The December quarter (Q3) results of Indian pharmaceutical companies, while unexciting, gave important cues about the US market.
One, companies are seeing reduced pricing pressure in the US generic drugs business, even though the degree varies across companies and product categories. Two, the long-awaited complex generics and specialty products businesses are finally shaping up. These segments have higher entry barriers and better price realizations. As these gain traction, and pricing pressure in the core generic drugs business subsides, chances of a rebound in US revenues in FY20 are quite high, say analysts.
“We expect US generic revenues to recover sharply over FY20-21 on the back of new launches, although the timing of the launches is still somewhat uncertain, which may push back the recovery in revenues and profits," Kotak Institutional Equities said in a recent note referring to the domestic pharma companies.
US is a key market for large Indian pharma companies, such as Sun Pharmaceutical Industries Ltd, Dr Reddy’s Laboratories Ltd and Lupin Ltd. Compared to a 1.6% fall in FY19, Kotak estimates the combined sales of these three companies to increase by 16% next fiscal year.
As competition in the US generic drugs business intensified, financial performance of all the three companies had come under pressure. Signs of stabilization emerged in Q3, with all three registering sequential growth in US revenues. The growth was driven by volume increase, new product launches and reduced pricing pressure.
Drug makers such as Dr Reddy’s Laboratories and Glenmark Pharmaceuticals Ltd, however, continued to see pricing pressure, but compared to earlier years, the price drop has moderated, after the squeeze in profitability made the industry wary of irrational pricing.
Concurrently, as companies began introducing complex generics and specialty drugs, the fall in revenues at the portfolio level is being arrested.
Lupin, which had launched one specialty drug (Solosec) last year, expects its sales to grow this year. It plans to introduce more limited competition drugs in the current quarter. Similarly, Sun Pharma introduced a couple of specialty drugs and plans to launch a few more this year.
In this backdrop, the expectation of a revival in US growth isn’t surprising.
Even so, Anshuman Gupta, analyst at Investec Capital Services (India) Pvt. Ltd, warned that the recovery assumptions are tied to the success of the new products. “The recovery will be dependent on success of these large products, where we believe the chances of surprising on the downside are higher," he said.
Indeed, the caution is warranted. Delays in product launches are commonplace, and the recent specialty drug launches did not see the kind of growth as initially envisaged. This should be reason enough for investors to exercise some caution.
Complex and specialty drugs require significant upfront investments. Slow growth can not only prolong the payback period, but can also increase risks to earnings projections. How well the companies ramp-up this business will be crucial.
“These investments are significant, and also bring in more risks as the probability of success is lower, along with higher gestation periods," pointed out Gupta.
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