Expectations that intensity of price erosion in the US market will ease have been deflated post the December 2017 quarterly results of the Indian generic drug makers. Lupin, Dr Reddy’s, Glenmark and Sun Pharma’s US subsidiary Taro Pharma saw their sales in the US fall up to 40 per cent, pulling down their consolidated performance. Taro’s 30 per cent fall in sales year-on-year came despite a volume growth.
Taro’s CEO Uday Baldota said that the US generic market continues to face a difficult pricing environment and higher competitive pressures. Israel-based Teva, the world’s largest generics manufacturer, too, warned of a weaker 2018 than earlier estimates post the disappointing December quarter show. According to analysts at Credit Suisse, the competitive pressures and price erosion will increase in the current year.
While the Street is banking on a reduction in price erosion in the US market to single digits, the analysts at Credit Suisse believe that it will accelerate to over 12 per cent. This will be led by a 50 per cent increase in approvals of new products (increase in competition) over the next two years, further consolidation among buyers (pharma trade channel) and an opportunity for late entrants to introduce their products. The double-digit price erosion will lead to a US generic market decline of 4-5 per cent on an annual basis over the next three years. If this plays out, more players will fight it out for a shrinking pie of the world’s largest drug market, thus, hurting revenues, margins and the bottom line of companies.
An exception among the larger Indian generic players in the US market has been Aurobindo Pharma. The company’s US sales grew 9.4 per cent despite a key launch, the kidney treatment drug Renvela, facing pricing pressures. It was able to report a better growth because of a higher frequency of new launches and lower dependence on any single product. A large product portfolio coupled with some niche drugs is critical for sustaining growth in the American market.
The other exceptions to the declining sales trend were companies which had upside from one-off launches, no outstanding US FDA issues and those with a lower exposure to the US geography. Cadila Healthcare, for example, was helped by sales under exclusivity for an ulcerative colitis drug and higher product launches.
Cipla, which was a late entrant in the US, gets only 17 per cent of its revenues from the region and hence, managed to maintain the overall growth momentum aided by India and other geographies. Its large-cap peers such as Dr Reddy’s and Lupin get 40 per cent of their revenues from the US market and are witnessing severe competitive pressures.
Geographic diversification has also helped Cipla and Aurobindo as improving contribution from other geographies pulled up overall performance. Cipla’s revenue growth was driven by India sales (40 per cent contributor), which grew 15 per cent, and Africa sales (22 per cent contributor), which grew 6 per cent, pulling up its overall show despite a decline of 2 per cent in the US sales. Similarly, Aurobindo’s Europe (27 per cent contributor) sales growth of 37 per cent helped register a double-digit growth.
The other factor which has helped Aurobindo, Cipla and Cadila is their US FDA compliant facilities. While Aurobindo and Cipla do not have FDA issues impacting product launches, Cadila was able to resolve the issues related to the Moraiya plant. In addition to price erosion, Lupin, Dr Reddy’s and Sun are awaiting resolution of FDA issues pertaining to their key plants which are impacting their US sales.