US pricing pressure cloud over Indian pharma growth, say analysts

Complex pipeline, execution, and regulatory compliance hold key

Price erosion and cost pressure in the US generics business continue to drag Q3 numbers for most domestic pharma firms. Analysts say that companies, which have a limited number of launches lined up in the US, or those with regulatory overhangs will continue to face headwinds.

According to Motilal Oswal analysis, price erosion continues to affect the US generics business. However, some firms like Sun Pharma and Cipla delivered mid-single digit growth year-on-year (YoY) as well as quarter-on-quarter (QoQ) in the US generics business. This was on the back of a robust pace of launches.

The analysts add that companies with a limited number of launches like Ajanta Pharma or those facing regulatory issues (like Torrent Pharma) saw headwinds in the US generics segment.

Samir Mehta, chairman of Torrent Pharma, said, “Due to the prolonged delays in re-inspection of our US facilities on account of the pandemic, coupled with higher than anticipated pricing pressure, our US business has been adversely affected during this quarter.”

He added that the company is hopeful of the US market prospects as soon as the facilities are re-inspected. “We have initiated cost optimisation measures, which should help us get back on track with respect to margins in the upcoming quarters,” Mehta said.

On the domestic formulations front, Q3 of FY22 largely saw minimal Covid-related business with 13 per cent YoY growth on an aggregate basis, Motilal Oswal said.

“With restrictions on travelling reduced, companies now focus on better marketing efforts. This resulted in the domestic formulations business doing better for most companies. Covid portfolio, however, is not expected to be the bread and butter and would remain largely seasonal. The focus on chronic and acute therapies is back,” said a senior executive, who heads the chronic division in a Mumbai-based mid-sized firm.
 

Torrent Pharma’s India revenues (Rs 1,072 crore) grew by 15 per cent versus a market growth of 6 per cent. Its medical representative (MR) productivity, too, was high at 9.9 lakh.

Typically, drug firms have posted steady revenues in the India business during the past few quarters. For instance, Sun Pharma — the domestic market leader with 8.2 per cent share of the Rs 1.67 trillion Indian market — posted market leading growth in domestic formulations for the last three quarters.
 

Kunal Randeria of Edelweiss Securities feels that Sun Pharma’s multiple growth drivers are starting to deliver — its US revenue ($397 million) was the highest in eleven quarters (excluding the one-off opportunities in Q4 of FY19 and Q1 of FY20). Its India business also grew 15 per cent and its global specialty business touched $183 million (versus $160 million in Q2 of FY22).

While Sun Pharma’s specialty or complex generics pipeline is starting to deliver, the road is not smooth for some other drug majors.

Edelweiss feels that Dr Reddy’s Laboratories may not have a smooth road ahead. This is because of the persistent price erosion in the US, slower offtake in complex generics pipeline, uncertainty around Duvvada inspection outcome, tepid India growth and a fading Sputnik vaccine opportunity.

A DRL spokesperson said that their India business has grown 7 per cent YoY.  “Adjusted for Covid-related portfolio sales in the previous year, and in the last quarter, the business performance has been fairly strong and in line with expectations. During Q3, we launched four new products in the India market. According to IQVIA MAT December 2021, we have grown higher, at 23.1 per cent, than market with 18.1 per cent. The domestic market certainly is a very strong focus area for us. We see relatively higher growth prospects in India and Emerging Markets, and our capital allocation is being done in accordance with this strategy.”

Companies with strong product pipelines for the US will be able to offset the price pressure.

Cipla, for example, has generic Advair, generic Abraxane and generic Revlimid launches in the US in a year. These can potentially double its US revenues by FY24. The company’s domestic Covid business, however, has started showing signs of slowing down. It is down 10 per cent YoY and 17 per cent QoQ.
 

Some of the upside from the US market is a medium to long term opportunity.

ICICI Direct analysts pointed out that Cadila Healthcare, which draws 43 per cent of its revenues from the US market, plans to venture into complex injectables in the US.

“However, it is likely to provide meaningful traction only from FY23-24 onwards. USFDA cGMP issues at Moraiya and slowdown in base are the main near-term headwinds requiring resolution for guidance of $1 billion by FY24,” said ICICI Direct.

Execution of the US pipeline holds key.

Mumbai-headquartered Lupin has a health pipeline comprising generic Spiriva, pegfilgrastim, and Suprep Bowel kit, among others. “Success hinges on execution…results of cost optimisation, while promised, are awaited,” said Kunal Randeria and Aashita Jain of Edelweiss.

The company is working actively on cost optimisation. Lupin CEO Vinita Gupta told Business Standard, “We have shifted production to India for some of our products like our nasal spray. For some other first-to-file (FTF) products in the US, we are transferring production to some contract manufacturers in the US and India.”

Bhavesh Gandhi, lead analyst, YES Securities, sums it up. “Jury still out on whether gross margin has bottomed out though some relief can be in Q4. US revenues may remain under pressure.”