Pharma: Shrinking Fortunes

Drug makers are going through a tough phase. Leading drug makers have started cutting costs as profitability continues to shrink, especially due to tough business conditions in the biggest market, United States (US), and also locally.

For Instance: India’s largest drug maker Sun Pharma reported a 59 per cent drop in second-quarter profit due to price erosion of generics in the US.

The founder of Sun Pharmaceutical Industries, Dilip Shanghvi has seen his net worth plunge to $11.1 billion on the Bloomberg Billionaires Index — drop of $14 billion in two years.

Shanghvi cited the pricing environment as the reason for fall in profit in the second-quarter, as well as the company’s continued investment in its specialty drugs business.

Sun Pharma is not the only one which is facing increase in competition in the generics market along with greater pricing scrutiny in the US. Glenmark Pharmaceuticals also reported a 4.2 per cent year-on-year drop in September quarter consolidated net profit to Rs 214.12 crore on weak US sales, the biggest market for the company. Sales dropped 5.7 per cent year-on-year to $113.24 million on the back of persisting price erosion in older products.

Apart from the challenges of operating in the US market, domestic drug makers have faced a string of actions by the American health watchdog, Food and Drug Administration (FDA).

Sample this: Wockhardt has been hit the hardest by FDA as three of its plants are under an import alert. The company, founded by Habil Khorakiwala, has lost over Rs 20 billion of sales from the US market over the past four years. To add to its woes, the global developments including Brexit (the company earns around 35 per cent of its revenue from the UK), demonetisation and goods and services tax have played a crucial role in derailing the company.

Reddy family of Dr. Reddy’s Laboratories and Murali Divi of Divi Laboratories too saw their wealth shrink last year. In September, shares of Dr. Reddy’s fell 6 per cent on a day when the report about an audit by German regulators uncovering manufacturing lapses at Reddy’s came out. Similarly, at Divi’s Laboratories, an import alert by US FDA crashed sales and cost net profits in the quarter ended June.

After Mumbai-based drug maker Lupin received a warning letter from the US Food and Drug Administration on its finished medicines plants in Goa and Indore, the company’s stock price nosedived, closing 17 per cent lower on the Bombay Stock Exchange. “While there will be no disruption of existing product supplies from either of the locations, there can be a delay in new product approvals from these two facilities,” the company said on the development.

Between 2013 and 2015, at least seven Indian pharma manufacturers were issued warning letters and import alerts. In 2015, India ranked fourth on the list of warning letters and import alerts raising questions on the efficacy and manufacturing practices of domestic drug makers.

While companies are preparing to announce results for the third quarter soon, the sentiments are not bullish. Pharma stocks are also posting losses for the second consecutive week. Between 15 and 19 January, the BSE Healthcare index declined 0.85 per cent, while the benchmark Sensex rose 2.38 per cent.

Most stocks, including Sun Pharma (-2.24 per cent), Cipla (-1.79 per cent), Aurobindo Pharma (-3.98 per cent) and Cadila Healthcare (-2.1 per cent), registered a plunge.

Data shows that not many companies are pro-actively investing in complex generics. According to a July 2016 report by JM Financial Institutional Securities, Indian companies have been slow in making investments in the complex generics and specialty drugs space.

But it’s time they diversify their product range, adopt differential strategies and focus on evolving as innovators. It may be easier said than done as running a specialty product company is much more difficult than a generics company. The product development cost for a complex generic is around $5 million compared with $1-2 million for a simpler final dosage form, Dr. Reddy’s said in its annual report for 2015-16.

Another report highlighted a concern. “The companies that have invested, find the investments return-dilutive in the short-to-medium term, given the complexities and long-gestation period for developing and bringing these products to the market,” pointed out the report by JM Financial Institutional Securities.

The global life sciences industry is gradually moving from chemical-based drugs to biologics. The global sales contribution of biologics is expected to increase from 24 per cent in 2015 to 27 per cent in 2020. Companies need to brace up for tough times ahead as not just profits from generics are getting affected, heavy investments going into the making of specialty drugs, including biologics and biosimilars, can further impact the margins.