Ipca Labs To Granules India: Bulk Drug Makers' Q3 Margin Under Pressure
Raw material inflation to be a drag on API makers' Q3 margins.
Some of Indian drugmakers’ best-performing business after the Covid-19 pandemic struck in 2020 is likely to be a drag in the third quarter.
Analysts and makers of active pharmaceutical ingredients—raw materials that go into medicines—indicated that their margin may contract in the three months through December as input costs continue to surge.
The bulk drug makers saw a 40-50% inflation impact in the second quarter, Abdulkader Puranwala, pharma analyst with Elara Capital, told BloombergQuint. “For Q3, inflation impacted the gross margins through all the three months.”
That will impact earnings for the quarter ended December for companies that initially benefited from higher demand for domestic bulk drugs as India imposed curbs after a border standoff with China. While the nation has offered incentives do drive local production, China is still the biggest supplier and its latest pollution curbs has driven prices higher.
According to Nirmal Bang’s pharma analyst Vishal Manchanda, prices of basic raw materials to all API companies such as acetic acid and methanol have almost doubled in a year.
Ajit Kumar Jain, joint managing director at Ipca Laboratories Ltd., said during a second-quarter earnings call that raw material prices have moved up two to threefold in some cases due to shortages arising from China’s so-called dual-control policy, setting targets for provinces to cap energy consumption and increase efficiency.
That means key provinces where suppliers of chemicals and intermediates are located were operational only for few days a week.
According to Manchanda:
Price of para amino phenol, the key raw material for paracetamol, has almost doubled, impacting Granules India Ltd. and GlaxoSmithKline Pharmaceuticals Ltd.
The raw material, dicyandiamide, to Metformin—an oral diabetes treatment drug—has witnessed over a 50% year-on-year increase in price. This could possibly impact Granules India, Aarti Drugs Ltd., IOL Chemicals & Pharmaceuticals Ltd. and Ipca Labs.
Artemisinin, an antimalarial ingredient, has also seen a price rise of 50%. It can impact drugmakers such as Ipca Labs.
Prices of 6-APA and penicillin potassium, key ingredients in antibiotic manufacturing, have gone up 30–40%. This may weigh on Lupin Ltd. and Aurobindo Pharma Ltd.
BloombergQuint awaits responses to queries emailed to Ipca Labs, Granules India, Aarti Drugs, IOL Chemicals, GSK, Lupin and Aurobindo Pharma.
Investors have possibly gauged the impact on margin. Some stocks, Puranwala said, are witnessing “pre-result corrections”.
Granules India, among others, had seen price inflation narrow its gross margin to 50.9% in the second quarter from 57.9% a year earlier. Margin on paracetamol was the most impacted. Higher freight costs and short-term inability to pass on the input price hikes to customers added to its woes.
The company said in the Q2 earnings call it would be able to pass on substantial portion of these price hikes to customers but didn’t give a timeline.
According to Ipca Labs, there will be a time lag of around four to five months before the whole industry can pass on these price increases.
“We have almost around three to four months order in pipeline always. So on those orders, prices cannot be revised,” Jain said. Hence, “the hiked raw material and energy prices cannot be passed on to the customers immediately”.
Earlier in January 2022, analysts had said multiple headwinds such as rising cost of raw inputs and demand volatility facing the bulk drug makers are likely to normalize in the new year, potentially boosting profitability.