Normalisation of Covid revenues: The base quarter of June 2021 was impacted by the second wave of the Covid-19 pandemic with companies’ domestic market performance driven by the sale of Covid medication. That business has now gotten normalised. For instance, given the base quarter Covid impact, Cipla‘s overall revenue dropped 2% year-on-year, and excluding the Covid impact, the sales growth was 6%. Similarly, in the case of Sun Pharma, the overall sales growth stood at 10%, and excluding the Covid impact, the growth stood at 14%.
Price Erosion in the US Continues at Moderate Levels: Cipla experienced modest price erosion on its overall portfolio in the US. The company expects this impact will be offset by upcoming new launches scheduled for the later part of the year. For DRL, the price erosion has been in line with the trend witnessed in the last few quarters, and it is not seeing any sign of it worsening.
R&D Costs Rationalised: At ₹433 crore, DRL’s R&D cost dropped 4.6% year-on-year. For Cipla, the R&D cost stood at ₹274 crore, comprising 5% revenue and 4% higher than the year-ago level. However, it is likely to increase in the quarters ahead since the company has guided R&D costs to be 5.5-6% of revenue for the full year. For Sun Pharma, the R&D expenses for the June quarter dropped 22% to ₹461 crore. According to Sun Pharma’s managing director Dilip Shanghvi, lower R&D spending is a timing issue and it is expected to gain momentum and be in line with the guidance in the remaining quarters. Incidentally, the R&D on speciality drugs accounted for a fifth of the company’s total R&D spend for the quarter.
Impact of Russia-Ukraine War: Due to the conflict, DRL saw increased inventory stocking in Russia in the base quarter of June 2021, as well as the preceding March 2022 quarter. With sales normalising in the latest quarter to June, the Russia business declined by 40% year-on-year and 60% quarter-on-quarter in constant currency terms.
Nevertheless, the company is running normal operations in Russia, with the flow of money within Russia and from Russia to India also being normal. However, overall forex volatility has increased due to the conflict. For instance, the impact of the significant movement of the ruble and some other currencies on DRL’s gross margins was roughly around 150 bps. The conflict is also keeping the procurement and freight cost at elevated levels, leading to supply-chain challenges for companies.
Cost and Freight InflationImpacting Profitability: DRL’s gross margins were also impacted due to an increase in commodity prices and shipping costs. The company’s CEO, Erez Israeli, is not seeing any sign of moderation yet, and any change in the trend is expected to be felt only around six months from now. In the case of Cipla, the impact of high procurement costs was offset by calibrated price increases, a decline in employee and other costs, and a reduction in the low-margin Covid portfolio.
Individual Company Strategies Play Out: For Sun Pharma, its investment in speciality business is paying off, as it is becoming a driver of growth for the company’s US business. Cipla’s ‘One India’ strategy, focusing on branded prescription, trade generics and consumer health brands, is leading to continued core portfolio momentum across businesses. Emerging markets, including India, is the biggest focus area for DRL. In FY23, the company is targeting 130 drug launches in the emerging markets, of which 30 would be in India.