Competition takes shine off niche pharma products

Aurobindo has been able to partially buck the trend; analysts expect prospects of most players to improve in second half of FY19

The faster pace of approvals by the US Food and Drug Administration (USFDA) is leading to a steep fall, not just in the price of generic drugs but also of limited competition products of Indian pharma companies in the world’s largest health care market.

While the products, be it niche or under exclusivity, bring a windfall for pharma companies in the initial period, sales thereafter have tended to fall at a much faster clip given higher competition. The trend led by channel consolidation, USFDA’s push towards faster abbreviated new drug approvals (ANDAs) under the general Drug User Fee Act and demands for lower generic prices meant that 2016 was the first year of decline for the overall US generic industry, which fell two per cent over a year. 

Says Alankar Garude of Macquarie Capital Securities, “To add to the woes of the generic pharma companies, first-to-file (FTF) products, even during exclusivity, are also witnessing pricing issues due to rampant launches of authorised generics (AGs).” 

Pricing pressures led to a sharp fall in US sales of larger pharma companies in the September quarter (Q2). For instance, Sun Pharma’s revenue from the sale of cancer drug, Gleevec, was down 40 per cent on a sequential basis, due to new competition from Teva and Apotex. Revenue for this drug was $16.8 million in Q2 (a third of the September 2016 quarter’s $50 million). The drug, which had contributed about $230 million to Sun’s FY17 sales, is estimated to contribute $80 million or lower in FY18, say analysts.

Similarly, Lupin reported a 15 per cent fall in US revenue due to price erosion in generics of anti-diabetic drug, Glumetza as well as loss of exclusivity in contraceptive, Minastrin. Sales of Glumetza fell 54 per cent on a sequential basis to $38 million, from $83 million in Q1. Glenmark’s US sales also fell 30 per cent over a year on loss of exclusivity for anti-cholesterol drug, Zetia.

In the profitability value chain, first-to-files or niche products are right below the patented drugs and are followed by authorised generic and commodity generics. Thus, the fall in profitability of pharma companies is higher due to lower sales from these opportunities. While Lupin’s margins in Q2 were down 240 basis point to 21.6 per cent, Sun’s fell 1,764 basis point to 20.7 per cent, over the year-ago quarter. 

Faster approvals for new drugs (of competitors) are shrinking the time available to companies to maximise sales of limited competition products, says an analyst.

Cadila, currently selling the ulcerative colitis drug, Lialda under exclusivity with monthly sales of $52 million, would see competition when its 180-day exclusivity period ends in January. The stock had corrected recently when Teva got approval to launch the product post the expiry of exclusivity period, earlier than what the street had estimated.

All this, coupled with regulatory concerns, have weighed on the stock price of many domestic pharma companies.

Thus far, Aurobindo Pharma, to an extent has bucked the trend in Q2 aided by Renvela (for treating chronic kidney disease). The $81 million sales from the drug coupled with shortage of acid control drug, Pantaprazole helped Aurobindo post a 21 per cent year-on-year increase in US revenues. Not surprisingly then, its stock has outperformed most large peers in the past 3-6 months. Even now, among the top six players by market value, Aurobindo has the maximum buy ratings by analysts, and maximum upside potential of 22 per cent.

While the company, too, is facing higher competition in Renvela from Dr Reddy’s, Impax, Cipla and Hikma, this may be partially offset by growth in injectables (40-50 per cent growth estimated in FY18). Analysts at Kotak Institutional Equities expect sequential decline in Aurobindo’s US sales from December quarter. To offset the decline and ongoing price erosion, particularly in oral solid products, new launches are critical, they add.

The same applies to other companies as well. The only way, according to Ranvir Singh of Systematix Shares, that companies can increase US revenues is by higher volumes and new product launches. Given the regulatory uncertainties for Lupin, Sun and Dr Reddy’s, product approvals and thus new launches are shrinking, thereby leaving them with limited revenue growth levers. The specialty/niche portfolio, according to analysts, will take time with price erosion of 10-15 per cent expected to continue in the coming quarters. “Expect an improvement in the prospects of the larger generic players in the second half of FY19 as companies launch their sizeable niche pipelines,” says Ranjit Kapadia of Centrum Broking.