Fewer launches, pricing pressures in US to affect pharma's Q4 show

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As Indian drug makers brace for fourth quarter earnings in the days ahead, analysts predict the March quarter will be tough with revenue growth moderating to 5-6 percent owing to the absence of any significant launches and pricing pressure in US, which accounts for half their sales.

Here are some key factors that may influence earnings of Indian drug makers:

Pricing pressure and rupee strengthening in 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. Analysts say the base business erosion ranges anywhere between high single digit to low double digits. The worrying aspect is that it is accelerating on account of consolidation of the distribution channel and rising competition.

Another concerning aspect is the unexpected sharp appreciation of the rupee since the Uttar Pradesh poll results. The headwind may hurt margins of pharma companies that export drugs to the US market, though some analysts say it isn’t going to be a huge factor in the fourth quarter, but the impact will be gauged from the first quarter of FY18.

In the fourth quarter of 2017, the rupee has appreciated 4.74 percent touching a peak of 64.98 per dollar, the highest since October 2015, while the dollar index is down 1.82 percent.

A 5 percent decline is likely to lead to a 1-5 percent earnings cut.

Sun Pharma, India’s largest drug maker is expected to face pricing pressure in its Taro portfolio and base effect of exclusivity sales of generic Gleevec in US.

''We expect Taro revenues to decline by USD 15 million to USD 205 million in the quarter,'' Kotak Securities said in its fourth quarter preview report.

''We model Sun Pharma's ex-Taro US revenues at USD 315, largely in line with 3QFY17, as any incremental volume benefit will be offset by declining generic Gleevec contribution,'' the report added.

Lupin’s US business which was riding on the exclusivity of generic anti-diabetic drug Glumetza and limited competition in Fortamet is expected to be under pressure in the fourth quarter owing to increased competition, thought the slide will be partially offset by launches such as generic oral contraceptive Minastrin launch and continued growth in Methergine.

Dr. Reddy's US revenues will continue to see a decline in fourth quarter earnings on account of additional competition in generic anticancer drug Vidaza and antiviral Valcyte. Aurobindo is expected to register a 7 percent growth in the US generic business, led by a pick-up in injectable products. Cipla is may see its US business get a boost due to its acquisition of Invagen and Exelon.

Alembic Pharma and Torrent Pharma would face pressure in US sales due to reducing contribution of generic Abilify and increased R&D spend.

Glenmark and Natco are the companies to watch out for given their exclusivity for Zetia (cholesterol lowering drug) and Tamiflu (antiviral), which were launched in December are expected to show their full revenue potential in the fourth quarter.

Remediation status

January-March period has been busy period with series of US FDA inspections and actions that brought cheer for some and further heartburn for other companies.

Sun Pharma, which was struggling with regulatory issues at its key Halol plant in Gujarat, received some good news with US FDA revoking its earlier import ban on Mohali formulation facility it acquired from Ranbaxy’s buyout.

Cadila Healthcare, part of Zydus Cadila group, successfully cleared US FDA’s re-inspection of its critical Moraiya facility in Gujarat. Lupin too successfully cleared US FDA audit for its Goa plant.

Dr Reddy's, howerver, floundered in its re-audit, with all the three plants facing US FDA warning getting observations, indicating a further delay in resolution. Divis Laboratories and Indoco Remedies are the other two companies that faced US drug regulator's ire in the fourth quarter.

In particular, the market will be interested in updates from Sun Pharma’s Halol facility, Dr Reddy’s and Divis commentary on their remediation efforts at plants under US FDA action.

Domestic formulation business:

The domestic formulation business, the safe bet for Indian drug makers, will continue to be under some pressure in the fourth quarter with seasonal factors and demonetisation, the impact of which has softened in the month of March.

According to data from market research firm AIOCD-AWACS, Indian pharmaceutical market growth rate dropped to 8.8 per cent in the quarter ended March compared to 10.5 percent growth in the same period previous fiscal year.

Even on sequential basis, the growth of Indian market contracted by two percentage points in the fourth quarter.

The acute segment, which includes anti-infective drugs and pain management medications, is under pressure, while the chronic segment continued its growth trajectory.

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 Glaxosmithkline are some of the companies with huge domestic formulation businesses to watch out for in the third quarter.

Other geographies

The impact of the rupee hardening versus currencies such Euro and Pound Sterling may have an impact in the fourth quarter. However, the relative stability of oil prices with OPEC's deal to cut production has helped to stem currency depreciation and reduced ongoing macroeconomic uncertainties faced by emerging economies such as Russia, Nigeria, Middle East and North Africa, some of the key markets for Indian pharmaceutical exports.

Venezuela continues to be problem for Dr.Reddy's and Glenmark as both companies are finding it challenging to repatriate their profits from the Latin American country, which is in political and economic turmoil. Dr Reddy's wrote-off its entire receivable amount of USD 65 million, while Glenmark is yet to do it. Glenmark has receivables to the tune of USD 50 million.

The performance of Lupin in Japan, Dr Reddy's in Russia, Cipla in Africa, Aurobindo and Wockhardt in Europe are some of the other things to look for in the fourth quarter.