Pricing pressure in US to take sheen off pharma

Increased competitive pressure in the US and regulatory problems are expected to impact top Indian pharmaceutical firms in FY17. Given that this highly profitable geography accounts for 40 per cent of overall revenues for the top generic companies, higher competition will hit their revenue growth and profit margins. Analysts at CLSA say incremental competition among leading Indian generic companies for top-15 US products indicates that Torrent, Dr Reddy's, and Sun Pharmaceutical could see higher price erosion of existing portfolios while Lupin could be the least affected.

Ironically, one of the reasons Indian companies are facing higher competition is the increase in product approvals as opposed to limited approvals in the first half of FY16. Given the surge in nods in the past nine months, US FDA (Food and Drug Administration) approvals are close to multi-year highs. This means more companies launching products, which has led to pricing pressures. Lack of product approvals in the US impacted pharma revenue growth in FY16. Even in the March quarter, revenue from first-to-file and limited-competition products in the US helped companies report good growth as the base business continued to reel under pricing pressure. Had it not been for US growth, currency volatility in emerging markets and higher R&D (research and development) spends would have affected growth at the operating profit and net profit levels.

The other reasons for fall in drug prices is consolidation among US pharmaceutical distributors, with top four players now accounting for over 80 per cent of the generics market. In addition, analysts at Edelweiss Securities say consolidation among larger generic companies is forcing smaller players to keep prices competitive to maintain market share. Increased US scrutiny, after November 2014 probe into soaring generic prices, is also keeping drug prices soft. US FDA compliance issues have heightened pricing pressures. Because of this, the Nifty pharma index underperformed broader indices in FY16, after outperforming them for five years. Increased US regulation will affect companies in the first half of FY17, according to ICICI Securities; growth will be back in the second half on higher product approvals and site transfers of affected plants.