Sun Pharmaceutical, Dr Reddy's line up new drugs amid price war

Arm themselves with speciality and complex drugs facing less competition

To stave off pricing pressure in the US, Sun Pharmaceutical and Dr Reddy's Laboratories have built pipelines of drugs that face less competition and command better pricing power. 

Mumbai-based Sun Pharma has already invested $600 million in seven speciality assets in dermatology, ophthalmology, central nervous system and oncology. Two drugs are already in the market, and the lead dermatology drug, MK-3222, should be launched in the first quarter of 2018-19. Speciality drugs are novel drugs for niche therapies needing more funds for development. Also unlike generic drugs in the US, speciality drugs also rack up marketing costs of field forces visiting doctors. 

“Currently, annual spend on speciality drugs is $150 million, which is suppressing base profits by 15 per cent. With the ramp-up of MK-3222 and oncology drug Odomzo, speciality drugs should break even by FY20,” said Anubhav Aggarwal, analyst with Credit Suisse Securities in his latest report. “High growth in speciality drugs also addresses concerns of lower growth in generics (10-12 per cent) and helps boost overall growth to a compound annual rate of 20 per cent for FY19-22,” said Aggarwal.

Dilip Shanghvi-founded Sun Pharma surprised the Street this financial year with its first quarterly loss in at least 12 years over settling of an antitrust (anti-monopoly) case in the US amid a global downturn in the generic-drug business. It posted a total loss of Rs 425 crore in the three months that ended on June 30. Shanghvi expected the performance to gradually improve from the second half of 2017-18. 

Generic drugmakers' profit margins are getting squeezed in the US, the world's biggest market as the US Food and Drug Administration (FDA) speeds up drug approvals, flooding the market with products from smaller companies competing on price. Also, pharmacy chains and retailers in the US have consolidated their orders to a point where four groups account for 80 per cent of the purchases.

Sun Pharma is particularly squeezed by prices in the US as the geography accounts for about half of its revenue. It reported Rs 6,167 crore revenue for the quarter ended June. For Hyderabad-based Dr Reddy’s, net profit for the quarter ended June declined 53 per cent to Rs 591 crore while its revenue grew three per cent to Rs 33,159 crore. This was a result of a 460-basis-point decline in gross profit margin.

“Amid headwinds in the US generic market, we believe Dr Reddy’s is well-placed with its strong complex generic pipeline,” said Deepak Malik, analyst with Edelweiss Securities, in his latest report. Complex drugs are difficult-to-copy generic drugs that incur higher R&D costs. 

The report says that with the recent approval of Doxil and Vytorin, positive litigation outcome for Suboxone and near-term Target Action Dates for high-value key products including Suboxone, Nuvaring and Copaxone, Dr Reddy’s complex generic pipeline is poised to start contributions from the second half of FY18. 

“We believe the company has managed to create a pipeline of first-to-market, tough-to-make products, with presence across different dosage forms, channels, and product mix that will drive near-term growth,” he said.