3% y-o-y (excluding one-offs). Adjusted profit after tax (PAT) is expected to grow by 7.9% y-o-y. Sun Pharma, due to its Taro acquisition, Ranbaxy, on a low base, and Divi's Lab, from a recovery in business, will lead earnings growth.

But PAT growth of CRAMS (Contract Research and Manufacturing Service) companies like Strides Arcolab and Biocon (excluding Divi's Labs) will be affected.

According to ICICI Direct, pharma companies under its coverage are expected to post mixed results. Sun Pharma's numbers are not comparable due to consolidation of Taro's numbers and also due to discontinuance of anti-ulcerant Protonix and anti-cancer Eloxatin in the US market. Similarly, the results of Opto Circuits, Elder Pharma and Biocon are also not comparable as Opto acquired US-based Cardiac Science, Elder acquired Bulgaria based Biomeda and Biocon sold a stake in Axicorp.

Companies like Aurobindo, Cadila, Glenmark, Indoco, Lupin and Torrent Pharma are expected to report good y-o-y sales growth due to new launches and increase in field force. Cadila and Lupin are expected to lead the pack with about 20% sales growth.  Unichem Laboratories is expected to report marginal growth in sales due to a change in the distribution pattern.

While healthy growth in domestic formulations sales coupled with good growth in the US market will drive the numbers, growth will be arrested by the absence of F2F products for Sun and Glenmark.

ICICI Direct also estimates a first quarter sales growth of 19% y-o-y to Rs9,819 crore, whereas PAT is expected to see marginal growth of about 1% y-o-y to Rs1,558 crore on a high base. It expects Glenmark, IPCA and Lupin to lead the pack.

Also, during the quarter, Sun Pharma signed a partnership with MSD (Merck Sharpe & Dohme) to market, promote and distribute MSD's diabetes products under different brand names in India. MSD would provide the scientific excellence and market success of the product to the partnership, while Sun Pharma would bring in its proven success and expertise in the marketing of drugs in the relevant therapeutic areas across India.