Challenges in the US generics business has been weighing on the performance of many Indian pharma companies. Despite a decent show in the domestic and other markets, players such as Dr Reddy’s lab and Cipla have witnessed an overall tepid performance in the latest March quarter.

Dr Reddy’s lab has reported a 3 per cent YoY drop in its consolidated net profit to ₹302 crore in the March quarter. The fall in earnings was primarily due to price erosion in the US business, supply disruption in Europe and lower sales traction in Russia. Its consolidated revenue dipped to ₹3,535 crore in the March quarter as against ₹3,554 crore during the same period last year.

Cipla reported a consolidated net profit of ₹179 crore in the March quarter. In the year-ago period, the company posted a loss of ₹62 crore due to a one-time impairment cost on intangibles from a US acquisition. The company’s consolidated revenue grew by a modest 3 per cent year-on-year (YoY) to ₹3,698 crore, impacted mainly by supply constrains in the US and seasonally weak business in India.

US business

Dr Reddy’s US business has been under pressure for many quarters mainly due to price erosion on account of customer consolidation, increased competition and slow realisation from new launches. The company’s US revenue fell 6 per cent YoY in the March quarter due to the double digit price erosion in key products—Renvela and Toprol XR. Slow pick-up in the sales of its recently launched Alox generic drug has also not helped much.

The delay in the re-mediation measures in facilities under regulatory scanner (Srikakulam and Duvvada) has further impacted key product approvals. Such delay could also lead to further erosion in the US core business in FY19.

Though the near term outlook seems gloomy for Dr Reddy’s due to sustained pricing pressure in key products, the company plans to launch about 15 products, including limited competition products such as Nuvaring, Suboxone and Copaxone in FY19. The company’s North America business has accounts for 42 per cent of the overall revenue.

Cipla has registered only 4 per cent growth in US market in the March quarter. The performance was subdued due to incremental competition in its key product Renvela, product recall and supply issues. The lower realisation in Pulmicort and Dacogen sales also weighed on the company’s revenues.

However, the management is confident of over double-digit revenue growth in the US in FY19, supported by a strong product pipeline and launching of one new limited competition product every quarter. The company believes that the form 483 observations issued by USFDA to its Goa facility will not be escalated to warning letter or import alert. Cipla’s US business contributes around 17 per cent to its total revenue.

India business

Dr Reddy’s India business grew by 7 per cent YoY to ₹614 crore during the March quarter, after adjusting for channel restocking post GST implementation. The company expects better traction in the domestic business in FY19.

Cipla’s domestic business that accounts for 39 per cent of its total revenue, grew 13 per cent YoY in the March quarter, supported by the key therapeutic segments such as respiratory, urology and paediatrics. The management has guided for a double-digit growth in the India business in FY19.

Other markets

Dr Reddy’s revenue from emerging markets declined by 19 per cent. Higher price erosion has impacted the Europe business that declined 17 per cent YoY during the quarter. Cipla’s South Africa business delivered strong performance during the quarter, recording a 16 per cent growth YoY.

Other metrics

Dr Reddy’s operating profit came in at ₹578 crore for the quarter. The operating margin contracted 83bps to 15.6 per cent during the quarter due to higher SG&A expenses. Cipla’s operating margin improved by 93bps to 15.1 per cent during the quarter due to lower other expenses.

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