More US FDA approvals do not mean better margins for Big Pharma

The pace of approvals issued by the US Food and Drug Administration (FDA) has picked up, but that has not led to better profit margins for drug firms in India. In fact, most big pharmaceutical companies have seen their margins shrink over three years barring a few examples, which have seen a boost because of limited competition products.

Indian drug firms, including their subsidiaries, have received around 304 abbreviated new drug application (ANDA) approvals from the FDA in 2017 compared to 201 ANDA approvals in 2016. While this is expected to translate into higher revenues in the mid- to long term, rising competition in the US generics market has affected the margin growth for large drug companies in India.

Analysts expect margins to remain under stress for the coming quarters as first-to-file (FTF) opportunities are limited. FTF basically means the company receiving an approval from the FDA enjoys a 180-day exclusivity period for selling that drug.

Gaurav Jain, vice-president, corporate ratings, ICRA, pointed out that the operating margins of the major pharma companies fell from 26-27 per cent in Q4FY17 to 18-19 per cent in the last three quarters or so despite cost optimisation measures undertaken by these companies. In the ICRA sample (Sun, Lupin, Torrent, Cadila, DRL, Glenmark, Aurobindo), revenue growth from the US has been negative for the last few quarters; it fell by 16 per cent year-on-year (y-o-y) in Q4FY17, then again fell by 18.8 per cent in Q1FY18 and could not recover in Q2FY18 either (-14.7 per cent).

Jain feels that apart from price erosion, the FTF opportunities, too, have been limited (Cadila and Aurobindo having one each in the last few quarters). Price erosion has been primarily contributed by consolidation in the US supply chain in which three large buying cconsortiums now control around around 85 per cent of drug purchases and also the faster pace of ANDA approvals. As such, the pace of FDA approvals has been on the rise — from 440 ANDA approvals during the October 2012 to September 2013 period, it rose to 763 during the October 2016 to September 2017 period.

Lupin saw its net profit margins shrink from 18.8 per cent in FY15 to 14.6 per cent in FY17 and 10.6 per cent in H1FY18; for Torrent it has shrunk from 16.1 per cent to 14.3 per cent for the same period (see chart).

Glenmark has seen its margins improve over a two-year horizon though — from 3 per cent in FY15 to 12 per cent in FY17. This is thanks to the launch of generic anti-cholesterol drug Zetia (180-day marketing exclusivity) in the US in December 2016. The drug has contributed around $60 million, or over a third of the company’s US generic sales, in the third quarter of FY17. As the exclusivity period ended in the June quarter of FY18, the company has started witnessing slower growth in revenues (1.5 per cent) in Q2FY18 and a decline in operating and net profits (down by 13.5 per cent and 4.2 per cent, respectively, in Q2FY18 compared to the year-ago period).

As for India’s most valuable pharma company Sun Pharma, pricing pressures ate into its US business — in Q2FY18, Sun’s revenue from its cancer drug Gleevec was down by 40 per cent on a sequential basis because of competition from Teva and Apotex. In FY17 this drug had contributed to $230 million of Sun's sales.

On the whole, analysts feel that the US business will continue to see pricing pressure in the near- to medium-term and while revenues may be boosted by drug launches, margins will remain stretched.