The profit growth of pharmaceutical industry in India in the quarter ended June 2004 does not indicate good prospects for the whole of current year. A Pharmabiz study of financial performances of 50 companies (with net sales of Rs 10 crore and above) during quarter ended June of this financial year shows that while gross turnover went up by 16 per cent, net profit recorded a growth of only 3.7 per cent.

The total sales of these 50 companies in the quarter ended June 2004 stand at Rs 6723 crore as against Rs 5796 crore achieved in the same period of the previous year. Net profit of these companies at the same is only Rs 972 crore in the current quarter as against Rs 938 crore in the same period of the previous year.

The study finds that large companies suffered more than the mid-size companies during the quarter. Big companies are affected mainly because of their higher R&D expenditure as compared to revenue and higher spending on marketing activity. Some of them also received setback on the export front. The operating profit margin and net profit margin ratios thus declined during the quarter under review.

While commenting on the performance of the pharma companies, analyst from HDFC Securities, Shahina Mukadam said, "The negative growth in net profits of top pharma companies as compared to mid-cap companies, put pressure on entire pharma sector. The decline in net profits for top pharma companies is on account of higher R&D expenses, and international marketing expenses like product registration. The second half of the current year should be better than the first half, however on a whole the current year will be subdued."

The overall net profit of the 50 companies was impacted adversely mainly due to fall in growth of profits by large players like Dr Reddy's Laboratories, Ranbaxy Laboratories, Aurobindo Pharma, Lupin, Orchid Chemicals, Ipca Laboratories and GlaxoSmithKline. Among these major companies, Dr Reddy's Lab suffered heavily and its net profit declined sharply by 75 per cent to Rs 30.94 crore in the first quarter ended June 2004 from Rs 123.51 crore in the corresponding period of last year, mainly due to higher R&D expenses and lower sales of generics. The company's R&D expenses went up sharply by 74 per cent to Rs 56.32 crore from Rs 32.39 crore. Further, its sales of generics declined more than 61 per cent to Rs 42.85 crore.

The fourth largest pharma company of India, Aurobindo Pharma, suffered a set back and its net profit declined by 22 per cent during the quarter ended June 2004 to Rs 18.02 crore from Rs 23.05 crore mainly because of lower exports and higher spending on staff. Its exports declined to Rs 129.45 crore from Rs 144.96 crore in the similar period of last year. The net profit of Ranbaxy (standalone) declined by 6 per cent to Rs 184.95 crore from Rs 196.78 crore in quarter ended June 2004. Lupin's net profit declined mainly due to loss of Rs 7.28 crore on exchange fluctuation as against gain of Rs 3.88 crore for the same quarter in the previous year.

GlaxoSmithKline (GSK), a leading MNC also suffered and its net profit declined to Rs 59.14 crore from Rs 64.76 crore mainly due to exceptional items regarding the costs of separation and retirement benefits at Bangalore factory. If we take profit before exceptional items moved up by 13.1 per cent.

Though the leading pharma giants put pressure on profitability of entire sector, few major companies like Cadila Healthcare, Cipla, Matrix Laboratories, Nicholas, Sun Pharmaceuticals, Unichem Laboratories and Wockhardt Ltd (consolidated), improved net profit significantly during the quarter ended June 2004. The net profit of Sun Pharmaceuticals went up sharply by 37.2 per cent in the first quarter ended June 2004 to Rs 75.06 crore from Rs 54.69 crore and that of Wockhardt Ltd touched to Rs 50.10 crore from Rs 35 crore, registering a rise of 43.1 per cent. Similarly, Aventis Pharma earned strong growth in net profit of 43.3 per cent and its profit touched to Rs 33.40 crore. Despite provision of Rs 8.93 crore for exchange rate fluctuations on foreign currency loans, Cadila Healthcare improved its net profit to Rs 32.80 crore.

Relatively new players like Biocon, Dishman Pharma, Matrix Laboratories and Vimta Lab performed well and added to profit level of 50 companies. Biocon reported a net profit growth of 14.6 per cent at Rs 43.65 crore, Dishman Pharma's profit reached at Rs 4.33 crore from Rs 1.31 crore and that of Matrix moved up to Rs 40.74 crore from Rs 30.71 crore. Divi's Laboratories, however, received setback and its net profit declined slightly to Rs 14.34 crore from Rs 15.15 crore.

The multinational companies, except GSK and Burrough Wellcome, improved their profitability level during the quarter ended June 2004. Aventis Pharma, Merck, Novartis, Pfizer and Wyeth added to overall profitability. Aventis Pharma recorded net profit growth of 43.3 per cent to Rs 33.40 crore from Rs 23.30 crore and Pfizer's net profit climbed up to Rs 9.35 crore from Rs 1.21 crore. Novartis and Merck pushed there net profit to Rs 21.14 core and 18.25 crore.

