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In follow up to our US approvals watch published in mid-August’23, we reassess US approvals data in the previous 3 months to understand the support from new launches. A look at fresh approvals suggests for most companies, barring Aurobindo and Zydus (yet again), approvals are either small in size or fully commoditized. While companies like Dr Reddys’ might navigate on back of Revlimid, reckon smaller companies would need several meaningful approvals to generate sustained growth. In continuation of what we wrote in Aug’23, we do not notice any signs of larger/meaningful approval filtering through across wide spectrum of companies. While we understand US environment remains supportive in the form of lower price erosion, it may turn for worse relatively quickly; hence fresh approvals are what would lead to sustained growth outperformance which is missing in most of the players. Zydus (not Rated) continues to get good approvals while Aurobindo yet again banks on sheer volume. Mid-sized companies have got the odd, good approval (Alkem – Chantix, , Alembic – Combigan, Selexipag) but most of them continue to struggle. Reiterate preference for Ajanta, positive view on Indoco while a cautious stance on Alembic is warranted given the lack of quality injectables approvals.

Aurobindo – As always garners large volume of approvals but has lesser number of meaningful ones compared to June-August period

 Alembic – Barring an ophthalmic approval (Combigan) in August and Selexipag in Oct’23, Alembic has not managed any decent onco/general injectable approval. Q3 performance would depend on volume gains in existing business and ramp up in Combigan.

 Alkem, Ajanta – No major approval and expect US performance to be driven by volume gains; Ajanta may have to contend with large sales of flu products in Q3 FY23

 Lupin & Dr Reddys’ – Lupin US performance rests on Spiriva share gain coupled with strength of flu season (good start so far); continued lack of approvals may hurt as company reaches optimum market share in Spiriva. A similar assessment would holds true for DRL as Revlimid and benign pricing environment are helping offset weak new launch pipeline

Q3 US business outlook – A repeat of Q2 FY24

Q2 FY24 had seen the full benefit of a benign US pricing scenario as many companies reported strong US sales driven by volume increase in existing products and lower price erosion. We expect a similar scenario to prevail in Q3 and this would ensure that lack of approvals across several players may offset by better volumes coupled with select shortage opportunities. We view current phase prone to sudden shifts in pricing environment which would impact US profitability accentuated by lack of approvals.

Reiterate preference for Ajanta; cautious on Alembic and neutral stays on Dr Reddys’

We continue to prefer Ajanta on few triggers like faster growth in branded business in Asia and Africa, 10-11% growth in domestic business and US turnaround after 2 tough years (ex-forex and flu-related sales in Q3 FY23). We had lowered rating on Indoco to ADD on back of continuous disappointment and too much to do in H2 FY24. On the other hand, Alembic is not getting support from large approvals that can propel US onto the next leg of growth and continues to rely on benign generic market to eke out volume expansion. Within the larger generic names, Lupin is supported by Spiriva traction though the market share gains may be gradual after the sprint since launch, thereby increasing dependence on US generic markets staying calm.

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