Regulatory woes resurface for Indian pharma companies as stocks fall

Concerns over US sales are diluting positives of strong domestic growth, and have led to a 10 per cent fall in the Nifty Pharma index in one month

Just when the Street had begun to believe that the multi-year regulatory woes of Indian pharmaceutical companies were behind them, the worries have resurfaced pulling down their share prices. The Nifty Pharma index, for instance, slipped 10 per cent in one month, against a gain of 2.4 per cent in the Nifty 50, after hitting a 73-month low of 7,047.10 intra-day last Wednesday. In fact, the intensifying regulatory headwinds for Indian drugmakers on account of action by the US Food and Drug Administration (US FDA) have also masked the good news on domestic growth during the September quarter, which has been the best in last three years. These rising worries on future growth in the world’s largest healthcare market, the US, which has also remained a key earnings driver for many Indian Pharma companies, are weighing on the Street’s sentiment.

FDA scrutiny rising

In the past one month or so, many companies having exposure to the US markets, such as Aurobindo Pharma, Lupin, Cipla, Torrent Pharmaceuticals, Glenmark Pharmaceuticals, and Biocon, were in the spotlight over FDA issues. Lupin, Glenmark, and Torrent Pharma have received Warning Letters for their facilities recently. With companies like Cadila Healthcare, IPCA, and Dr Reddy’s already struggling to resolve their FDA issues, the list has only grown longer. Analysts at Jefferies, not long back, had said that US FDA focus on Indian facilities has increased over the past 12 months, with more than 30 per cent of ex-US inspections being for Indian facilities, as against 20 per cent earlier.

This rise in regulatory hurdles is expected to impact product approvals and launches, and even lead to a rise in remediation and compliance costs. These, in turn, will impact the earnings of most drugmakers. As a result, the Street sentiment has turned sour.

Analysts at Edelweiss say that US FDA regulatory actions are becoming the new norm and adding risks. The US FDA issued observations to Cipla (for its Goa and Bangalore API facilities), Lupin (Tarapur and Mandideep facilities), Biocon (Bengaluru and Malaysia facilities), Torrent Pharma (Dahej plant), and Dr Reddy’s (Bollaram API and Duvvada facilities).

Worse, these developments came at a time when the Street was expecting a respite from pricing pressure in the US and also expecting some companies to resolve their FDA issues. The US generic price erosion (intensity) has almost halved versus levels seen in 2018, point out analysts at IIFL. With price erosion expected to remain in single digits, companies were expected to grow their US business led by higher product approval rate and launches. Already, total approvals for abbreviated new drug applications (ANDAs) by major companies have been on a decline. Now, with compliance of plants becoming an issue, US growth may suffer.

Weak US growth will once again be the dominating theme for earnings in September quarter (Q2) and overshadow the revival in the domestic business, say analysts at Emkay Global. 

Positives include sector growth of 11.9 per cent in September, and analysts at Jefferies point out that Q2’FY20 growth at 11 per cent is the highest in the past three years. Dr Reddy’s and Sun Pharma saw domestic growth accelerate to the highest level in the past two years, while Lupin’s growth remains well ahead of the industry in Q2. However, with Lupin’s key plants facing regulatory issues, and given the limited visibility on a new big-ticket pipeline in the US, analysts are cautious about its growth prospects. For Sun, while eyes will be on a ramp-up in its speciality portfolio, analysts say that the US business should see a sharp fall sequentially as the one-time generic supply order in the US has been ceded. 

On the whole, analysts at Emkay Global expect revenues and Ebitda to grow 12 per cent and 8 per cent year-on-year for their coverage universe – the lowest in the last four quarters.