Revival of US generic sales not before FY19
Sharp fall in Teva's June quarter earnings and bleak near-term US generic outlook dash hope of recovery in FY18 for domestic pharma companies
An 18 per cent fall on Thursday in the stock price of the world’s largest generic drug maker, Teva, due to an unexpectedly steep price erosion in the US market, impacted top Indian generic companies’ stocks. These shed up to four per cent intraday on Friday before recovering. While Teva has been bogged down by acquisitions and high debt, the key reason for the sharp negative reaction by the Street were falling price realisations of generic medicines in the US market, 40 per cent of Teva’s global sales. US generics revenues for Teva fell 20 per cent year-on-year.
Indian generic makers face the same issues, though their woes are compounded by plants which are not compliant with the US Food and Drug Administration’s (USFDA’s) version of good manufacturing practices. Not only did Teva post poor results, it revised its earnings forecast downwards by 12-15 per cent and expects high single digit price erosion for the second-half of the current year. The impact on Indian pharmaceutical companies is expected to be higher, say analysts.
Commenting on Teva’s June quarter earnings guidance, Anmol Ganjoo and Agraj Shah of JM Financial say Indian pharma players could witness double-digit pricing erosion, given the significant concentration of earnings in a limited number of products, as well as lack of limited competition products in the pipeline.
While some of this is already known and factored in the prices, it is the sharper than expected price erosion and Teva’s management commentary that have caught analysts off-guard. “If the world’s largest drug maker is unable to negotiate for better prices with its customers (post the distributor consolidation in the US), what kind of negotiating power will Indian companies have,” asks an analyst with a domestic brokerage.
JM Financial analysts believe Indian companies exposed to product concentration risk aremost vulnerable to reasonable periods of earnings decline. The companies, according to them, under this category are Lupin and Dr Reddy’s. The June quarter results reinforces this thesis.
While Dr Reddy’s US revenue is down four per cent year-on-year despite sales from limited competition products, its gross margins in the quarter were down nearly 500 basis points year-on-year highlighting the pressure on pricing. Lupin’s US sales saw a fall of 28.6 per cent over the year-ago quarter. Lupin had a higher base last year to due to sales under exclusivity from generics of diabetes drug Glumetza. On a sequential basis, too, US sales for Lupin were down 15.7 per cent.
Sun Pharma’s results this week will provide further indications of the road ahead for Indian pharma.
Meanwhile, most analysts have cut their FY18 and FY19 earnings estimates by five-10 each for the top four Indian generics companies, given the extent of price declines, with some analysts suggesting that any recovery in the US market will only be possible in FY19. Ranjit Kapadia of Centrum Broking says that the chances of price recovery in FY18 looks remote with recovery or stability only expected next year. The recovery in FY19 is subject to the pace and quantum of approvals in the second half of FY18, says Kapadia.
Given the gradual increase in the US FDA’s product approval, analysts believe that gains on the revenue front next year could come more from the volume perspective than from realisations. The proportion of new products to the existing base will have to increase.
What had pegged back Indian companies over the last six months was that headwinds, be it US pricing pressure, facilities under FDA scan, lack of approvals, price control in India, demonetisation and GST, and a strong rupee, were bunched together making the situation worse.
Among the various factors listed above, analysts pin their hopes on the revival in the domestic market in the second half of the fiscal year, and that GST-related pricing and stocking process is completed.
Going ahead, the street could lean towards companies which have a higher proportion of revenue coming from the Indian market. Say Ganjoo and Shah of JM Financial, “The unabating headwinds in the US further reinforces our preference for domestic facing businesses amongst the Indian pharma players.” Among the larger companies, Alkem, Cipla and Alembic have 40 per cent or more of their revenues coming from the Indian market and less than 30 per cent from the US market.