Indian drugmakers are betting on new launches to combat prolonged price erosion in the U.S.
“Initial success has been achieved in certain cases such as Cipla and Lupin in respiratory, Dr. Reddy’s and Aurobindo in injectables, and Sun Pharma in specialty portfolio,” Systematix said.
To fight pricing pressure, the brokerage said:
Sun Pharma aims to significantly strengthen its global specialty franchise with a bulk of incremental capital allocation in this area.
Zydus has guided to increased investments in its innovation franchise.
Dr. Reddy’s has reduced its capital allocation on specialty business and guided for aggressive investments in India and other non-U.S. markets like China.
Besides strengthening its injectables/ biosimilars franchise, Aurobindo has committed significant capital to the active pharmaceutical ingredient segment.
Cipla and Lupin have been enhancing investments in complex generics.
“These products also act as a hedge against margin erosion in the commodity portfolio, given relatively lesser competition and higher profitability,” Systematix said in a report.
BloombergQuint’s emailed queries to Sun Pharma, Dr. Reddy’s, Zydus Lifesciences, Lupin, Cipla, Aurobindo, Alembic, and Strides remained unanswered.
Is Price Erosion Bottoming Out?
Pharma companies were hopeful about pricing trends reversing and margins improving in the last two years, but that isn’t reflected in any data, Aditya Khemka, fund manager, InCred Healthcare Fund, told BloombergQuint. The companies are still operating on thin margins in the U.S., and there are no clear signs of bottoming out.
Systematix attributed the “heightened price erosion" of FY22 largely to higher channel filling or stocking up in FY21 as supply was a major worry. As these products approach expiry dates, discounts have gone up to liquidate the high inventory in the system, it said. The industry, according to the brokerage, prioritised product procurement over price erosion and thus, there were no major price discounts in FY21.
These factors, it said, should give way in FY23. Systematix expects normalised 5-7% price erosion on a broader basis for the U.S. portfolios.
According to Deepak Jotwani of ICRA Ltd., pricing environment is likely to remain subdued in the near to mid-term with erosion in high single-digits. Pharma companies are likely to witness some margin contraction in FY23, he said.
The extent of impact, however, will differ depending on the companies’ product portfolio, revenue share from the U.S. and new product launches, Jotwani, assistant vice president and sector head-corporate ratings, said.
GS Capital Advisors’ Jain, too, said pricing pressures may continue for a couple of quarters before bottoming out.
Strides Pharma Science Ltd., in its analyst call, said the quarter-on-quarter trend for generics in the U.S. is showing signs of stability. But, full recovery is still two or three quarters away.
In certain generic drugs, where prices have substantially declined, competition has been exiting due to non-viability and in such a scenario, prices may stabilise, said Abdulkader Puranwala, pharma analyst at Elara Capital. Pricing, he said, may have stabilised for Sun Pharma, Dr. Reddy’s and Aurobindo, while Zydus, Lupin and Cipla may continue to witness margin pressures.
Vishal Manchanda, pharma analyst at Nirmal Bang, is optimistic. If U.S. prices fall below current levels, it may be unprofitable even for Indian companies, he said.
Manchanda sees high-competition oral solids to be the first to see an improvement in pricing situation. Aurobindo and Lupin, which relatively have higher exposure to this category, may be the first ones to benefit, he said.
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