Aarti Drugs To Ipca Labs: Analysts Expect Bulk Drug Makers To Overcome Margin Headwinds In 2022

From rising costs of raw inputs to demand volatility, bulk drug makers faced multiple headwinds in 2021. Analysts expect that to normalise in the New Year, potentially boosting profitability.

Margins of the companies that make the raw materials for pharmaceutical products fell in pandemic-hit 2021 as supply chains across the world remained disrupted, causing a container shortage and freight inflation. Raw material costs also rose as China—the world’s largest maker of active pharmaceutical ingredients—shut polluting units ahead of the Winter Olympics.

Price deflation as demand fell because of "hoarding or overbuying" in FY21 also hurt margins, Vishal Manchanda, pharma analyst at Nirmal Bang, told BloombergQuint over the phone. “We’ll see a more profound impact in Q3 FY22.”

India Inc. has started reporting third-quarter numbers.

Margins of some prominent active pharmaceutical ingredient manufacturers like Aarti Drugs Ltd., Ipca Laboratories Ltd. and Solara Active Pharma Sciences Ltd. slipped by 100 to 300 basis points in April-December, said Manchanda.

API maker IOL Chemicals and Pharmaceuticals Ltd. was the worst affected, he said, as the inventory it hoarded didn't generate adequate sales. In addition, its production too rose at the same time with new installed capacity, adding to the problem.

But he expects margins to recover to pre-Covid levels in FY23 as raw input prices are expected to fall. “The prices of solvents, raw materials to API manufacturers, have started to correct.”

BloombergQuint awaits responses on queries emailed to Aarti Drugs, Ipca Labs, Solara Active Pharma and IOL Chemicals.

Param Desai, pharma analyst with Prabhudas Lilladher, said while input prices may fall, margins may remain volatile for bulk drug makers in October-December and the ongoing quarter ending March.

“There will be a 10-12% growth in the API industry in the coming year and it will be largely driven by volume growth than pricing,” Desai told BloombergQuint.

‘Volumes To Normalise’

Manchanda expects sales volumes to normalise in the coming year, aided by higher demand from drugmakers.

Kranthi Bathini, director of equity strategy at WealthMills Securities Pvt., agreed. “API manufacturers will do well in the next couple of quarters amid increased sale of generics and the new Covid-variant, Omicron, will give an extra impetus to this demand.”

“Demand-side inflation will be a huge positive for the API industry,” Bathini said.

Desai of Prabhudas Lilladher said bulk drug makers would soon be able to pass inflation in manufacturing costs to customers, which would help stabilise their margins. He also expects the “China plus one” strategy to aid volume growth.

Global firms looking for alternative raw material sourcing to shift away from China would contribute to incremental demand for Indian bulk drug manufacturers, Bathini said. He also expects more approvals for newer drugs from the U.S. FDA in the coming year, boosting demand for APIs.

The government’s efforts to boost manufacturing of raw materials and key-starting materials through the production-linked incentive scheme should start seeing results from financial year 2023-24 onwards, said Manchanda.