The operating profit before interest, depreciation, extra ordinary items and taxation of 50 companies improved by 6.5 per cent to Rs 1539 crore from Rs 1445 crore as the other income of these companies moved up by 19.2 per cent to Rs 264.86 crore during the quarter ended June 2004 from Rs 222.17 crore in the corresponding period of preceding year. The other income of Cadila Healthcare, Cipla, Sun Pharma and Biocon moved up sharply but that of Dr Reddy's, GSK, Kopran, Novartis and Pfizer declined during the period under review.

The reduction in interest rates helped the pharma companies as there interest cost rose only by 0.2 per cent to Rs 108.11 crore from Rs 107.88 crore. The interest burden of Orchid Chemicals, Panacea Biotec, Aurobindo Pharma, Dr Reddy's and Wockhardt moved up during the period. However, Lupin, Alembic, Kopran, Matrix and Nicholas Piramal successfully reduced the interest burden. Few MNCs like Aventis Pharma, Burrough Wellcome, GSK and Indian major Sun Pharma remained totally free from interest burden. The depreciation provision amounted to Rs 215.15 crore as against Rs 175.64 crore. The cost of raw material increased by 22.4 per cent to Rs 2865.94 crore from Rs 2339.43 crore and staff cost of 50 companies moved up by 23.1 per cent to Rs 528.04 crore from Rs 428.98 crore.

The net sales of 50 companies moved up by 16 per cent during the quarter mainly due to substantial improvement of net sales of Panacea Biotec, Biocon, Cadila Healthcare, Glenmark, Sterling Biotech and Wockhardt. Panacea Biotec achieved net sales of Rs 96.02 crore during the first quarter ended June 2004 as against Rs 31.87 crore in the corresponding period of last year. The sales of Cadila Healthcare moved up by 69.9 per cent to Rs 288.67 crore, Biocon sales touched to Rs 160.24 crore from Rs 99.54 crore and that of Glenmark increased to Rs 98.58 crore from Rs 58.06 crore. However, the net sales of Alembic, Aurobindo Pharma, Dr Reddy's Lab, Wyeth and Burroughs Wellcome declined during the quarter ended June 2004.

The Indian pharma companies are spending more on R&D to tap new opportunities in the international markets. Ranbaxy spent around Rs 57 crore during the quarter ended June 2004 on R&D activity as compared to Rs 48.62 crore in the corresponding period of last year. Similarly, Dr Reddy's, the highest investing company in R&D, has incurred R&D expenditure of Rs 56.32 crore as compared to Rs 32.39 crore in the last period. Lupin, Sun Pharma and Nicholas Piramal spent Rs 17.29 crore, Rs 14.78 crore and Rs 9.36 crore on R&D during the first quarter.

On the export front also major companies performed well during the quarter ended June 2004. Ranbaxy's exports went up to Rs 614.53 crore from Rs 548.74 crore. Matrix and Sun Pharma also pushed their exports to Rs 91.38 crore and Rs 62.47 crore. Cipla achieved strong growth of 60.4 per cent in exports of formulations and 9 per cent in export of APIs. Nicholas Piramal is focusing more on exports through contract research. However, the export earning of Aurobindo Pharma declined to Rs 129.45 crore during the quarter ended June 2004 from Rs 144.96 crore and that of Alembic declined to Rs 30.65 crore from Rs 40.62 crore. Analyst Sanjay Chawla from Motilal Oswal said that the decline in net profit growth is on account of forex losses. However, the market on an overall basis is expected to grow at the rate of 9 per cent, he added.

The operating profit margins of 50 pharma companies declined to 22.9 per cent during the quarter ended June 2004 from 24.9 per cent in the corresponding period of last year. Similarly, the net profit margins also moved down to 14.5 per cent from 16.2 per cent mainly due to more spending on marketing, R&D, and staff cost adverse fluctuation in exchange rates.

Out of the PHARMABIZ sample of 50 companies, 9 companies have also announced their first half year ended performance. These nine companies viz Aventis Pharma, Burroughs Wellcome, GSK, Merck, Pfizer, Ranbaxy, Solvay Pharma, Sterling Biotech and Wockhardt notched up sales growth of 4.2 per cent at Rs 3,833 crore during the first half ended June 2004 from Rs 3680 crore in the corresponding period of last year. The net profit, however, declined by 3.5 per cent to Rs 715.66 crore from Rs 741.62 crore mainly due to substantial fall in the profit of Ranbaxy Laboratories. The net profit of Ranbaxy for the first six months declined to Rs 333.50 crore from Rs 476.55 crore in the similar period of last year. Remaining 8 companies' improved their profits during the first half of 2004-'05.

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