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US concerns persist
Opinion on US generics remains divided
Pharma earnings season turned out to be a divergent pack with mixed commentaries from managements. In this report, we have collated the key takeaways from the conference calls of companies under coverage and highlight some of the common threads running across US, India and ROW markets. While Sun alluded to no change in underlying US generics operating environment, some of the key competitors like Lupin and Dr Reddys’ remained optimist on the US market on back of turn in lead indicators like decline in ANDA submissions and high product discontinuations. Importantly, Teva, a bell weather for US generics, indicated that it is seeing stability in US generics as its revenue has been stable for five quarters in a row.
Need for specialty pipeline has fully sunk in
Importantly, managements of all frontline pharma companies with US$500mn plus US sales reiterated a pressing need to build a specialty portfolio to mitigate the persistent erosion in base business. Moreover, Glenmark and Taro, key players in the US derma market, echoed similar commentary of challenging growth environment characterized by persistent price erosion in dermatology. Limited period opportunities due to withdrawal of large players or supply disruptions like Valsartan played a meaningful role in supporting US business; indeed, AmerisourceBergen, a large US generics distributor, also highlighted such quick volume openings for most of the companies; albeit such opportunities cannot be relied upon for sustained growth. On a contrasting note, Aurobindo management remained confident of growth on a sizable base business on back of solid injectables growth in FY19 which is likely to sustain in the current fiscal.
India: weak anti infective season impacts acute-focused companies
In the domestic market, generic-generic may be causing a dent on IPM especially at the lower end. Separately Alembic Pharma management flagged a surprising slow-down in Q4 which needs a close watch. In another common refrain, companies indicated that trade channels have definitely pared inventory with average holding down to around 40 days from pre-GST norm of 45-50 days. FY19 also saw a weak antiinfective season which impacted predominantly acute focus companies like Alkem; management believes 1 in 3 years would be bad for acute business which, given the moderate growth in past 2 years, offers better prognosis in FY20. Europe implemented serialization of drug supply chains which dampened YoY growth for most companies in H2 FY19 though the issue would be resolved in the current quarter. Institutional business in Africa was impacted to due to sharp pull back in global funding and price erosion which lowered anti-malarial sales; expect funding to remain depressed which precludes recovery in sales.
No V-shape recovery expected in US
Sun Pharma guided to mid-teens revenue growth on FY19 reported base which translates in to 11% growth as Q4 was devoid of ~Rs11bn due to restructuring of Aditya Medisales. Barring Aurobindo, most managements remained circumspect about US business as despite semblance of stability in price erosion, product opportunities in base business are vulnerable to commodity type pressures; at the same time, specialty basket will take time to offset the base erosion. We retain our negative stance on the sector with Sell on Sun, DRRD and Lupin; retain preference for non-US plays like IPCA Labs.
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