As Indian drug makers prepare to report their fourth quarter earnings in the days ahead, analysts predict it to be a mixed bag. A near-flat or lower single-digit year-on-year revenue growth and a net profit decline of around 9-10 percent is expected.
On positive side domestic formulation business is limping back to normalcy after the supply chain disruption seen in the first half of the year due to roll out of GST. Indian pharmaceutical market (IPM) grew 8.7 percent in March quarter compared to 7.2 percent in the previous quarter indicating recovery.
On the flipside –the US business that contributes around 40-50 percent sales of major India drugs makers is expected to remain under pressure without meaningful launches, and continuing pricing pressure.
Moneycontrol has put together some key factors that may influence earnings of Indian makers.
Pricing pressure in the US market:
One of the key factors to look out for in the fourth quarter is the extent of price deflation of generic drugs that has eaten into the base business. To be sure there isn’t any let-off in terms of pricing woes that Indian drug makers face.
Companies with first-to-file launches, limited competition and specialty drug portfolio are the ones that are positioned to withstand price erosion and deliver healthy growth rates in US.
“We expect Q4FY18 numbers to show moderate growth to decline in US sales,” said ICICI Securities in its research report.
“Sun Pharma, Lupin and Glenmark are expected report decline in US sales due to pricing pressure and increased competition. Natco, Cadila and Strides would benefit from new product launches,” the report added.
Sun Pharma, India’s largest drug maker may continue to see decline in the US sales.
“We expect US revenue (USD 330 million) to remain flat sequentially, with Taro expected to decline by 4 percent (USD5mn) sequentially. Base business erosion is likely to offset launch of generic versions of Epiduo and Duac by Taro,” Edelweiss report said.
Dr Reddy’s revenues (USD 297 million) are expected to see a drop of 17 percent in the fourth quarter mainly from declines in generic Renvela, and new competition in generic Dacogen from Cipla and generic Vytorin from Alkem. Company launched gXenazine and gXyzal during the quarter.
Aurobindo Pharma is expected to post a small decline in US sales (USD 280 million) due to market loss of generic Renvela, despite the launch of generic Arixtra (fondaparinux sodium injection) that may offset some loss in revenues.
Cadila Healthcare US revenue (USD 220 mn) is likely to decline sequentially due to competition in generic Lialda, however the company will get support from generic Tamiflu due to strong flu season in US
Cipla with the launches of generic Renvela and generic Pulmicort Respules, is likely to post strong numbers in 4QFY18, the company will also be helped by a low base.
Lupin and Glenmark may see pressure on US earnings as their exclusivity for generic Glumetza (anti-diabetic drug) and generic Zetia (anti-cholesterol drug) which they enjoyed last year doesn’t exist anymore.
Natco can throw punch above its weight in the fourth quarter backed by approval of generic versions of multiple sclerosis drug Copaxone 20 and 40 mg.
Natco is also expected to benefit on generic Tamiflu suspension the fourth quarter.
Fourth quarter will bring some clarity on the status of remediation work going on at various facilities under US FDA scanner. Interestingly, many companies have received establishment inspection reports (EIRs) for their facilities in the fourth quarter indicating the Indian companies are increasingly falling in line with US FDA expectations.
Most of Indian drug makers have hired third party consultants and working on strengthening their compliance systems in line with US FDA expectations.
In particular – the market will be interested in updates from Sun Pharma’s Halol facility, Dr Reddy’s Duvvada unit remediation status, Lupin’s update on Goa and Indore plants. All these sites are under warning letters that restrict them from launching new products made from these facilities in the US market.
Analysts say things on regulatory front have eased to some extent.
“One of the factors working in favour of larger Indian pharmaceutical companies is a marked reduction in the number of regulatory alerts in 2017, a welcome change from 2015 and 2016,” said Crisil Research in its latest report.
“Official Action Indicated (OAI) reduced significantly to 16 in 2017 from 28 in 2014. This was possible because of efforts taken by large formulation companies over the past 2-3 years towards remediation,” the report added.
OAI indicates objectionable observations that may result in regulatory sanctions by the US FDA. Typically, non-closure of an OAI results in a warning letter or import alert.
Domestic formulation business:
Indian pharmaceutical market (IPM) is on recovery path, but growth remains in single digit. IPM saw series of interruptions during past few months, caused by demonetisation and followed by roll out of GST, in addition to frequent notifications related to drug price controls.
However, the industry is fast moving towards normalisation and attaining secular growth.
As per AIOCD-secondary sales data, IPM witnessed 8.1 percent growth in 4QFY18 – the highest in FY18 , versus 7.2% yoy growth in 3QFY18, 0.7% in 2QFY18 and 6.7% in 1QFY18.
Sun Pharma, Cipla, Cadila, Alkem, Lupin, Glenmark, Abbott and GSK are some of the companies with huge domestic formulation businesses to watch out for in the third quarter.
Higher R&D costs:
The aggregate R&D spends of top few domestic companies have increased from 5.9 percent of sales in FY11 to close to 9 percent in FY17. Fourth quarter is also expected to be no different as top Indian generic drug makers continue their investments on complex formulations, specialty drugs and biosimilars.
The gradual strengthening of oil prices could be positive for drug makers as oil-exporting economies such as Russia and CIS, Middle East and North Africa (MENA) and West African countries such as Nigeria have stabilized with exception of Venezuela - that's still reeling under economic turmoil.
Lupin – Japan, Dr. Reddy’s – Russia & CIS, Cipla – South Africa, Aurobindo and Wockhardt
– Europe, Glenmark – Latam, Strides Shasun
- Australia are some of the key geographies to look for in the third quarter.