Now, Indian pharmaceutical majors also face the African challenge

Cipla and Aurobindo among major companies whose March quarter sales in the institutional segment fell close to 50%

While Indian pharmaceutical majors continue to face severe pricing pressure in the US market, Africa has been a growth story. However, Indian companies are now facing headwinds here, too, especially in the institutional sales or tender business.

In the listed space, five major companies — Cipla, Aurobindo, Strides Sashun, Ipca Labs and Ajanta Pharma — cater to the anti-malarial and anti-retroviral (ARV) tender business. Sales for this segment came down significantly in the March quarter and in 2017-18. Delay, funding cuts for organisations such as the Global Fund and pricing pressure have been compounded by a rise in raw material costs impacting revenues and realisation.

Consider Cipla. The company reported a 54 per cent decline in its global access (tender) business. Umang Vohra, managing director and global chief executive, indicated its global access business (anti-retroviral) fell 54 per cent over a year before during the quarter, due to tender phasing (rollout) and challenges in the funding environment. In FY17, the global access business did about $145 million; in FY18, it was $110 million, down 24 per cent for the year.

Other companies faced similar pressures. Strides Shasun’s tender business is under pressure due to lower funding in anti-malaria tenders and cost pressure in the anti-retroviral business. Arun Kumar, executive vice-chairman and managing director, indicated in a recent investor call that the institutional business has had its toughest year yet, as the malarial opportunity has compressed and is almost negligible from what it used to be at one point. “Add the long-term contracts on our anti-retrovirals, which suffered significant API (raw material) price increases.”

Highlighting the issues faced by companies such as Strides, Sriraam Rathi and Vinay Bafna of ICICI Securities say new malaria tenders have reduced by half in size and competition has increased, further pressurising the segment. The ARV segment is facing margin pressure as fixed contracts force the company to bear higher raw material cost.

Aurobindo Pharma, which also supplies ARV formulations, saw revenue from this business come down 29 per cent to Rs 8.4 billion. The management indicated that for the March quarter, it declined by 43 per cent year-on-year to Rs 1.49 billion, with higher pricing pressure in a key product and reduction in tenders floated by various countries. However, the company expects a better FY19, given the transition to a new ARV formulation and new orders.

Among the worst impacted companies in the institutional business has been Ajanta Pharma. The company’s Africa institutional business revenue fell 22 per cent year on year in the quarter. The pressure is likely to continue in FY19. Says Kunal Dhamesha of SBICAP Securities, “The Africa institutional business faces significant (revenue) headwind in FY19 due to considerable pricing pressure, as well as market share erosion following the re-entry of incumbents. The management expects as much as two-thirds of the Africa institutional revenue to evaporate in FY19, which will put significant pressure on the Ebitda (operating earnings) margin.”

Though on a smaller base (the company resumed supplies last year), Ipca Laboratories posted 22 per cent growth in FY18 to Rs 1.57 billion and 44 per cent growth in the March quarter. This was led by incremental supplies for USAID tenders and other tender business. The company expects gradual ramp-up over the next few quarters and has a target of Rs 1.8-2 billion in sales for FY19.

While some of the global tenders could restart in the coming quarters, the uncertainty on these and on pricing for the orders will be a bit of an overhang for the companies. Given the higher procurement cost for raw materials and a higher number of competitors, profitability pressure will continue in the near term.