ANDA filings in the US continue to increase and worry us. This trend goes against generic companies’ commentary that margins in the US have already come down to an extent that players have started exiting. In our view, portfolio margins in the US are still very healthy and continue to attract new players, and we expect price erosion to accelerate from here rather than decelerate.
The impact of these increasing filings have not yet hit the sector as higher filings are just getting accumulated in backlog queue (which stands now at four years of filings). FDA’s highest approvals last year were 850 but these were still lower than filing trend in any of the past five years.
Approvals slowed down in Mar-2018 quarter due to FDA’s guideline on Elemental Impurities. But, the trend is now normalising and Jun-2018 approval rate should be high at 270 vs 114 in Mar-2018 quarter. Thus, pricing pressure should increase in near term. We prefer Cipla, Sun, Aurobindo and Torrent — companies with low price erosion risk (low product concentration or low US exposure) and Sun as it is shifting away from generics.
ANDA filings continue to increase
Most of the investors and the generic companies believe that price erosion in the US generic market is near its bottom as the margins have already hit a low where several generic players have started exiting products (like Teva and Sandoz). However, we believe that sector margins are still very healthy and this is showing up in ever increasing ANDA filings to the US FDA. Annualised ANDA filings were the highest in Mar-2018 quarter. The impact of these increasing filings is not yet visible in margins in the US as approvals are still low at 850 a year (CY17 data which was the highest ever) whereas filings have been more than 1,000 for more than five years now. All these high filings are just getting added up in the backlog queue (close to 4,000).
ANDA approvals picked up in March
ANDA approvals in Jan-Feb 2018 slowed down due to new FDA guidelines on Elemental Impurities. The companies have already implemented the required changes and approvals have started picking up in Mar-2018 though not reached the normalised run-rate as yet. Our understanding is slow approvals in last quarter should be fully made up by high approvals in Jun-2018 quarter as several applications were stuck only for Elemental Impurities. Therefore, we expect 270+ approvals in Jun-2018 quarter and with enhanced approvals, we expect price erosion to accelerate for the sector.
Prefer Cipla, Sun, Aurobindo and Torrent in the sector
We prefer companies with low price erosion risk (Cipla, Aurobindo, Torrent — low product concentration in the US and good US pipeline or low US exposure) or companies which are transitioning away from generics like Sun Pharma. We are overall cautious on the sector and believe these companies should be relative outperformers.