December quarter earnings of pharmaceutical companies may see incremental improvement helped by a favourable base and steady domestic business. But if the drug approvals trend in the US is anything to go by, pricing pressure in the key market is unlikely to abate anytime soon.

As approval rates gathered pace and increased competition eroded prices, earnings of domestic pharmaceutical firms came under pressure, forcing reorganization of their US businesses. With new business lines yet to acquire scale, the generic drugs business still remains core to the companies’ earnings.

As the chart shows, the year ended September 2018 has seen a record 781 abbreviated new drug application (ANDA) approvals by the US Food and Drug Administration (FDA). ANDA is an application for a US generic drug. At 278, approvals remained high in the December quarter as well. The US FDA follows a October-September fiscal year.

With a large number of applications pending, the pace of approvals is likely to remain high. “FDA’s alacrity is unlikely to die down anytime soon and FY19 may surpass FY18, given that ANDA backlog is still over 3,500 in our view. Thus, the full impact of ever-increasing approvals is likely to continue in FY20 for US-focused Indian companies," Antique Stock Broking Ltd said in a note.

On the positive side, competition and price erosion have triggered a rethink among firms. Filings for drug approvals slowed in October and November. The steep price erosion is leading to portfolio rationalization at the pharmaceutical firms, which are weeding out low-margin drugs.

But withdrawals are happening in ultra-competitive drugs. The market otherwise continues to see a large number of generic drug sellers. The majority of the drugs that were approved in December have more than six sellers, said Antique Broking.

The high number of sellers and fast approval rates can continue to weigh on prices, warns the broking firm. “Around 65% of approvals (in December) have come in drugs that have greater than 7 players and, thus, unlikely to improve margin dynamics of the companies," it added. “We conclude while the pricing pressures from the buyers has subsided, the increasing pace of approvals—especially in commoditized products—is unlikely to lead to an abatement of sellers’ pressures."

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