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Markets

Indian drug shares spurt but ground remains shaky

New entrants to help keep pressure on generics prices

Indian drugmakers attempt to move up the value chain, making more complex branded and specialty drugs while improving quality and finding new markets.   © Reuters

MUMBAI (NewsRise) -- Shares of Indian drugmakers have rallied in recent weeks, helped by a mix of factors, including the likelihood of reduced competition and a weaker local currency that has cheapened exports, improving the earnings outlook in the near term.

However, views are divided on the prospects of a sustained recovery in the global generics industry. Although the pressure on prices has lifted somewhat, changes in the U.S. market are also attracting new, and smaller, players.

Much of the gains in Indian drug stocks has followed comments from global generics leaders like Teva Pharmaceutical Industries. In May, the Israeli company said it planned to stop making about 80% of the products in its U.S. generics portfolio, retaining only the more profitable drugs. Earlier this month, Swiss drugmaker Novartis sold parts of Sandoz, its U.S. generics business, to India's Aurobindo Pharma in a $1-billion deal.

As a result, some expect less pressure on generics prices, which have fallen in double digits over the past three years. Lupin, India's second-largest drugmaker after Sun Pharmaceutical Industries, said in a conference call after its earnings in May that it doesn't expect erosion in U.S. generic drug prices this year to be as bad as last year.

In a report early this week, CLSA identified improved conditions at home as another factor boosting the sector. After a rough patch following a government ban on fixed-dose combination drugs and efforts to extend the price cap to more categories, domestic sales have begun to pick up, offsetting the pressure in U.S. for many Indian companies, CLSA said. In the April-June quarter, growth in sales averaged 26%-28%.

"The pharma sector is just starting to rev up," said Sanjiv Bhasin, executive vice president for market and corporate affairs at Mumbai-based brokerage IIFL. "It is becoming the best proxy play to a weak rupee," Bhasin added. Since the start of the fiscal year in April, the local unit has tumbled 14% against the dollar.

Meanwhile, the Nifty pharma subindex has gained over 25% in the same period outperforming the 12% increase in the benchmark Nifty 50. Shares of Sun Pharmaceutical, which is best known for its psoriasis and eye drugs, have risen 30%, while those of smaller rivals Dr. Reddy's Laboratories and Lupin have risen 24% and 26% respectively.

That's a dramatic turnaround from the past three years when the intense competition in the U.S. market, partly stemming from the Food and Drug Administration's decision to speed up the approval process for generic drugs, depressed the earnings of Indian manufacturers. While the FDA's move spurred competition by drawing many new players, a consolidation among U.S. buyers of bulk generic drugs hurt prices further.

In the fiscal year ended March, the Nifty pharma subindex lost 20%, compared with a 10% increase in the benchmark.

Faced with eroding profits, Indian companies started the attempt to move up the value chain, making more complex branded and specialty drugs while improving quality and finding new markets.

Some of those efforts are beginning to pay off.

For example, in March, the FDA approved Sun Pharmaceutical's first biologic drug Ilumya, used to treat psoriasis. Last week, the U.S. agency approved the company's two specialty products, Xelpros and Elepsia, used to treat glaucoma and epilepsy.

According to CLSA, there is room for Indian drug shares to rise further. The brokerage expects to raise target prices for the stocks it covers, including Sun Pharmaceutical and Cipla, by an average 13%.

However, brokerage Jeffries is less optimistic about generics pricing.

Despite the exit of Teva and Sandoz, the large numbers of new entrants mean pressure on prices will remain, it said in a report. For example, between 2012 and 2017, the number of new generics drugmakers more than doubled to 40.

Jeffries expects drug prices to fall in the high single-digit range to low double-digit range in the months ahead.

Further, a surge in the cost of raw materials, mostly imported from China, is likely to limit margin expansion for Indian companies, the brokerage said.

India imports drug ingredients worth 130 billion rupees ($1.78 billion) each year from China, the world's largest supplier. However, in the past few years environmental concerns have forced many Chinese manufacturers to shut shop, boosting prices of key raw materials.

--Dhanya Ann Thoppil

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