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Pharma companies lost significant market cap over last 2 years, outlook grim

LiveMint logoLiveMint 30-05-2017 Isha Trivedi

Mumbai: The heydays of drug makers are long-forgotten. Pricing pressure in the biggest market, the US, and sticky compliance issues have significantly eroded value of pharmaceutical companies over last two years.

While India’s benchmark Sensex Index added nearly Rs6 trillion in market capitalization in the past two years, BSE healthcare index lost market cap of Rs94,000 crore. During this period, Sensex has risen 12%, whereas the healthcare index has declined 22%.

At 10.12am, Sensex was trading up 0.17% at 31,162.51 points and healthcare index was up 1.88% at 13,464.89 points.

India’s largest drug maker, Sun Pharmaceutical Industries Ltd, has been the worst performer with its market cap down 48%. Other pharma majors such as Lupin Ltd, Dr. Reddy’s Laboratories Ltd, and Cipla Ltd have seen their market cap fall by 39%, 31% and 22%, respectively.

A respite for pharma companies seems unlikely in the near future if disappointing earnings in the March quarter and uncertainties over growth in fiscal year 2017-18 highlighted by management of several drug makers are any indication.

With increasing competition and further consolidation of distribution channel, price erosion in generic drugs in the US is expected to increase going forward, top company officials and analysts said.

For the first time ever, Sun Pharma has guided a single-digit decline in revenue for the current financial year, which came as a surprise for investors. The negative outlook was on account of pricing pressure and delay in product approvals in the US.

Lupin also expects FY18 to be a challenging year on a high base of FY17. “Given the additional channel consolidation, price erosion in base business will continue. New product launches will be critical to offset the impact of price erosion,” Vinita Gupta, chief executive officer of Lupin told Mint.

In a report, released last week, brokerage firm Credit Suisse said price erosion in generic drugs in the US is likely to increase to 10-12% from 7-8% currently.

Distribution channel in the US will further consolidate with Express Script expected to join Walgreen consortium, which means the top three buyers will account for about 90% of generic drugs purchasing, the broking firm said. This gives the distributors higher bargaining power.

Launching new products in the market can help countering the pricing issues but some firms such as Sun Pharma and Dr. Reddy’s are unable to do so because of pending compliance issues at key manufacturing units, which is weighing on earnings.

Dilip Shanghvi, managing director of Sun Pharma, said in a post-earnings conference call with analysts that the company, in its guidance, has not factored in any product approval from its Halol plant, which was issued a warning letter by the USFDA in December 2015 for violation of good manufacturing practices.

If the Halol plant gets clearance from the FDA during this year, the company might revisit its guidance, he said.

Glenn Saldanha, chairman and managing director of Glenmark Pharmaceuticals Ltd had said in an investor conference call that price erosion in the US is expected to be in the range of 10-15%. Notwithstanding this, he sees the company’s revenue growing by 12-15% in FY18 but analysts remain doubtful.

“We expect slower revenue growth in fiscal 2018 from fiscal 2017 levels due to continuing generic price compression in US market, only partial contribution of generic Zetia exclusivity revenues, and significant dependence on new approvals in the US, which could constrain growth in the case of any delays,” Standard & Poor’s (S&P) said on Thursday while revising the company’s rating outlook to ‘negative’ from ‘stable’ because of weak cash flows.

Pricing pressure on generic drugs is not confined to older products. Some of the new generic drugs and limited competition products are also witnessing it, said an analyst who did not wish to be named.

Apart from challenging environment in the US market, drug price controls, and implementation of the goods and services tax (GST) have created uncertainties over growth at home.

“This year there is too much volatility considering implementation of GST, de-stocking in the channels currently and volatility in currencies across the world. Internally, we target a double digit growth, but are refraining from giving a guidance for FY18,” said Umang Vohra, managing director and global chief executive officer of Cipla, at a post-earnings press conference last week.

In the current scenario, companies that may show better earnings growth this year would be the ones having a low base of last year or the ones that launch higher quantum and meaningful products in the US or the ones that are able to resolve pending regulatory issues, analysts said.

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