Q2 preview: Non-Covid revenues to hint at normalisation for healthcare cos

The healthcare sector – pharmaceuticals, hospitals and diagnostics – is likely to show signs of normalisation with non-Covid-19 revenues growing in the September quarter (Q2) of 2021-22, say brokerages.  Analysts predict a 6 per cent-12 per cent year-on-year (YoY) revenue growth for top pharmaceutical companies and a profit after tax (PAT) growth up to 45 per cent wherein some may also see profits declining. Hospitals are likely to report strong revenues as non-Covid occupancy ramps up while the diagnostics space also stands to benefit from non-Covid testing and a modest.....
The healthcare sector – pharmaceuticals, hospitals and diagnostics – is likely to show signs of normalisation with non-Covid-19 revenues growing in the September quarter (Q2) of 2021-22, say brokerages. 

Analysts predict a 6 per cent-12 per cent year-on-year (YoY) revenue growth for top pharmaceutical companies and a profit after tax (PAT) growth up to 45 per cent wherein some may also see profits declining. Hospitals are likely to report strong revenues as non-Covid occupancy ramps up while the diagnostics space also stands to benefit from non-Covid testing and a modest Covid-19 boost.

On a sequential basis, however, analysts expect hospital revenues to fall as the first quarter coincided with a massive second wave ravaging the country.

Increasing share of non-Covid portfolio to drive the Q2FY22 YoY sales even as US generics business weakness continues, noted analysts. “While growth rates have been erratic over the last 12-18 months owing to the pandemic, we now see signs of a recovery and further consolidation of share among larger players,” Ambit Capital report said.

For ICICI Direct’s healthcare universe (12 companies), the brokerage said that it expected the companies to post 5.5 per cent revenue growth YoY. The domestic formulations business is expected to grow 14 per cent or so due to ‘continuous traction from the acute segment’ besides ‘normalised’ trend in the chronic segment.

Edelweiss Research pointed out that domestic recovery is visible in the pharma sector, and the core portfolio should clock mid-teens growth.

“We expect a significant shift in growth momentum from Covid to non-Covid portfolio on the back of receding active cases and growing vaccination drive across the country,” ICICI Direct said.

The fall in Covid-19 revenues may be a dampener for some firms though. Cipla is a case in point. Impact of Covid-19 has been significant on Cipla’s sales over the last one year. Sales of its Covid-19 drugs like remdesivir, tocilizumab, inhalers etc were above normal during the pandemic.

“In addition, the company benefited from higher demand for some OTC products (for example sanitisers) and trade generics. We had estimated Covid-19-related sales at Rs 700-800 crore in Q1FY22 (25 per cent-30 per cent of India revenues). We factor in 4 per cent growth YoY and a 20 per cent decline in sales QoQ,” Nomura analysts noted.

ICICI Direct said that the US portfolio is expected to decline by 2.2 per cent YoY, while Europe is expected to grow 8.4 per cent YoY.

On a sequential basis, however, the US is expected to post around 3 per cent growth as volume recovery and launches would be partly offset by price erosion, for the sector. “Good launches at Alkem, Cadila Healthcare, Lupin apart from albuterol ramp up for Cipla and Lupin, Ilumiya update to offset Absorica decline for Sun Pharma – which would keep US steady,” noted Edelweiss analysts.

“Marketing channels have opened up post Covid-19. This would lead to growth in some overseas markets as well,” pointed out a senior executive at a Mumbai-based pharma firm. He, however, pointed out that the API segment would post flat growth. “APIs had a higher base last year, when the global disruption had led to many of our overseas clients to stock-up,” he said.

ICICI Direct estimates APIs to clock a 2.8 per cent YoY growth.

For hospital operators, reduction in Covid-19 cases in the September quarter is likely to change the product mix more towards elective surgeries, which, in turn, would improve realisations.

Ambit Capital analysts said that sector leaders in healthcare (hospitals and diagnostics) will benefit from market share consolidation.

The diagnostics sector, say Nomura analysts, can see a slowdown with a substantial decline in Covid-19 testing demand and lower RT-PCR pricing. SRL, for example, is expected to report a 12 per cent sequential fall in revenue, felt Nomura.

 

As for hospitals, analysts expect a sequential drop in revenues, while on an annual basis it would post good growth.

“We expect hospital revenues to record a drop in QoQ with lower Covid-19 occupancy and average revenue per occupied bed (ARPOB). However, YoY growth remains strong given a weak base,” the brokerage said.

Brokerages said they expect overall hospital occupancies to remain around 67-68 per cent driven by normalisation of non-Covid-19 occupancies. Vaccination revenues, however, will decline in the September quarter. “Vaccines contributed 5.1 per cent and 5.5 per cent to Q1’FY22 revenues and EBITDA, respectively, based on our estimate,” Nomura said for Apollo Hospitals.

Amongst diagnostics players, Dr Lal Pathlabs is expected to post an 18 per cent YoY growth mainly driven by a 30 per cent growth in their non-Covid business. Edelweiss analysts noted that on a sequential basis Dr Lal Pathlabs is expected to post a 13 per cent decline in revenue. Travel-related RT-PCR tests to continue, which should account for 10 per cent of revenues, the brokerage added.

“EBITDA margins are likely to decline (QoQ) to around 29 per cent due to lower Covid-19 volumes, and increase in fees to franchisees,” it added.

On the other hand, Thyrocare Technologies, which has government tie-ups, has continued to do 15,000-16,000 RT-PCR samples a day. Therefore, RT-PCR revenues are likely to contribute 25 per cent of revenues. “Higher volumes and realisations to keep the EBITDA margin at healthy levels of around 41 per cent,” Edelweiss noted.


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