Not so healthy

The first quarter report card for 2017-18 is out. We evaluate the performance of the pharma sector to see what lies ahead

Caught in regulatory tangles and pricing pressure in key markets, most companies within the pharma sector have delivered dismal performance over the past year or so. In 2016-17, revenues of companies within the CNX 500 index rose by just 9 per cent, while the earnings registered an 8 per cent growth. However, overall revenues for these companies have continued to shrink sharply. During the first quarter of 2017-18, the revenues declined by 5 per cent Y-o-Y and earnings by a steep 62 per cent.

The US and India remain the two key markets for most pharma companies and, hence, structural headwinds in both markets have weighed on their performance. In the US, a spate of regulatory charges from the US Food & Drug Administration (USFDA) has hit most Indian pharma players. In the domestic market, Goods and Services Tax (GST)-related channel de-stocking has dampened performance.

Winners and losers

The on-going concerns within the sector have impacted most players, though a few have weathered the downturn better.

During the June quarter, Indian pharma companies focussing on the US market have been hit significantly. Sun Pharma reported a sharp 23 per cent decline in its consolidated net sales and 114 per cent in profit. Lupin and Dr Reddy’s Labs too reported weak performance.

The drop in US revenue was due to lower sales on account of expiration of exclusivity in generic products such as Gleevec (Sun Pharma), Glumetza (Lupin), and Abilify (Torrent). With no larger products to replace them and lack of meaningful high-value launches, sales in the US market suffered. Continued drug price erosion on the back of channel consolidation and increasing pace of approvals that intensified pricing pressure also weighed on the US business.

However, some companies managed to contain the downside, thanks to a diversified portfolio mix and foray into high-margin, limited competition, complex generics. For instance, Glenmark Pharma registered strong Y-o-Y growth of 22 per cent and 47 per cent in revenue and net profit respectively given its strong innovative pipeline in the US. Aurobindo Pharma is gaining market share, thanks to new launches, especially in complex segments.

The domestic business of most pharma companies witnessed de-growth in the June quarter due to channel de-stocking ahead of GST implementation. For instance, Cipla and Cadila, with a relatively heavier domestic portfolio (around 36 and 34 per cent of sales respectively), reported 13 and 19 per cent decline (Y-o-Y) respectively in their domestic business during the June quarter. However, Glenmark reported strong growth in domestic business (around 15 per cent Y-o-Y) on the back of better dealer incentivisation. Lupin’s domestic business (around 25 per cent of sales), which is skewed towards the high-margin chronic segment, registered flat growth.

What lies ahead

While the stock prices of most Indian pharma companies have been hit hard and they now trade at attractive valuations, investors need to adopt a wait-and-watch approach . That said, despite muted earnings outlook in the near term, most pharma companies are confident of good recovery in the medium term on the back of new launches. With 30-35 launches planned in the US market in the next 12-18 months, Lupin has guided for three to four ‘first-to-file launches’ in FY18. Aurobindo Pharma has received USFDA approval for higher-margin Sevelamer Carbonate drugs that are expected to contribute more than 7 per cent of its US sales in FY18. Along with the launch of Lialda (first-to-file opportunity) in FY-18, Cadila plans to launch six products that have limited competition.

Over the long run, pharma companies with diversified product portfolio, focusing on high-margin complex generics, strong R&D pipeline and steady India business, could do well. However, they also need to adopt best practices .

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