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Worst Ever Quarter For Indian Pharma

Top drug makers such as Sun Pharmaceutical Industries, Dr Reddy’s Laboratories and Cadila Healthcare faced US import ban on their key production facilities in India

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For Indian pharma industry, the last quarter of the 2016-2017 financial year was a disastrous one. Most of the companies, including the top and leading ones, missed their guidance by a wide margin. While severe price erosion in the generic drug market continued affecting the revenue, the significant drop in new launches and the least number of fresh approvals in the US caused the disaster.    

Top drug makers such as Sun Pharmaceutical Industries, Dr Reddy’s Laboratories and Cadila Healthcare faced US import ban on their key production facilities in India. Since US sales are the key growth drivers for these companies, the FDA ban significantly impacted their revenue as well as new approvals.  As these companies did not receive significant product approvals, they had limited power to deal with the base business erosion and hence the whole financial year ended up being a confluence of negatives.  While other leading companies like Aurobindo Pharma and Torrent Pharma faced severe capacity constraints.

Price erosion has been ever-present in the generic drugs business model that Indian drug makers are engaged in. In normal market conditions, this price erosion is always offset by new product launches. Since new product launches were almost nil due to the delayed approvals, this renewed revenue flow did not take place and it resulted in a decline in the US business and erosion of margins.

Sun Pharma, India’s largest drug maker by sales, which announced its fourth quarter results on May 26, had reported a 13.59 per cent drop in consolidated net profit at Rs 1,223.71 crore for the March quarter, falling short of at least Rs 1,500 crore profit estimated by analysts. The company had posted a net profit of Rs 1,416.13 crore in the corresponding quarter last year.  Its net sales for the quarter under review stood at Rs 6,825.16 crore compared to Rs 7,415.98 crore in the same quarter last year.

While the second largest player Dr Reddy’s Lab reported a fourth-quarter profit that was below analysts' estimates as increased competition and regulatory hurdles hit business in the US, its largest market.

The company posted a January-March net profit of Rs 338 crore ($52.56 million), missing forecasts of about Rs 427 crore.

At the same time, the companies focused mainly on the domestic market such as Alkem Lab, Torrent Pharma and Cipla, too had a less impressive quarter due to pricing issues. But, the analysts predicts that the first half of the current financial year could be worse for them. These companies are expected to experience some difficulties in the first half of the financial year 2017-18. This is mainly owing to the impending GST implementation and resultant channel disruption.

 “Although there are arguments that this pain is structural (hence more permanent) in nature, with high pricing erosion in generics products, we believe otherwise. While there can be no denying the shift in the mechanisms of the US business, in our opinion, these issues are transitory in nature and were in the spotlight owing to the absence of crucial capacities for many of these companies,” says an analyst report by HDFC Securities.

The analysts also believe that once the Indian Pharma companies come up the curve in terms of regulatory compliance, their progress in more lucrative spaces such as complex generics and speciality will be unencumbered, and the sector multiple is likely to re-rate. The quality of pipeline remains crucial.

“Once the companies have their facilities cleared and capacities available, new product launches will quickly follow and the US business will bounce back. Also,  we believe that the second half of the financial year 2017-18 will provide a good entry point for the companies, which are focussed on the domestic market,” the HDFC Securities report said.

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