As Indian drug makers prepare to report their third quarter earnings in the days ahead, analysts predict Q3 FY18 to be mixed bag with revenues expected to remain almost flat on year-on-year basis.
Domestic formulation business returning to normalcy after the supply chain disruption seen in the first half due to roll out of GST and healthy 10-20 percent growth in geographies excluding US & India, especially in emerging markets are major positives.
On flipside – lack of major generic approvals, competition in existing portfolio and channel consolidation in US could hit large India generic drug makers.
"Overall, we see 1.4 percent YoY growth for our coverage universe and the EBITDA margin to remain steady sequentially at 21.9 percent in 3QFY18E," said HDFC Securities in its latest report on pharmaceutical industry.
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 third quarter is the extent of price deflation of generic drugs that has eaten into the base business.
Rating agency ICRA expects base business erosion ranging anywhere between low-to-mid teens - 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 1027 generic drug approval in 2017 , which was the highest in a decade's time. 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 that are positioned to withstand price erosion and deliver healthy growth rates in US.
Cadila Healthcare, Aurobindo Pharma, Natco and Cipla are the companies to watch out for.
Sun Pharma, India’s largest drug maker - analysts expect US revenue growth to be lacklustre owing to generic competition for Gleevec and Doxil. Taro revenues are also expected to slide. HDFC Securities expects 11 percent decline in sales.
Dr Reddy’s revenues are expected to see a drop of 4 percent in the third quarter but the launch of generic Renvela in the third quarter and ramp-up of generic Vytorin and Doxil are expect to compensate price erosion of key products.
Aurobindo Pharma is expected to post decent US sales on YoY basis on expanding base; however, with the benefit of generic Renvela tapered-off in the third quarter due to new competition – the company could see pressure in retaining Q2 sales.
Cadila Healthcare US sales will get boost from generic Lialda exclusivity. Generic Lialda is expected to contribute another USD 40-50 million to Cadila Healthcare, while Cipla with the launches of generic Renvela and generic Pulmicort Respules, is likely to post strong numbers in 3QFY18, the company will also be helped by a low base.Lupin
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.
The street will also come to know about the full impact of warning letter Lupin received for two plants on its US sales.
Natco can throw punch above its weight in the third quarter backed by approval of generic versions of multiple sclerosis drug Copaxone 20 and 40 mg. Natco’s partner Mylan that markets Copaxone generic version is said to have already made dent to Teva’s blockbuster drug sales. Natco-Mylan combo enjoy exclusivity for 40 mg version that clocked sales of around USD 2.7 billion sales in 2016.
Natco is also expected to benefit on generic Tamiflu suspension and generic Doxil ramp up in the third quarter.
Third 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 establishment inspection reports (EIRs) for their facilities in the third quarter indicating that 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 re-inspection, Dr Reddy’s Duvvada unit remediation status and 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.
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 have got normal, but the full recovery on year-on-year basis still remain elusive. The Indian pharmaceutical market (IPM) grew 7.2 percent in the third quarter, recovering from the wash out in the second quarter as the industry grew just 0.7 percent due to disruption caused by GST implementation. The IPM grew 10 percent during the same period in the previous year.
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.
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. The drugs that are coming off-patent in the future will be mostly biologics and complex injectables – that 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 top few domestic companies have increased from 5.9 percent of sales in FY2011 to close to 9.1 percent in FY2017. Third 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.