Indian generic players reported strong sales growth during the first quarter of the financial year 2009-’10, despite odds like hostile US FDA actions and depreciating Indian currency, according to a sector report by the Mumbai-based equity broking firm Enam Securities Ltd.
Aggregate sales of generics of the companies Biocon, Cadila, Cipla, Dr Reddy’s, GlaxoSmithKline Pharmaceuticals, Glenmark, Lupin, Ranbaxy & Sun Pharma rose by 12.4% during the period while EBITDA and profits fell 4.9% and 42.5% respectively as strong sales driven performance from Cadila, Lupin and Cipla was offset by sales declines at Ranbaxy and Sun.
Lupin and Cadila strong sales growth in generics outperforming on traction in existing products and new launches while the USFDA actions caused the performance of Ranbaxy & Sun’s falling below expectations.
Margins were strong for Cadila and Lupin, at the EBITDA level too.
Sun’s subsidiary Caraco reported provisioning of USD 8 mn on inventory and made certain product recalls and though Ranbaxy’s EBITDA margins turned positive, they still remain low due to a significant sales decline in the US markets.Lower crude oil prices went down nearly 50% YoY resulting n a fall in input costs improving gross margins (adjusting for one?offs for Sun and Glenmark in Q1FY09).
While interest expense at 35% continues to be high relative to Q1FY09, there has been a significant 20% fall in quarter on quarter. As a result of lower operating margins and higher interest rates, adjusted PAT excluding Ranbaxy fell 5.2% YoY. Including Ranbaxy it was 34.4%.
The increasingly aggressive stance of the US FDA does not seem to bode well for players with wide exposure to the US market, points out the report commenting on the outlook for generic Indian Pharma., the report notes.
Sentiment will also be impacted by the proposal to provide 12 years of data exclusivity on biosimilars.
The companies in the ENAM coverage list continued to report lower sales and operating profit growth for the 3rd consecutive quarter despite a 17% YoY Indian rupee depreciation.
Exports in generics continued to gain momentum. Lupins’ branded franchise in the US continued with its strong performance (up 75% YoY) and Kyowa’s sales grew 42% increasing its franchise in amlodipine & risperidone. Cadila’s export formulation sales grew 66% driven by 81% rise in the US sales to Rs 1.5 bn. It started selling mycophenolate mofetil during the quarter. Excluding sales from the acquisitions at Spain, South Africa and from the Hospira JV, they were still strong at 34%.
Regarding the currency movement, compared with the situation last quarter, most currencies recovered losses against the US dollar and strengthened. The Brazilian Real strengthened the most v/s the USD during the quarter. The companies that have a significant presence in Latin America include Glenmark and Ranbaxy. The Russian Rouble recouped some of the losses against the US dollar gaining 9% during the quarter.
The companies like Dr. Reddy’s and Glenmark had to take price increases to offset the fall in sales in USD terms in Q4FY09. Most currencies barring the CNY have strengthened against the USD 11%, EBITDA and PAT fell by 5.2% and 34.4% respectively.
Among the abbreviated new drug applications submissions from Indian generic players, Sun Pharma was the most active during FY09 making as many as 8 filings, though all from its own facilities and not Caraco’s. Dr. Reddy’s indicated that the lack of ANDA filings was a timing issue and Q2FY10 would see the resumption of ANDA filings. The significant ANDA approval during the quarter was omeprazole OTC received by Dr. Reddy’s where it was the first -to – file.
Omeprazole OTC currently sells about USD 250 million annually in the US.
Gross margins for generics fell by 239 bps YoY despite INR depreciation. Major factors that contributed to the same include (1) poor performance of Ranbaxy, whose GMs fell by ~750 bps and (2) Inventory provisioning of USD 8 mn at Caraco coupled with some product recalls. Q1FY09 also included exclusivity sales from oxcarbazepine for Sun Pharma and Glenmark.
However, the silver lining is that raw material costs have actually fallen significantly as crude prices fell about 50% YoY.
Overall EBITDA margins for generics fell 327 bps YoY to 18.5%. Key factors contributing to the same were Ranbaxy’s continuing drop in profitability and the impact of Sun’s provisions and product recalls. On the positive side, Cipla and Cadila surprised others with better?than?expected margin expansion on higher export contribution.
Meanwhile, the first quarterly performance of CRAMS companies under study were slow. Except Jubilant, sales of all the companies declined.
Mainly Divi’s & Dishman disappointed on margins as a fall in sales resulted in lower fixed cost coverage (?500 bps YoY). However, diversified CRAMS companies Piramal Healthcare and Jubilant performed better on margin front. Generics’ margin was mostly above estimates on stronger export growth and fall in raw materials costs.
De?stocking by clients will continue to impact performance for API manufacturers in Q2. On the research outsourcing front, a revival of investment in the biotech industry seems unlikely in the near term.
While aggregate sales grew, performance of pure?play CRAMS players (Dishman & Divi’s) was worse than the diversified CRAMS players like Jubilant and Piramal HC.
Even though overall sales for these companies grew 5.8%, growth in the CRAMS business was negative for all except Jubilant. The rise in sales was contributed by strong performance in non?CRAMS business of Piramal HC. Low fixed cost coverage in the CRAMS business resulted in a fall in profitability with EBITDA and PAT declining by 10.4% and 18.4% respectively.