Domestic market revives, but US woes to hit pharma firms’ earnings

Analysts see overall sales growth of 7-10% for the pharma industry in the September quarter, but profits are likely to be under pressure


Indian firms have stepped up investments in research and development to enhance their product pipeline, especially in the specialty drugs and complex generics space. Photo: Hemant Mishra/Mint
Indian firms have stepped up investments in research and development to enhance their product pipeline, especially in the specialty drugs and complex generics space. Photo: Hemant Mishra/Mint

The lucrative US drug market has become challenging for Indian companies because of regulatory issues, product pricing pressure and limited number of high-value drug approvals.

Sluggish performance in the US and unfavourable currency movements in emerging markets are expected to weigh on the earnings of local drug makers in the September quarter.

Analysts expect overall sales growth of 7-10% during the quarter, but profits are likely to be under pressure as higher spending on research and development and on remedial measures at manufacturing plants facing compliance issues has squeezed margins.

Indian firms have stepped up investments in research and development to enhance their product pipeline, especially in the specialty drugs and complex generics space.

The manufacturing facilities of various companies, including Sun Pharmaceutical Industries Ltd, Dr. Reddy’s Laboratories Ltd, Lupin Ltd, Cipla Ltd, Cadila Healthcare Ltd, Wockhardt Ltd and Ipca Laboratories Ltd, are under the US Food and Drug Administration’s (US FDA) scanner for violation of good manufacturing practices. These companies are witnessing delays in product approvals in the US.

Companies are also seeing price erosion in base products in the US on account of increased competition and consolidation in the distribution channel, which has enhanced the bargaining power of distributors.

Likely double-digit growth in the domestic market due to improved sales of anti-infective drugs, anti-malarial medicines as well as drugs for chronic diseases during the quarter will be a silver lining for pharmaceutical firms.

Earnings of companies still suffering from US FDA-related issues and dearth of approvals will be subdued, while a few companies that continue to enjoy low competition in high-value products launched in past quarters will perform better, Emkay Global Financial Services said in a report.

Aurobindo Pharma Ltd is set to post robust earnings on the back of 15 product approvals in the US during the quarter, while Lupin may continue to see some benefit from limited competition in its generic of diabetes drug Glumetza and integration of US company Gavis Pharmaceuticals, which it acquired earlier this year. Glenmark Pharmaceuticals Ltd is likely to gain from the improved pace of product approvals in the US and the low base of last year.

Sun Pharmaceutical Industries may see a muted quarter as the limited competition in sales of the generic version of cancer drug Gleevec is likely to be offset by pricing pressure in base business, regulatory issues at its Halol plant in Gujarat, and subdued performance of its subsidiary Taro Pharmaceutical Industries Ltd.

Dr Reddy’s Laboratories is expected to be the laggard among top drug makers because of the absence of product approvals as three of its manufacturing facilities remain under the FDA’s lens. Cadila Healthcare will also bear the brunt of regulatory issues. Meanwhile, the high base of last year may weigh on earnings of Cipla and Torrent Pharmaceuticals Ltd.

While domestic pharmaceutical sector growth is expected to be 10-12% in the current financial year, resolution of compliance issues and good number of product launches in the US will be critical to boost earnings of companies in the coming quarters.

Sun Pharma and Cadila Healthcare have completed their remediation procedures and now await re-inspection from the FDA, whereas Dr Reddy’s and Ipca Laboratories are still undergoing corrective actions and would submit a re-inspection request within the next 6-8 months to the FDA, according to Emkay Global’s report.

“We believe the situation will improve substantially in 4QFY17/1QFY18 with US FDA issues getting resolved for most of the companies,” HDFC Securities said in a report.

Centrum Broking said in a report that pharmaceutical companies are moving towards better times as around 35% of generic drug approvals from the US FDA are in favour of Indian companies, which would help them gain market share, and as domestic market may continue to witness good growth.

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