Lack of new launches due to inspection delays, intensifying competition key headwinds
The margins of Indian generic drug makers could be under pressure given rising instance price erosion in the US market. Further, the drop in new launches given the lack of inspection and approvals by the US Food and Drug Administration (USFDA) amid intensifying competition is adding to the margin worries.
The National Average Drug Acquisition Cost or NADAC data, which captures the price pharmacies in the US pay for medications indicates that 73 per cent of generic drugs during February to March 2021 have seen some degree of price erosion as compared to 47 per cent of drugs in this category in the same period last year. This highlights that a record number of drugs have experienced price erosion.
Not adjusting for new launches, the price erosion in the generic portfolio for April is pegged at 10 per cent as compared to 6-8 per cent in the March quarter. An analyst at a domestic brokerage says that the competitive intensity in the US generics industry has increased and there are signs of deflation especially in the legacy portfolio. This may worsen in the next few months in the absence of new product launches, he adds. This could not only impact the margin profile of companies in the March quarter but also in the current quarter.
IIFL Research believes that the demand environment will be weak in the March quarter due to the lower intensity of the flu season and the fact that elective surgeries in the US are still down 20 per cent as compared to pre-Covid levels.
Some of these trends are visible in recent March quarter results of companies such as Biocon. Brokerages have cut the company’s FY22 earnings estimates by 10 per cent due to delays in approvals for biosimilars as well as higher competition in its legacy drug portfolio.
The pressure is expected to ease once the impact of the pandemic wanes and new products are launched in the second half of FY22. The impact on Indian pharma companies will be a mixed bag, according to Tushar Manudhane of Motilal Oswal Institutional Equities. Companies with limited competition complex generic portfolios and those with compliant manufacturing facilities could show better growth and profitability while delays in approvals for niche drugs due to Covid would cap overall growth prospects.
Among the listed players, Aurobindo gets the highest proportion of revenues from the US market, followed by Cadila, Dr Reddy’s, Lupin and Sun Pharma. Given the near term pressures investors should await for a meaningful improvement in volumes and market share gains in the US market before considering the stocks.