The BSE Healthcare Index hit an all-time low last week and continues to trade weak due to multiple headwinds. Despite easing competitive intensity in the US and lower price erosion, the sector does not seem to be out of the woods. There are multiple pain points for the sector in the core markets of the US and India which are pegging back the growth prospects.
First, the US market. Near-term growth in this lucrative geography hinges on timely approval for large products, regulatory clearances and success of speciality products. Even though Indian companies are on a strong footing and are taking steps to develop a strong product pipeline, including complex products (biosimilars, injectables), the benefits of the same are some time away.
Dr Reddy’s Laboratories, for example, is rationalising its product portfolio in the US (selling some proprietary products) and concentrating on niche injectables. While this should help over the medium term, the benefits will be gradual. This means that it will have to depend on large product approvals to drive growth in the near term. It is not surprising then that the stock has corrected 9-10 per cent in two trading sessions after the company received a complete response letter (CRL) from the US regulator for the launch of generics version of contraceptive drug Nuvaring. The CRL indicates a delay in the launch of this large product opportunity, adding to concerns on near-term profit growth.
For other players such as Lupin, Cadila, Ipca, regulatory clearances for their plants will drive growth momentum and earnings upgrades. Sun Pharma, after resolving regulatory issues, has already launched a major part of its speciality products. However, the upside now hinges on the ramp-up of the same. While Ilumya (dermatology product) sales are showing increased traction, the reflection of the same in sales will be back-ended given the ongoing patient access programme and a slow ramp up, say analysts. Analysts at Edelweiss said that earnings growth in the medium term will be challenging given Ilumya’s slow uptake, non-recurrance of one-off sales and higher R&D costs.
While regulatory clearances are one part of the problem, stringent regulatory compliance is the other. This leads to higher compliance costs which coupled with rising R&D spends will hurt margins.
Growth for pharma majors will be led by volumes and not prices. Experts point out that drug prices in the US may not be hiked given that it has become a key political issue ahead of the presidential election scheduled next year.
In the domestic market, too, growth has remained in single digits during the June quarter. The slowdown is also related to pharma companies rationalising their distribution. While the companies are changing their structure to service customers better and to improve their working capital management, short-term disruption has impacted sales. Cipla’s domestic sales, which account for a third of the overall revenue, declined 12 per cent year-on-year and 10 per cent sequentially in the June quarter. The company attributed the same to a conscious decision on realignment of distributors in the generic trade channel. It is the restructuring that led to Cadila Healthcare to report a second quarter of low growth at 6.2 per cent.
Thus, with growth in both the US and India markets under check, other emerging markets could have helped but revenues in these markets are hit by currency headwinds. Companies are planning to enter markets such as China, but reaching scale will take time.
Analyst Purvi Shah of Sharekhan is cautious on upgrades looking at the sustainability of the numbers. Further, while managements have indicated that overall growth is good, this is limited to few regions. Most analysts expect growth in FY21 and have highlighted the need to monitor management commentaries on growth in the following quarters. – Business Standard