More pain ahead for drugmakers in FY19

Higher number of approvals from April 2018, repeated regulatory issues and lower profits from niche opportunities some of the concerns

If FY18 was a forgettable year for the pharma sector, FY19 might not be any better. This is on account of the improved pace of approvals from April 1, as well as competition even for difficult-to-make drugs. New guidelines from the US Food and Drug Administration (US FDA) had led to the slowing down in drug approvals over the past couple of months as companies took time to adjust. But, as companies comply with the new guidelines, the approval time for drugs from April is expected to come down, further increasing competitive pressures. Anubhav Aggarwal and Chunky Shah of Credit Suisse believe that as first cycle approvals (after first inspection) increase further, the period of high profits on few drugs should shorten and impact industry profitability significantly. They expect a 50 per cent increase in ANDA (abbreviated new drug application) approvals over the next two years and price erosion to be in high double digits.

What is adding to the disappointment has been the lack of a steady and consistent compliance record on the manufacturing Spark front. The record has Capital say meaningful monetisation worsened given the observations of opportunities will by the US FDA in recent require significantly better execution inspections. Glenmark, Lupin, than in the recent past. Aurobindo and Cipla, who have Sun Pharma (and its partner had a strong track record in US Mylan), for example, FDA objections, have seen recently got an approval for manufacturing violations at tildra, a new biological entity their key facilities in recent for treating inflammatory disorders months. Harith Ahamed and after completing the Krishna Prakash R of Spark necessary clinical trials. While Capital say that the repeat the opportunity size is large, nature of observations and the company, according to inability to resolve issues completely Kotak Institutional Equities, at critical sites, even faces steep commercial hurdles after 12-15 months of remediation and higher promotional activity, and engagement withthird given a number of competing party consultants, have drugs. After years of collaboration, disappointed investors. Shifts the payoff, thus, in the nature of inspectional becomes unpredictable and such as Toprol and the observations flagged by the US depends on the ability of the launch pipeline for FY19 is FDA at Indian sites have added product to gain traction, strong (40 ANDA launches), to the concerns, they say. backed by strong execution. Cadila has the highest price

Companies in the sector For Cadila Healthcare, sooner erosion risk as 45 per cent of its were banking on complex or than expected competition US revenues comes from its difficult to make generics as from Teva and Mylan for Lialda top three products. well as sales under exclusivity (ulcerative colitis) means that a Given the regulatory challenges, to overcome the stiff pricing product which was expected to higher product approvals pressures on their base business. have limited competition will from April and payoff from complex/ The progress on this front, translate to lower profits goingniche generics not being at best, has been gradual. ahead. Among other drugs, the able to compensate for the high Competitive intensity has company is also facing pressure base business erosion, investors increased substantially in segments in potassium citrate (kidney ailment), should await more clarity, especially where Indian players given competition from consistent revenue growth have made large investments Strides Shashun and Teva. from the US market. Don’t take such as dermatology, ophthalmology, While there are some niche an exposure only on the basis of oncology and hormonal opportunities drugs. Analysts for the at company lower valuations.