Cadila Healthcare, Dr.Reddy’s, Aurobindo are the companies to watch out for with half of their revenues coming from US.
As Indian drug makers brace up to report their second quarter earnings in the days ahead, analysts predict Q2 FY18 to be another challenging quarter, with revenues remaining flat year-on-year, while EBITDA and PAT would decline 19 percent and 27 percent, respectively. (Source: Edelweiss). However, the second quarter is expected to be a tad better on a sequential basis as the Indian formulation business is slowly returning to normalcy after the supply chain disruption seen in the first quarter due to roll-out of GST.
Moneycontrol has put together some key factors that may influence earnings of Indian drug makers.
Pricing pressure in US market
One of the key factors to look out for in the second quarter is the extent of price deflation of generic drugs that has eaten into the base business. Analysts say the base business erosion ranges anywhere between high single digit to low-double digit - and the concerning aspect is that its accelerating on account of consolidation of distribution channel (top 3 control 90 percent of the market), rising competition and limited number of drugs going off patent.
Also, the ramp-up in approval rates isn’t helping the matters for generic drug makers. The US FDA approved 763 generic drugs in the US fiscal year ended September 30, which was 17 percent higher than the previous year. Indian companies accounted for around 40 percent of those approvals.
Companies with first-to-file launches, limited competition and specialty drug portfolio are the ones who are positioned to withstand price erosion and deliver healthy growth rates in US.
For Sun Pharma, India’s largest drug maker, analysts expect US revenue growth to be lacklustre at USD 339 million owing to generic competition for Gleevec and Doxil. Taro revenues are also expected to slide.
Dr Reddy’s after several tepid quarters in the US saw some momentum in terms of launches in form of generic Vytorin and Doxil which can cumulatively contribute USD 10‐12 million in the second quarter.
While Aurobindo Pharma is expected to see full benefits from limited competition generic Renvela, to US sales, Cadila Healthcare US sales will get a boost from generic Lialda. Edelweiss puts the contribution of generic Renvela at USD 30 million to Aurobindo and generic Lialda at USD 40-50 million to Cadila Healthcare.
Lupin, Glenmark and Natco may see pressure on US earnings as their exclusivity for generic Glumetza (anti-diabetic drug), generic Zetia (anti-cholesterol drug) and generic Tamiflu (anti-flu pill) respectively as exclusivity ends and more competition enters the market.
During the second quarter we will get to have some clarity on the status of remediation work going on at various facilities under US FDA scanner. Interestingly, many companies have received an establishment inspection report (EIRs) for their facilities in the second quarter indicating that Indian companies are increasingly falling in line with US FDA expectations.
Most Indian drug makers have hired third-party consultants and working on strengthening their compliance systems in line with US FDA expectations. A few of them sought re-inspection indicating the completion of their remediation exercise. Meanwhile, Sun Pharma and Dr Reddy’s have initiated site transfers for some of their important products to the plants that didn’t face the ire of US FDA. Site transfers are not that easy – as they may sound – as it is time-consuming and involves cost.
In particular the market will be interested in updates from Sun Pharma’s Halol facility, Dr Reddy’s Srikakulam, and Vizag units and Biocon’s status on Bengaluru formulation site.Higher R&D costs
The number of plain vanilla small molecules going off patent has plateaued in the US market; at the same time, competition has intensified with US FDA fast-tracking generic approvals through the GDUFA (Generic Drug User Fee Act) route. The drugs that are coming off-patent in the future will be mostly biologics and complex injectables. They are not that easy to copy, needing sophisticated biology and synthetic chemistry capabilities – including clinical and regulatory expertise. Leading Indian drug makers have increased their R&D budgets over the past five years. Rating agency ICRA expects the increase in R&D budgets witnessed over the past few years to continue, given the growing focus both on regulated markets and complex molecules/therapy segments.
The aggregate R&D spends of the top few domestic companies have increased from 5.9 percent of sales in FY11 to close to 9.1 percent in FY17.
Domestic formulation business
The GST rollout in the first quarter has resulted in destocking and supply side disruptions leading to weak growth of the domestic business for the companies. In the second quarter, things are getting normal; however, analysts say the recovery of inventory levels are slower than many expected. The inventory levels which used to be 40-45 days during pre-GST and at time of GST implementation had fallen to 17 days, have only been partially restored to 30 days. Data from market research firm AIOCD-AWACS for the July and August indicates that Indian pharmaceutical market is still not out of woods. The growth rate in August was 2.4 percent and in July it declined 2.4 percent.The price-led growth of pharma companies has been on a decline in the current financial year due to price-control regulations of the government.
Sun Pharma, Cipla, Cadila, Alkem, Lupin, Glenmark, Abbot and GSK are some of the companies with huge domestic formulation businesses to watch out for in the third quarter.Other geographies
With the exception of Russia that saw recovery in oil prices, the weak economic and political conditions in Africa and currency volatility in Latin America (LATAM) are impacting the consumption of pharmaceutical formulations.
“India’s pharmaceutical formulation exports to the semi-regulated markets grew at the weakest pace of 0.7 percent in the last seven years, after exhibiting robust growth till FY14. The underperformance in FY17 was attributed to a 7.0 percent YoY and 5.1 percent YoY decline in exports to Africa and LATAM, respectively,” according to India Ratings & Research.Lupin – Japan, Dr Reddy’s – Russia & CIS, Cipla – Africa, Aurobindo and Wockhardt – Europe are some of the key geographies to look for in the second quarter.