Pharma sector looks at inventory correction, gradual restocking

Indian pharmaceutical industry, at present, is hugely depending on factors like the product-specific opportunities with low competition in the US, opportunity in contract manufacturing businesses, resolving the issues with USFDA and forex-related losses booked in the year-ago period.

According to analysts, most Indian contract, research & manufacturing services (CRAMS) companies will be impacted by the ongoing inventory reduction undertaken by CRAMS customers in the global pharma industry. The third quarter of the current fiscal will be the final period of this inventory correction and a gradual restocking of inventory is expected from the following quarter. Full recovery in outsourcing business is expected from the next fiscal.

The growth in the US, meanwhile, will be driven by increased pace of new product launches. This is especially true for the tier-II generic companies, for which, past product filings with the USFDA are now coming up for approvals. The exception to this trend will be Ranbaxy, which will witness a 15-20% decline in US revenues due to the ongoing USFDA ban, and Sun Pharma, due to high base of last year and on-going USFDA issues.

Though the revenue from the US market depends on product launches, the growth in domestic formulation market will boost the top line as well as the bottom line of the local as well as the MNCs in India. The ORG-IMS data indicates domestic formulation market growth of 29% and 20%, respectively, for the months of October and November 2009.

The strong growth reported by IMS can be attributed to a low base effect as pharmaceuticals market growth slumped to -1% and 7% in October and November 2008, respectively, says a Nomura report. Leading Pharma MNCs are set to to gain from the opportunities arising in the stronger patent regime in India. Aventis Pharma Ltd will be one of the key beneficiaries of the patent regime as the parent company has a strong R&D pipeline.

One of the majors whose top line and bottom line of Q3FY10 will be hit would be Divi’s Labs. Its bottom line is expected de-grow by 6%, reflecting the slowdown in CRAMS business and the reduction in EBITDA margins. Though partly tempered down by the ongoing slowdown in its CRAMS business and the closure of the Huddersfield facility in UK, Piramal Healthcare Ltd (PHL) is likely to witness a 17% growth in the third quarter. PAT is expected to grow by 100%, partly aided by low base of Q3Y09 (Rs 351 million of forex loss). But Biocon?s top line is expected to grow by 27.6%, mainly due to a 25% increase in contract research revenues due to gradual scale-up of the BMS contract as well as 33% growth in AxiCorp operations (Germany) due to supply of metformin.

Nimish Desai of Motilal Oswal says, “We believe that the next few months will be crucial for some of the Indian generic players (like Ranbaxy, Lupin and Sun Pharma-Caraco) for determining their ability to satisfy cGMP norms of USFDA. This has to partly do with the USFDA becoming more stringent in its approval process post the adverse experience with some of the Chinese facilities. Opening up of local offices in India by the US FDA will result in more frequent audits for Indian players.?

The continuing issues with the USFDA will have an adverse impact on the revenues of majors such as Sun Pharma. Its Q3FY10 topline is expected to grow by only 5% due to absence of exclusivity based pantoprazole supplies and the impact of the US FDA issues on Caraco, its US subsidiary, says Motilal Oswal report. Domestic formulations business (50% of revenues) are likely to revert back to the double-digit growth trajectory post the correction of excess supplies recorded 4QFY09.

The key factor which can determine Indian pharma sector’s growth story in coming years could be companies’ expansion into the untapped, semi-regulated markets. The size of the semi-regulated markets is expected to increase from $46 billion in 2007 to $74 billion by 2012. The opportunity spans more than 150 markets through Latin America, Asia, Eastern Europe and Australia. The current market share of Indian companies is merely about 6%, implying that there is substantial room for growth. Secondly, most of these markets are branded generic markets, thus, resulting in better margins compared with the US generic market.