The net profit of top 50 pharmaceutical companies in the country declined by 18 per cent in nine months of the current year mainly on account of the provision of foreign exchange loss. The aggregate profit of these 50 companies, as per a Pharmabiz study, dropped to Rs 4615 crore during April-December, 2008 from Rs 5630 crore reported in the same period of the previous year. The study covered companies having a net turnover of Rs 100 crore and above.

A significant rise in employee's cost as well as interest burden impacted also profitability adversely. The figures in the third quarter are mainly responsible for the poor show by the companies during the years.

The net sales, however, moved up by 27.1 per cent to Rs 44,156 crore from Rs 34,730 crore despite stiff competition in the highly regulated markets, recessionary conditions, stringent approval policy and volatile exchange rates. Though the bottom line was under pressure, the operating profit improved smartly by almost 30 per cent.

Based on the performance for first nine months of 2008-09, the net profit of these companies will be under pressure and likely to declined by over 15 per cent for the full year 2008-09. However, the net sales of these companies will increase in the range of 22-24 per cent. For the full year ended March 2008, these 50 companies recorded the net sales and net profit at Rs 47,952 crore and Rs 7,308 crore respectively.

The Pharmabiz study includes only those companies having year ending during March 2009. The study excluded few important multinational companies like Ranbaxy Laboratories, GlaxoSmithKline Pharma, Aventis Pharma, Pfizer, Abbott India, AstraZeneca, Solvay and Fulford India on account of December year ending. Further, Indian companies such as Wockhardt and Stride Acrolab also excluded from study due to calendar year.

The other income of 50 companies increased only by 7.7 per cent to Rs 1,195 crore during the first nine months of 2008-09 from Rs 1,109 crore in the similar period of last year. The total raw material cost increased by 22.9 per cent to Rs 18,751 crore as against Rs 15,263 crore. With significant investments in expansion programme, the employees cost increased by 32.4 per cent to Rs 5,187 crore from Rs 3,918 crore and put some pressure on overall profitability. Other expenditure, including selling & marketing, research & development and other increased by 27.6 per cent to Rs 11,192 crore from Rs 8,770 crore.

The profit before interest, depreciation, taxation and adjustments (EBDIT) has shown strong growth of 29.6 per cent during the first three quarters of 2008-09. EBDIT reached at Rs 10,220 crore from Rs 7,888 crore in the corresponding period of last year. With recessionary conditions several companies experienced the credit crunch and have to borrow funds at the high interest rates. This inflated the interest cost by 61.4 per cent to Rs 1,091 crore from Rs 676 crore in the last period. The depreciation cost increased by 28.8 per cent to Rs 1,793 crore from Rs 1,392 crore.

The profit before taxation and adjustment (PBT) of 50 companies increased by 26 per cent to Rs 7,336 crore from Rs 5,820 crore in the corresponding period of last year. The taxation provision increased only by 2 per cent to Rs 1,012 crore from Rs 991 crore.

With the new ICAI guidelines regarding the mark to market provisions, several companies have to make provision for foreign exchange losses. The aggregate foreign exchange loss of these 50 companies mounted to Rs 1,622 crore during the first nine months ended December 2008 as against a gain of Rs 829 crore in the last period. This put additional burden on bottom line, which dropped sharply by 18 per cent to Rs 4,615 crore from Rs 5,630 crore in the last period.

Relatively small companies showed better growth in top line during the first three quarters of 2008-09. The net sales of Ankur Drugs, Bliss GVS Pharma, Granules India, Hikal, Hiran Orgochem, Marksans Pharma, SMS Pharmaceuticals and Surya Pharmaceuticals recorded sales growth of over 50 per cent. Ankur Drugs' net sales increased by 54.9 per cent to Rs 722.26 crore from Rs 466.14 crore in the last period and that of Marksans Pharma's went up by 76.2 per cent to Rs 291.73 crore.

The net sales of a few companies like Fresenius Kabi Oncology (formerly known as Dabur Pharm) declined by 4.2 per cent, Indoco Remedies by 3.6 per cent, Panacea Biotec by 14 per cent, Shasun Chemicals by 13.5 per cent and Themis Medicare by 10.1 per cent. Dr Reddy's Labs remained on the top with net sales growth of 34.2 per cent at Rs 4,862 crore followed by Cipla at Rs 3,738 crore with sales growth of 27.8 per cent. Sun Pharma also notched up strong net sales growth of 49.5 per cent at Rs 3,138 crore. Jubilant Organosys and Lupin recorded sales growth of 48.7 per cent and 39.7 per cent respectively during the first nine months of 2008-09.

The major losers on account of foreign exchange loss were Aurobindo Pharma, Biocon, Cipla, Jubilant Organosys, Ipca Laboratories, Orchid Chemicals, Panacea Biotec, Piramal Healthcare, Alembic, Cadila Healthcare and Shasun Chemicals. Aurobindo provided Rs 215.86 crore for the foreign exchange loss as against a gain of Rs 61.50 crore in the same period of last year. Similarly, Cipla's foreign exchange loss amounted to Rs 221.79 crore as against a gain of Rs 41.70 crore. Jubilant Organosys foreign exchange loss touched to Rs 424.17 crore as compared to a gain of Rs 126.52 crore. Relatively small companies or who have not issued FCCBs or ECBs dose not shown any foreign exchange loss or mark to market provision.

With these foreign exchange losses, the net profit of Aurobindo declined by 88.2 per cent to Rs 19.85 crore from Rs 168.37 crore in the last period. Similarly, Alembic's net moved down by 87.2 per cent, Biocon by 82.9 per cent and that of Ipca Laboratories by 29.7 per cent. Jubilant incurred a net loss of Rs 137.53 crore as against a net profit of Rs 342.35 crore, Orchid Chemicals loss mounted to Rs 78.62 crore and that of Panacea Biotec reached at Rs 28.88 crore.

Sun Pharma's net profit has taken a quantum jump of 86.2 per cent and reached at Rs 1422.85 crore from Rs 764.09 crore in the previous period. Torrent Pharma's net profit went up by 64.3 per cent, Unichem Lab by 64 per cent, Vivimed Labs by 86.7 per cent and Ind-Swift Laboratories by 46.6 per cent. The net profit of J B Chemicals jumped by 59.3 per cent to Rs 66.35 crore during the first nine months of 2008-09. Ankur Drugs, Bliss GVS Pharma, Marksans Pharma, Ind-Swift, RPG Life Sciences Surya Pharma also achieved better growth in profitability.

The interest cost of Aarti Drugs, Piramal Healthcare, Panacea Biotec, Orchid Chemicals Matrix Laboratories, Jubilant Organosys, Ind-Swift Laboratories, Hikal, Glenmark Pharma, Surya Pharma, Cadila Healthcare and Ankur Drugs put pressure on profitability during the first nine months of the current year.

Thus, the pharmaceutical sector will manage to clock the sales growth of 22-24 per cent in the year 2008-09, but its net profit will be under pressure due to foreign exchange losses, higher interest cost and higher employees cost. However, with better operating profit, the pharma segment will able to overcome the temporary problems and move ahead faster than other major sectors of economy. With drop in profitability, there may be lower returns in the form of dividend to investors during 2008-09.

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