There are signs that pricing pressures for Indian pharmaceutical majors in the US market is easing a bit. But, while the worst seems to be over, growth could continue to be a challenge.
One of the reasons for this is the rate of approvals for abbreviated new drug applications (ANDA), which has been quite high for the past few months. Analysts at IIFL said at the current rate, ANDA approvals in 2018-19 (FY19) would be 38 per cent more than in 2017-18 (FY18).
This means competition in a larger basket will be high.
Analysts expect the US Food and Drug Administration (USFDA) to keep approval rates elevated, and the US generic pricing will improve from the current mid-to-high single digit erosion, when overall generic approvals start to come down, or first-time/exclusive generic opportunities start to go up. The first is not happening yet; there is some progress on the second. Ranjit Kapadia, senior vice-president, pharma, Centrum Broking, said companies are looking for opportunities in differentiated and proprietary products as well as biosimilars to boost growth.
Brokerages have given higher valuation to companies with more complex products than their peer. Analysts also reflect this trend. For instance, analysts say the promising ramp-up of the specialty pipeline is the reason for a positive outlook on Sun Pharma. While the company launched Yonsa (oncology drug) and Ilumya (psoriasis treatment) during the first half of FY19, it launched Xelpros (ophthalmology) in the third quarter. It also plans to launch Cequa in this quarter.
This is critical for Sun as incremental generic sales from Halol, according to broking firm Prabhudas Lilladher, remained tepid in the December quarter. While corporate governance concerns remain a move from generics to specialty in the backdrop of US headwinds is the key differentiator for Sun vis-à-vis its peers, feel analysts at ICICI Securities.
Aurobindo has been among the few generic majors that has not seen as much pricing pressure. Lower dependence on any one product helped it counter it.
Also, the company’s mainstays on growth are also products with limited competition, such as its injectables portfolio. The company has continued to grow by turning around acquisitions.
While it recently completed the acquisition of Apotex’s portfolio in Europe, it is on the verge of integrating the dermatology business of Sandoz in the US.
The acquisition transacted at attractive valuations (one time sales and five times Ebitda), will give Aurobindo higher scale ($2.3 billion of consolidated US sales) and portfolio diversification.
The incorporation of the Sandoz business will increase the FY20 earnings per share by 15- 20 per cent, according to analysts at Elara Capital. Strong US business and an emerging European Union, transitioning from negative operating margins into the double-digits profitability, are key drivers for Aurobindo, they added.
However while Aurobindo may have succeeded with acquisitions, it has not worked as well for others.
Lupin had acquired the Gavis portfolio to drive US growth in 2015, for about $880 million. However at the start of FY19, it had to take a one-time impairment of Rs 1,464 crore on opioid drugs, looking at the increasing control on sale of these drugs.
The company’s former Chief Financial Officer Ramesh Swaminathan had said, “We have seen underperformance in the sale of certain molecules and we have made impairment provision on a conservative side.”
Analysts said Lupin’s “carpet-bombing” strategy to expand into multiple product segments yielded limited results, with brokerages cutting forward earnings estimates by as much as 34 per cent. The company, however, has made perceptible progress on inhalers and, to an extent, on biosimilars. Once these start contributing over time the company’s outlook can improve. Lupin and Dr Reddy’s growth are also constrained as their Indian facilities are under the USFDA scanner.
Biocon has seen its fortunes improve, with its range of biosimilars. By mid-2019, Biocon will benefit from the commercialisation of its entire advanced pipeline in European market markets. Progress in the US means its profits could grow 45 per cent annually during the FY18 to FY21 period.
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