Pharma Sector Expects Domestic Strength to Offset US Declines in Q4, Margins May Be Impacted by Rising Freight Costs

Pharma Companies Face Mixed March Quarter Amid US Generics Slowdown

Pharma companies are bracing for a mixed March quarter, with strong growth in domestic formulations offset by a sharp slowdown in US generics. The sector's earnings are under pressure due to price erosion in the cancer drug Revlimid and higher freight costs linked to the Iran war.

Revenue Growth Expected to be in High Single-Digits

Brokerages expect high single-digit to low double-digit revenue growth at an aggregate level, while margins and earnings remain under pressure. Systematix estimates year-on-year median revenue growth of 12 percent, EBITDA 3.6 percent, and a 14 percent YoY decline in net profit. This divergence between topline resilience and earnings compression underscores the challenges faced by the sector.

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Generic Revlimid Aftershock Weighs on Earnings

The loss of Revlimid's US exclusivity, which had driven outsized profits over the past year, remains the biggest drag on earnings. Companies with higher exposure to the franchise, including Dr Reddy's Laboratories, Zydus Lifesciences, Cipla, and Sun Pharma, are expected to report the steepest year-on-year earnings declines this quarter.

India Formulations Remain the Sector's Earnings Shock Absorber

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India formulations remain the sector's earnings shock absorber, with most large companies expected to deliver double-digit domestic growth. Domestic revenues for companies such as Sun Pharma, Cipla, Dr Reddy's, Mankind Pharma, and Ajanta Pharma are expected to grow in the low-to-mid teens, with chronic therapies outperforming acute segments.

West Asia War: Cost Pressure, Not Demand Shock

The Iran war has reintroduced cost volatility, but demand has not been disrupted materially. Systematix said that higher freight and raw material costs could partially offset the favorable impact of USD/INR appreciation. BNP Paribas warned that if geopolitical tensions persist, freight and input inflation could intensify, particularly for exporters.