Pharma growth to pick up in 2nd half

Companies have been under pressure after weak Q2 results and regulatory headwinds

Expectations of a gradual reduction in pricing pressure in the US market were belied as Indian pharmaceutical companies reported another quarter of muted growth. On the back of 11-12 per cent price erosion in the US market, year on year, revenues of the top generic pharma companies fell a little over 20 per cent over the year-ago quarter. The brokerages had expected some pricing pressure but the results indicate this was as severe as in the June quarter.

Barring Cadila Healthcare and Aurobindo most Indian pharma majors revenue from the US market fell, by seven to up to 46 per cent. This country accounts for a little over 30 per cent of sales. One reason for the fall has been a sharp increase in product approvals, both for existing generic products and for drugs under the sale exclusivity period. For example, Lupin’s sales in the US were down 32 per cent over a year on loss of exclusivity for Minastrin (a contraceptive) and pricing pressure in anti-diabetic medications Glumetza and Fortamet.

Similarly, Sun Pharmaceutical industries reported a 44 per cent fall in US revenue on account of a pricing pressure on the base business (dermatology portfolio), deferring in sales of some products to the December quarter and falling contribution from the generic of cancer drug Gleevec. The company had enjoyed marketing exclusivity for this drug in the year-ago quarter.

What has been pegging back US revenue, in addition to increased competitive levels, are the lack of approvals due to regulatory issues. Analysts believe the lack of approvals for Sun Pharma (Halol) and Dr Reddy’s (Srikakulam, Visakhapatnam) has been due to facilities not compliant with the US regulations. Most companies in the US market neither have the volume or the new product levers to counter price erosion on account of generic launches, as well as consolidation of the distributor chains.

The outliers among larger companies have been Aurobindo Pharma and Cadila Healthcare. They reported 17 per cent and 37 per cent growth, respectively, in overall sales, on the back of limited competition products.

Most companies have been cautious about growth for 2017-18. Sun Pharma has maintained it expects single-digit revenue decline for FY18 on a consolidated basis; analysts believe a large part of this is on account of the disappointing US performance. Analysts at ICICI Securities expect the company’s US sales to fall by 24.7 per cent, due to delay in product approvals and continued pricing pressure. On profitability, the management has indicated a margin of 20-22 per cent, much lower than the 30 per cent it was reporting after the Ranbaxy integration.

In addition to the pricing pressure, higher expense on account of developing a speciality product pipeline is also impacting the margins. While margins for Lupin and Dr Reddy’s were down 100-240 basis points year on year, Sun Pharma saw the steepest fall, with margins declining 17 percentage points. On the other side, Cadila reported a 457 per cent jump in operating profit margin. Given stiff competition from newer players, channel consolidation and lack of product approvals, analysts expect pricing pressure to continue in high single-digit for the other Indian players in the US market.

The positive for the sector has been the expectation from most managements that the second half of FY18 would be better than the first half. This is because the June quarter was one of the weakest reported by Indian drug companies in recent times, a weak US market being compounded by Goods and Services Tax disruption in India and currency-related issues in other markets. This had impacted revenues and shrunk margins of all players.

Further, analysts at Kotak Institutional Equities expect launches to pick up from the second half of FY19, driving US generic revenue and overall revenue and profit.

On a sequential basis, growth seems to have picked up in India, second most important market by revenue for the larger drug makers. After declining by two to 10 per cent in the June quarter, companies reported double-digit growth in domestic sales. Cipla, Lupin and Sun Pharma reported 11-16 per cent year on year growth, on the back of channel restocking, helping offset some of the pain in the US market.

Analysts, however, say it will take some more quarters for sales to come back completely, as secondary sales data indicate there is still inventory in the channel. Ranvir Singh of Systematix expects domestic industry growth to come back to 10-12 per cent levels on an annual basis.