Sun Pharma To Cipla, How Indian Drugmakers Are Defying Pricing Pressure In U.S.

Indian drugmakers are betting on new launches to combat prolonged price erosion in the U.S.

From Sun Pharmaceutical Industries Ltd. to Alembic Pharma Ltd., companies plan to launch specialty drugs to complex generics to counter pressure in their core portfolio of copycat drugs. Besides focusing on the domestic market.

The strategy, underscoring the struggle in the U.S., isn't new. But now more companies are taking the route as competition continues to take away pricing power, shrinking margins. And while some analysts are optimistic, there has been no let-up, barring a brief period during the pandemic.

Prices of generics sold by Indian firms in the American market have fallen in high single-digits in the last three quarters, Gaurav Jain, director at GS Capital Advisors, told BloombergQuint.

“FY21 saw a relief in price erosion due to Covid-19, after high erosion witnessed from FY18-20,” Jain said. “Supply issues in FY21 due to Covid-related lockdown and stocking prevented price erosion in FY21.” The pressures of FY21, he said, are being reflected in FY22.

Growth slowed as well. Sales of Sun Pharma, Lupin Ltd., Cipla Ltd. and Dr. Reddy’s Laboratories Ltd. rose in single digits over a year earlier in the three months to December, while that for Zydus Lifesciences Ltd. remained flat. Alembic Pharmaceuticals Ltd., Torrent Pharma Ltd. and Aurobindo Pharma Ltd. reported a decline.

With the U.S. base portfolio seeing sharp price declines and pain on account of regulatory issues, Indian companies are striving to “scale up the value chain in terms of product complexity”, said Systematix Institutional Equities. This the brokerage said, is being done by higher allocation towards injectables, oncology, hormones and respiratory among other areas facing some or the other barriers in terms of product complexity, manufacturing or technology.

• Sun Pharma, earning about 30% of revenue from the U.S., in its third-quarter earnings call said it has been able to combat the pricing pressure in the region with product launches and supply-chain management.

• According to Dr. Reddy’s, in addition to launches (around 80 products in two years), geographical diversification—investing in other markets such as emerging markets, Europe, the Middle East and Africa that are expected to grow faster than the U.S.—has been its strategy since the last four years. The U.S. contributes 35% to the company’s total sales.

• Price erosion in the base business, lack of new approvals and pending re-inspection of facilities dragged down Torrent Pharmaceuticals Ltd.’s revenue from the U.S.—accounting for 11% of total sales. But the company, in its earnings call, said it was confident that cost cuts initiated during the third quarter would aid margin.

• Alembic Pharma is hopeful of lesser supply-chain disruptions in the U.S. in Q4 even as freight costs remain elevated. This, along with new product launches and better performance, keeps the company bullish on its U.S. business, contributing around 31% to total sales.

• Aurobindo Pharma said an increase in input material and service costs led to high cost of transfers from India impacting profitability. But it hopes to have touched the bottom and that things will improve from now. The U.S. contributed around 46% to total sales in Q3.

“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.