In at least four quarters, a majority of Indian generic pharma majors with a strong presence in the US have posted a sequential improvement in their US business.
While Sun Pharma’s March quarter revenues were 11.6 per cent higher than the December quarter, the same for Lupin has been 4.7 per cent. Cadila and Cipla, too, logged 4 per cent q-o-q improvement in the quarter.
Ranjit Kapadia of Centrum Research, said, “There is a sequential improvement in US business for a majority of big Indian pharma companies. While last year the price erosion for the pharma sector was in the 13-15 per cent range, on an average, the same is now 8-10 per cent. We can expect better performance from Indian generic majors in the US market.”
It is not surprising that CLSA and Macquarie have upgraded Sun Pharma. While CLSA expects the company’s earnings to double over the next couple of years on the back of speciality product pipeline, Macquarie believes risk-reward is more balanced. The duo says that US sales are showing some signs of stability.
While pricing pressures brought in by consolidation of the distribution channel is still there, there are a couple of trends that have led to the improvement.
Analysts say the world’s largest generic players Teva and Sandoz have stopped marketing several molecules in the US market, allowing smaller players to occupy that space. Analysts said this trend is likely to continue as larger players are focusing on value-added products to improve their profitability.
The other reason for improvement is that a larger number of product approvals have come through. This has increased the product portfolio of these companies. “New products are adding to the incremental gains for the generic majors,” said an analyst at a domestic brokerage. Cadila Healthcare, for example, has indicated that it will launch 50 products in the year which should help it to keep the sales momentum going. The company is also among the few large generic players which have no plant-related issues, allowing it to guide for a strong launch pipeline.
Profitability for the larger players should also improve given the shift to speciality products for Sun Pharma as well as niche opportunities for Cadila. The Cadila management indicated that it will maintain margins for FY19.
The other trigger is sales in the domestic market which is hit by implementation of the goods and services tax (GST). Growth over the last three quarters at 5-6 per cent has been subdued on account of GST, though volume growth has been strong. Most analysts expect it to hit double digits, going ahead. Kartik Mehta of Deutsche Bank expects pharma growth to inch up towards 9-10 per cent from the June quarter of 2018 when the base becomes comparable. According to him, GST has impacted overall growth by 300 basis points.
The bounce-back of growth in India is critical as it contributes 40 per cent each to sales of Cipla and Torrent while for Sun Pharma, Lupin, Cadila and Glenmark the proportion is 30 per cent.
While improvement across the two key markets
of India and the US is a major boost for generic companies, analysts say some caution is warranted. This is due to lack of clarity on the policy front in the US market.
“Any regulatory pressure due to the need to bring down generic drug prices by the current US government could put pressure on Indian companies,” said an analyst. The other issue is that players such as Sun Pharma and Dr Reddy’s have not completely come out of regulatory issues related to good manufacturing practices at their plants.
The Street is, however, assuming that players such as Sun will be able to overcome the regulatory hurdles, given the management commentary.