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Published on 26/09/2018 10:50:01 AM | Source: Motilal Oswal Securities Ltd

Expert Speak : US generics in recovery mode by Mr. Abhijit Mukherjee - Motilal Oswal

US generics in recovery mode

Better prospects in Emerging Markets as well

We met Mr. Abhijit Mukherjee, the ex-COO of Dr. Reddy’s Laboratories (DRRD), who retired on 31 March 2018. Currently, Mr. Mukherjee is an advisor to some pharma companies, sharing his knowledge on strategic and operational matters. Key takeaways from the meeting:

*  The US generics market is in a recovery phase with limited downside in its existing business for companies with a diversified base. Incremental growth is expected from a healthy pipeline of differentiated products.

*  The attractive valuation of recent deals should lead to more consolidation opportunities.

*  Other than the US, emerging markets look promising with stability in the eco-political situation and its relative currency movement, thereby aiding better growth in business prospects from these regions.

*  In order to curb healthcare cost, Government intervention on price capping may continue.

*  The China pharmaceutical market offers strong business prospects to Indian pharmaceutical companies, choosing the right products and a good quality dossier.

 

US generics market in recovery mode

*  Phase-I in the US generics market (2011-14) was a dream run for companies exhibiting strong sales growth, as well as profitability. During 2015-18, Phase-II in the US generics market witnessed buyer-side consolidation, increased competition, and regulatory headwinds, which adversely impacted the business of pharma companies. The impact has been much adverse for companies having a concentrated portfolio and facing an increased competition in high value products.

*  However, Mr. Mukherjee expects companies to be in the next phase now—the recovery mode in US generics. This is primarily on limited price erosion from here on, partly due to gross margins being on a lower base now. With limited downside in the base business and pipeline remaining healthy, companies should be able to offset the decline in its base business and also grow over the next 2-3 years.

*  Particularly, likely winners should be companies that are cost-efficient with a strong supply-chain management in place. Companies with the capability and capacity to achieve backwards integration for active pharmaceutical ingredient (API) manufacturing, should be in a better position to maintain and/or improve customer connect with better supply assurance.

 

M&As should improve viability of entities in the US generics space

*  The recent deal (for e.g. acquisition of Sandoz Dermatology and Oral Solids portfolio by Aurobindo) was at reasonable valuations. Consolidation in the industry should help improve viability of entities, and lead to robust business models.

 

Impact on API supplies due to increased pollution control norms in China

*  Environment-led slowdown in production of raw materials necessitates new supply-chain initiatives—and industry is on the job, pursuing it. Overall, this is not expected to be a show-stopper. Some of the costs of better environment control would eventually be passed on by the industry.

 

Emerging Markets — a growth area

*  Emerging Markets can now be revisited as a growth area due to political stability and oil prices—this has led to a limited downside on a relative currency basis. Better growth with increased operating leverage can provide good upside in terms of profitability, provided right areas of the business are picked.

 

Strong opportunities for Indian pharma companies in China

*  Given the fact that there is a serious effort in healthcare management in China, the Chinese government is in the process to streamline regulatory pathways, enabling strong business opportunities for Indian Pharma companies—who have established their manufacturing base in China, with a strong product pipeline and superior execution rate.

 

And, your view on India formulation market

*  Government measures to bring multiple products under the price ceiling could result in lower CAGR for the domestic formulation market. Annual growth rate is expected to be range-bound — between 10-12% over the next 2-3 years with some profitability challenges. Companies would need to extensively focus on sales productivity to ensure healthy growth and to maintain low front-end employee attrition. However, over-thecounter (OTC) and nutraceuticals could provide new opportunities, given the vast market potential.

 

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