Shishir Asthana Moneycontrol Research
Amidst the global rout in pharma, the only comfort that Indian pharmaceutical companies can take is that they are not the only ones falling. All generic pharmaceutical companies across the world and those involved in the distribution of generic drugs in the USA have seen their market value eroding sharply.
Teva, the generic major from Israel, has lost nearly half its value in the matter of a week. The company said that it will be closing 15 manufacturing units, sacking 7,000 people and withdrawing from 45 countries.
Taro, another Israeli company that was taken over by India’s Sun Pharma, has shown a sharp drop of 31 percent in its sales and a multi-year low operating margin. Most analysts have sharply reduced their price target for Sun Pharma post its results. The stock has lost 30 percent in value in the nearly two weeks. Other Indian generic companies like Lupin and Dr. Reddy’s have also met with a similar fate in the market.
While pressure on generic medicines in the US market has been on since 2010, the sharp fall in share price in over the last few weeks is because the reported financials have been worse than analyst expectation.
Increased competition among the three wholesalers who account for 80 percent of generic drug distribution in the US resulted in prices falling more than expected. Further, some retailer groups decided to deal directly with manufacturers pushing prices lower.
For the US economy, it looks like falling generic prices is good as the government’s spending on health care reduces. However, a QuintilesIMS report – an industry research firm, as reported in an NYTimes article says that drug spending has actually increased by nearly 5 percent. Though generic drugs account for 89 percent of the prescriptions dispensed in 2016, in value terms they were only 26 percent.
In a rush to protect market share as more companies were cleared by US FDA to sell generic drugs in the USA undercutting was rampant in the space.
Unfortunately, the price pressure is likely to continue over the next few months as wholesalers continue to bid aggressively. AmerisourceBergen Corp, the second-largest US wholesaler is quoted as saying that it continued to expect generic prices to decline by a range of 7 percent to 9 percent in its current fiscal year. Teva has reportedly said that the consolidation of its customer base into purchasing groups as a key factor driving its disappointing quarterly performance.
On the supplier side, the pressure is visible in the financial numbers of companies. Teva’s 7,000 employees who lost their jobs are the first victims of the price war as more low-cost generic companies start selling in the USA.
The higher cost players are taking the blow on their chin. Indian players, because of their low-cost operations and integrated nature, where they normally produce the bulk drug, are witnessing a margin squeeze, though no one on Teva’s path.
The aggressive stance by the US regulator in controlling drug prices is also preventing companies with branded products in the market to increase prices.
Little wonder then that analysts are slashing their earnings estimates, going forward. CLSA has chopped its EPS (earnings per share) estimate for Sun Pharma by 30 percent and 44 percent for FY18 and FY19, respectively.
Given the uncertainty in the US markets, it would take a brave heart to pick up the stocks as price depreciation is still not over and it is difficult to project future numbers. It might take more high-cost manufacturers to shut shop before the market stabilises. Though this consolidation is good for low-cost Indian players, new product lines and diversification to new markets will bring in some stability to the numbers.
As in the case of IT sector, milking high margins from the US markets are now passé. Pharma stocks have also lost the defensive stock tag. The sector is now being categorised as a risky play by most analysts. But traditionally this categorisation has been a breeding growth for value investors.
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