Mumbai/Singapore: Rising revenues in the domestic market helped Indian pharmaceutical companies counterbalance the ongoing pricing pressure on generic drugs in the US in the financial year ended 31 March 2019 (FY19), says Fitch Ratings.
The US and India are the two key markets served by Indian pharmaceutical companies, which sell predominantly generic drugs. Many of the leading pharmaceutical companies – including Glenmark Pharmaceuticals Ltd (BB/Stable), Lupin Limited (Lupin) and Dr Reddy’s Laboratories Ltd (DRL) – reported double-digit growth in their domestic sales, supported by robust growth in chronic categories such as cardiac, anti-diabetics and respiratory, which in turn supported overall industry growth of 11% during FY19.
By contrast, growth in the US market remained subdued for many Indian drug-makers, as consolidation of pharma distributors and a faster pace of approvals of new generic drugs by the US Food and Drug Administration (USFDA) has resulted in continued pressure on generic drug pricing over the last few years. Companies with a solid record of compliance with the current Good Manufacturing Practices (CGMP) of the USFDA – such as Glenmark – have experienced less severe revenue pressure as they managed to avoid regulatory disruption to existing business, and launched new products leveraging on timely approvals from their Abbreviated New Drug Application (ANDA) pipeline. Similarly, the ramp-up of speciality portfolio and generic launches with “First-to-File” exclusivity helped some of the larger companies boost their US revenues in 4QFY19.
Overall, revenue growth was in the mid- to high-single-digits for Glenmark, Lupin and DRL during FY19. There was also healthy growth in Europe and Russia as well as in Active Pharmceutical Ingredient (API) sales. Operating margins were weaker for most companies due to the combined effect of pricing pressure in the US as well as an ongoing focus on R&D spending in order to bolster their presence in novel and speciality drugs.
Earnings commentaries of some of the Indian pharmaceutical companies suggest that pricing pressure in the US has peaked in certain categories as fierce competition has forced some firms to exit. Nonetheless, we believe any improvement in competitive dynamics is unlikely during FY20, in light of the ANDA backlog with the USFDA which is still significant. Fitch expects companies with an appropriate CGMP compliance record to be better placed to mitigate the effect of pricing pressure in the US. We believe Indian drug-makers’ efforts to expand their presence in speciality and novel drugs will help to reduce their dependence on the intensely competitive generic business. However, we do not expect a meaningful shift away from generics during FY20.
We expect continued growth in the domestic market, supported by the government’s focus on enhancing access to healthcare to economically weaker sections of the society. This will help to support overall revenue growth for Indian pharmaceutical companies despite our expectations of continued pricing pressure in the US. We expect margins to trend lower, with the active pursuit of speciality focused R&D programmes.
Fitch believes that Glenmark’s ANDA pipeline will help counterbalance pricing pressure in the US, while growth in India and other geographies will help achieve moderate level of revenue growth and largely stable profitability. Glenmark aims to invest actively in R&D to develop its novel and speciality pipeline. However, we expect no significant impact on credit metrics as the company aims to fund this by disposals of non-core products and by sharing development costs with partners.
Jubilant Pharma Limited (JPL, BB-/Stable) is focused on speciality pharma segments, with a very limited presence in generic formulations. We feel this will help to sustain its operating performance and credit metrics in line with our expectations despite the adverse USFDA developments recently in their generic focused plants in India.