Returns down from US generic drugs market for Indian pharma firms

The share of the top 10 Indian companies in the US generics market nearly doubled from 10.5 per cent in 2012-13 to 19.5 per cent in 2017-18
While the top 10 Indian drug companies’ share in the US generics market has nearly doubled over the past five years, the sector’s average return on capital employed (RoCE) has declined.

Firms, however, expect the pricing pressure to easing in the US over the coming quarters. The generic drug market size there is around $60 billion a year.  

International players such as Teva, Mylan and Sandoz, which earlier dominated the generics space by aggressive inorganic investment, are facing the heat due to excessive debt. “In an attempt to cut flab, Teva and Sandoz recently exited part of their generics businesses. Indian generics companies, with lean balance sheets, perceive this as an opportunity to enhance market share,” said Deepak Malik, analyst with Edelweiss. 

The share of the top 10 Indian companies in the US generics market nearly doubled from 10.5 per cent in 2012-13 to 19.5 per cent in 2017-18. At the same time, the sector average RoCE has been declining, from 25 per cent in FY13 to 13 per cent in FY18. 

This decline was primarily for two reasons. One, commoditisation of generics led to price erosion. Two, investments increased in both research and development (R&D) and in expansion, organic and inorganic. 

“The price erosion was the highest in oral dosage forms. This is because most drug firms entered the US market with oral dosage formulations. At times, the erosion is as high as 90 per cent on the day of launch, with five to six players entering simultaneously,” explains a Mumbai-based analyst. 

Drug firms, however, see this easing. “We are seeing pricing stabilisation in the US generics segment. The steep price deflation which the industry experienced in the past few years has stabilised. Our own outlook is price erosion in middle to high single digit,” said Alok Sonig, chief executive of US generics at Lupin. 

On R&D, companies had moved away from basic to complex generics and niche therapies, pushing up costs. “Over FY14-18, the sector’s R&D investments jumped to $1.6 billion per annum from $700 million,” says Malik. 

Lupin’s Sonig adds, “Lupin has maintained R&D spending at approximately 10 per cent of net sales and expect this to continue. While investments in complex generics and speciality programmes might require higher R&D spending by projects, we are being selective, to focus on investments where we can leverage our capabilities to focus on products that will deliver a desired rate of return and those with limited competition.”

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The India head of a leading pharma company from here, which has significant export to the US, said both organic and inroganic investment for building of capabilities in the US has picked up. 

“As investments in R&D and in building other capabilities swelled (some companies were focusing on building front-ends in the US, etc), the returns obviously declined. However, Indian firms are well-positioned to take advantage of the next wave,” he felt. 

Edelweiss’ research shows of thel $15 billion in investments over FY14-18, about $9 billion was in new capabilities via acquisitions, with the rest being organic spending.

Indian firms, say analysts, are better positioned than global peers when it comes to leveraged balance sheets. Edelweiss’ data shows the net debt to Ebitda (earnings before interest, depreciation, tax and amortisation, which is an indicator of a company’s operating profitability) ratio is higher for global pharma firms than Indian ones.

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