How Pharmaceutical Companies Fared in the Fourth Quarter

Pharmaceutical companies are slowly shedding Covid portfolios that have provided higher growth in all geographies and acted as a rising tide for all. As (Covid) revenues normalize and margin issues emerge, Q4-FY22 performance offers a diverging view from company to company. In this analysis, companies with a long-standing exposure to various geographical areas have been taken into account; Sun Pharma, Cipla, Dr Reddy’s, Aurobindo, Lupin, Zydus Lifesciences, Biocon and Torrent Pharma. Although revenue growth has been strong and margin performance weak across all businesses, the quality of performance and its drivers can be further dissected.

Revenue growth remains strong

The Indian market continues to drive corporate revenue growth with an average growth of 14% YoY in Q4-FY22. Lupine, which had a higher Covid contribution during the reporting period, saw 5% year-over-year growth. At other companies, the Covid contribution is now around 1-5% of the Indian portfolio, but growth has been supported by non-Covid portfolios. The main drivers continue to be price growth as well as new product launches.

A similar performance in emerging markets is also contributing to corporate revenue growth. Dr Reddy’s, which has a significant presence in Russia, reported on the continuity of its activities and this is also the case for other international players. But the depreciation of the ruble is a major compensation. In other exporting economies, represented by Torrent in Brazil and South-East Asia, the African market for branded products by Ajanta, the South African markets by Cipla and the rest of the world markets by Sun Pharma, the growth of revenue was strong, like in India.

Much-vaunted API sales were lackluster for most companies, proving that the underlying China +1 theme may not be as linear as seen in chemicals and specialty metals . Aurobindo has gained popularity in the segment and plans to create a penicillin-G facility supported by the PLI program.

US markets continue to struggle with price erosion which has worsened further since Covid. But companies that are in the growth phase for new products, Sun Pharma with specialty, Cipla with respiratory, and Dr. Reddy’s with limited competitive launches, have managed to overcome product erosion. These companies recorded an average growth of 15% (including 2 to 4% due to the depreciation of the rupee) on the American market. On the other hand, companies without significant or high-value new launches continued to report a 5% decline in US revenue; Aurobindo, Lupin and Zydus, for example. Factory inspections and factory status reinstatements expected for all US-exposed companies are critical near-term triggers.

Overall, at the consolidated revenue level, Aurobindo (3% revenue decrease YoY in Q4-FY22) with no formulations presence in India and Lupine (3%) with low growth in India reported moderate revenue growth among companies which averaged 12% percent in Q4-FY22.

In recovery mode

The first quarter of FY23, when tenders, new contracts and price reviews typically take place, companies can begin to recoup higher costs

Margin compression

Rising input prices and price erosion in the United States weighed heavily on margins. Few companies like Biocon, Cipla (on an adjusted basis), Dr Reddy and Zydus Lifesciences have handled the pressures better. New product launches, improved product mix (lower API sales), and price pass-through contributed to the same from these companies. But for others, EBITDA margins fell significantly, as freight in some cases was reported to be 40% higher in the quarter. However, with pharmaceutical companies having a larger portfolio of branded products in India, emerging markets are better placed to pass on the price hike. The first quarter of FY23, when tenders, new contracts, and price reviews typically take place, companies can begin to recover higher costs that can be assessed in the next earnings season.

But with the opening of clinical trial centers (as patients and centers open post Covid), high cost trials will be back on budgets adding to R&D costs. Cipla, Sun and Biocon, for example, are continuing high-cost trials in Advair, Ilumya and next-generation biosimilars respectively and are expected to add 100-200 basis points to costs. The cost of filing generics in the United States and market launches in India continue to drive up other expenses, with only Torrent rationalizing the cost of filing in the United States.


Since May 2022, when the earnings season began, the Nifty Pharma index is down 8% compared to Nifty’s broader 5% decline. Aurobindo and Lupin lost almost 17% during the period following weak results, while Biocon fell 10% despite better results, the imminent consolidation of larger transactions (Viatris and SII) and the problems associated debt weighing on the title. Sun Pharma fell 8%, in line with the index. Cipla and Dr Reddy’s fared relatively better over the period, gaining 1-2%.

The results underscore that strong domestic performance can overcome weakness in the US segment. Dr. Reddy and Cipla are better placed in the lot. The recent clearance of Dr. Reddy’s factory contributes to its performance in the United States and the focus on the domestic market has increased. Torrent Pharma is also in a better position with its Indian portfolio, subject to obtaining US FDA factory clearance in the short term.

Published on

June 11, 2022

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