Domestic market revives, but US woes to hit pharma firms’ earnings
Indian
firms have stepped up investments in research and development to enhance their
product pipeline, especially in the specialty drugs and complex generics space.
The lucrative US drug market has become
challenging for Indian companies because of regulatory issues, product pricing
pressure and limited number of high-value drug approvals.
Sluggish performance in the US and
unfavourable currency movements in emerging markets are expected to weigh on
the earnings of local drug makers in the September quarter.
Analysts expect overall sales growth of 7-10%
during the quarter, but profits are likely to be under pressure as higher
spending on research and development and on remedial measures at manufacturing
plants facing compliance issues has squeezed margins.
Indian firms have stepped up investments in
research and development to enhance their product pipeline, especially in the
specialty drugs and complex generics space.
The manufacturing facilities of various
companies, including Sun Pharmaceutical Industries Ltd, Dr. Reddy’s Laboratories
Ltd, Lupin Ltd, Cipla Ltd, Cadila Healthcare Ltd, Wockhardt Ltd and Ipca
Laboratories Ltd, are under the US Food and
Drug Administration’s (US FDA) scanner for violation of good manufacturing
practices. These companies are witnessing delays in product
approvals in the US.
Companies are also seeing price erosion in
base products in the US on account of increased competition and consolidation
in the distribution channel, which has enhanced the bargaining power of
distributors.
Likely double-digit growth in the domestic
market due to improved sales of anti-infective drugs, anti-malarial medicines
as well as drugs for chronic diseases during the quarter will be a silver
lining for pharmaceutical firms.
Earnings of companies still suffering from US
FDA-related issues and dearth of approvals will be subdued, while a few
companies that continue to enjoy low competition in high-value products
launched in past quarters will perform better, Emkay Global Financial Services
said in a report.
Aurobindo Pharma Ltd is set to post robust
earnings on the back of 15 product approvals in the US during the quarter,
while Lupin may continue to see some benefit from limited competition in its
generic of diabetes drug Glumetza and integration of US company Gavis
Pharmaceuticals, which it acquired earlier this year. Glenmark Pharmaceuticals Ltd is
likely to gain from the improved pace of product approvals in the US and the
low base of last year.
Sun Pharmaceutical Industries may see a muted
quarter as the limited competition in sales of the generic version of cancer
drug Gleevec is likely to be offset by pricing pressure in base business,
regulatory issues at its Halol plant in Gujarat, and subdued performance of its
subsidiary Taro Pharmaceutical Industries Ltd.
Dr Reddy’s Laboratories is expected to be the
laggard among top drug makers because of the absence of product approvals as
three of its manufacturing facilities remain under the FDA’s lens. Cadila
Healthcare will also bear the brunt of regulatory issues. Meanwhile, the high
base of last year may weigh on earnings of Cipla and Torrent Pharmaceuticals
Ltd.
While domestic pharmaceutical sector growth
is expected to be 10-12% in the current financial year, resolution of
compliance issues and good number of product launches in the US will be
critical to boost earnings of companies in the coming quarters.
Sun Pharma and Cadila Healthcare have
completed their remediation procedures and now await re-inspection from the FDA,
whereas Dr Reddy’s and Ipca Laboratories are still undergoing corrective
actions and would submit a re-inspection request within the next 6-8 months to
the FDA, according to Emkay Global’s report.
“We
believe the situation will improve substantially in 4QFY17/1QFY18 with US FDA
issues getting resolved for most of the companies,” HDFC Securities said in
a report.
Centrum Broking said in a report that
pharmaceutical companies are moving towards better times as around 35% of
generic drug approvals from the US FDA are in favour of Indian companies, which
would help them gain market share, and as domestic market may continue to
witness good growth.
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