Changing dynamics: What’s fuelling growth in the US generics market?

Four Indian large-cap pharma companies, Lupin, Cipla, Dr Reddy's and Sun Pharma, reported strong double-digit US sales growth during Q1.

The April-June earnings season for large-cap pharmaceutical players has been marked by a common thread: a better-than-expected performance in the US market, where it was floundering just a few quarters ago in the face of multiple headwinds.

Large-cap pharma players such as Dr Reddy’s, Cipla, Lupin and Sun Pharma have all reported strong double-digit growth in the US market in the April-June quarter. Cipla clocked its highest-ever US sales during Q1 at $222 million, a 43 percent spike on year, while North America revenue for Dr Reddy’s surged 79 percent year-on-year to Rs 3,197.8 crore during the same period.

Lupin recorded a 49 percent on-year jump in US sales for the quarter at $181 million. A similar story played out for Sun Pharma, with sales in the US growing 12 percent over the base period to $47.1 million.

The changing dynamics within the US market beg the question about what has changed within that space so much that the segment is now faring better than Street expectations. The reasons behind the change are many. Let’s take a deep dive to examine them.

For starters, the major headwinds arising from intense price erosion and high raw material prices within the US market last fiscal year have subsided this time around.

Though price erosion remains part and parcel of the landscape for drugmakers operating in the US market, the earlier intensity of price erosion has eased to high single digit from the peak of 15-20 percent seen in FY23.

Along with that, raw material prices have also cooled over the past quarters. A combination of both these factors has helped pharma companies not just report better US sales, but also improve their operating margins.

A significant portion of US sales for a majority of drugmakers, such as Cipla, Dr Reddy’s and Sun Pharma, has been led by a strong contribution from the blockbuster cancer drug Revlimid.

The resilient sales of Revlimid came as a surprise for the market, as analysts had expected its contribution to decrease over the quarters as more companies launched their own generic versions of the drug.

However, the moderation in sales of Revlimid was much slower than analysts had expected, and hence, it helped boost numbers for major players.

Another growth multiplier for drugmakers during the quarter gone by was a line-up of drug launches along with a ramp-up of recently launched drugs.

Lupin launched its generic of Darunavir (an antiretroviral medication used to treat and prevent HIV/AIDS), for which it enjoyed 180-day exclusivity and ramped up sales of Suprep (a combination bowel prep kit). As for Dr Reddy’s, the company got hold of Mayne Pharma’s portfolio post its acquisition. It also launched six new products in the US.

Cipla witnessed an increase in market share for Lanreotide (a medication used in the management of acromegaly), which helped offset the loss of share for Albuterol (an inhalation drug). Sun Pharma, too, enjoyed a ramp-up of its specialty products like Ilumya (used to treat plaque psoriasis) and Winlevi (used to treat acne vulgari) during the quarter. The launch and ramp-up of these high-margin complex drugs gave the large-cap pharma players a much-needed push to register strong sales in the quarter.

Shortages of several drugs in the US also helped Indian pharma companies grab a greater market share by filling the supply void, which lifted their sales further. The management of Cipla also pointed at another change in the US pharma market that contributed to an increase in their market share. Umang Vohra, CEO of Cipla, explained in an earnings call that several US pharma companies have amalgamated, merged or gone bankrupt in recent times, thereby reducing competition and increasing the market share up for grabs for Indian drugmakers. Vohra attributed this change within the US market as a major factor for the sales growth seen during the quarter.

Another encouraging fact about the changing dynamics in the US market is that expectations of strong growth for Indian drugmakers do not end here. A strong line-up of complex drug launches lined up by companies such as Lupin and Cipla, which are slated to hit the US market in the coming quarters, could lift the sales growth trajectory higher.

As Indian pharma players increase their focus on research and development (R&D), aiming to make the most out of $75 billion revenue opportunity arising from the slew of patent expiries in the FY23-26 period, the US sales growth seen in the quarter under review may well be just a teaser of what is to come.

Moreover, in a market that is inching towards newer all-time highs, analysts are also comfortable with valuations of pharma players as they see the recent run-up in the sector as just a phase of catching-up. Chirag Dagli, a fund manager with DSP Mutual Fund believes valuations within the sector are still far from their historical highs and also at a discount to the overall broader market, leaving more fuel for them to go further.

Analysts and company managements are equally optimistic about the sector’s prospects, making the pharma growth story an opportunity you wouldn’t want to miss.

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