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Last Updated : Dec 31, 2016 05:34 PM IST | Source: Moneycontrol.com

5 trends to watch out for in the pharma sector in 2017

From the look of it 2017 is unlikely to be any easier. Pricing pressures in US– the world‘s largest market for generic drugs—tighter regulatory scrutiny by the US FDA and thereby higher compliance costs, global macro-economic uncertainty and price controls back home are expected to continue in the 2017.

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Todays L/H

Viswanath Pilla

It was a tough year for the pharma sector, which normally has a reputation for delivering credible returns even in tough market conditions. Pharma companies finished among the worst performers of 2016, alongside sectors like IT, power, real estate and capital goods.

From the look of it 2017 is unlikely to be any easier. Pricing pressures in US – the  world’s largest market for generic drugs — tighter regulatory scrutiny by the US FDA and thereby higher compliance costs, global macro-economic uncertainty and price controls back home are expected to continue in the 2017.

Seen another way, 2017 could perhaps provide opportunities for investors who have been looking to buy pharma shares, but found valuations prohibitive.

Here are five things to watch out for 2017:

Generic pricing uncertainty in US

Profit margins of Indian companies selling generics in the US will remain under pressure in 2017 with channel consolidation and USFDA fast tracking approvals through Generic Drug User Fee Act (GDUFA). Despite that US still remains a lucrative market with margins upwards of 20 percent. In fact in FY16 – Indian companies have clocked EBITDA margins of 27 percent – the highest over previous four years.

“Generic price deflation was significantly worse than expected in 2016, ranging anywhere from down 5-25 percent and resulted in several manufacturers lowering guidance. Further, the generic environment remains challenging with increased competitive pressures from new entrants and buying consortiums, and recent results suggest these challenges will continue well into 2017, which we model as another year of high single digit to low double digit price erosion,” said analysts at JP Morgan – in their latest report titled ‘US Pharma 2017 Outlook’.

Analysts expect companies with new approvals, differentiated and specialty product portfolio are the ones better positioned to thrive in 2017 – which means that companies will incur higher expenses on R&D as was the case in 2016.

Regulatory scrutiny:

Indian drug makers were kept busy throughout 2016 with adverse observations, warning letters and a few import alerts in extreme cases from US drug regulator. There are no two thoughts about – the rising expectation of compliance to current good manufacturing practices (cGMP) by USFDA. Companies have learnt the hard way – the downsides of non-compliance – that include loss of market value, fresh approvals getting stuck and the cost of remediation.

Analysts say things are getting better.

"We believe 2016 has been a better year where the number of warning letters and import alerts for Indian sites declined compared to 2015,” said a Normura report.

“For instance, the number of sites receiving import alerts is down to three vs. 12 in 2015. Similarly, the number of Indian sites receiving warning letters is eight (15 percent of all warning letters) in 2016 vs. 12 (32 percent of all warning letters in 2015)," the report said.

Price controls in local market

Domestic pharmaceutical market - despite heavy competition was a safe bet to drug makers – given the fact that market grew at 24 percent to USD 26.1 billion in 2016 and is insulated to some extent from external shocks such as currency volatility and other macro uncertainties. In 2017 – analyst expect the government continue its price control policies and aim to improve quality and streamline the approval process will continue.

 “One of the reasons Indian generic peers trade at premium valuations is the strong branded business in India. While we continue to remain positive on the medium term outlook for the industry, near term we expect growth to be slower,” said Jefferies in their sectorial research note in August.

“This is led by increased regulations and pricing caps from the government. We expect industry growth to be in high single digits vs expectations of low-teens over the near term. Further, margins could also likely see further impact if the government’s zeal of pricing key drugs expands,” the report added.

Mergers and acquisitions (M&As)

The year 2016 was a busy years for mergers and acquisitions, 2017 is expected to be no different – as Indian companies try to expand into new markets, deepen their presence in existing ones, get access to manufacturing assets and fill their portfolio and technology gaps.

"With organic-growth rates moderating and profitability plateauing, Indian companies are exploring M&A that could serve as a springboard for growth," said Moody’s in their latest report.

Other markets and Biosimilars:

With economic slowdown, aging population and governments encouraging generic substitution – Indian generic companies continue to expand in 2017 in geographies like Europe and Japan.

The other good news in 2017 could be that with crude oil prices looking up, the problems of exchange rate volatility and steep depreciation of currencies in key export markets like such as Russia may ease.

2017 is seen as a critical year for Biocon and Dr.Reddy’s as they move with their filings in highly regulated markets such as US and Europe for biosimilars.

First Published on Dec 30, 2016 07:07 pm