Saturday, November 25, 2017

GST increased Pharma Industry’s worries

It is not just the Trump effect that Indian Pharma industry has to grapple with; it has to face the GST test too

By Neha Seth

The Indian pharmaceutical industry ranks third largest in the world by volume of production and 14th in terms of value, thereby accounting for around 10% of world’s production by volume and 1.5% by value. The industry has witnessed a robust growth over the past few years moving on from a turnover of approx. USD 1 billion in 1990 to over USD 30 billion in 2015. Indian pharma industry is mainly operated as well as controlled by dominant foreign companies having subsidiaries in India due to availability of labor in India at low cost of production.

Through the introduction of a system of product patents since 2005, Indian industry has today become very a worldwide exporter of high quality generic drugs. Indian exported drugs worth USD 15 billion to more than 200 countries including the highly regulated markets of US, Europe, Japan and Australia. Indian companies are also making their presence felt in the emerging markets around the world, particularly with a strong portfolio in anti-infective and antiretroviral.

The industry now produces bulk drugs belonging to all major therapeutic groups requiring complicated manufacturing technologies, the formulations produced are in various dosage forms. Based on projections by a McKinsey report on Pharma 2020, India's pharmaceutical sector is to grow to USD 55 billion by 2020.

The industry has been certainly grown yet the pharma sector is in trouble according to a HDFC Securities Institutional Research report.

Trump thunderous affect on Pharma

Early during the year in Jan’17, President Donald Trump, told US drug makers to bring back manufacturing to the United States. This “Buy American” move could largely affect the Indian pharmaceutical companies. India exported USD 6billion worth of drugs to US in 2015 and restrictions on pharmaceutical imports and manufacturing abroad could impact the industry in India. Trump also promised to relax the regulations required by the United States Food and Drug Administration (USFDA) and told companies to lower down the prices keeping trade should be the purpose for prices control.

How much will be the impact of Trump’s push on the Indian pharma sector is a matter of time. Yet, can see the results for the fourth quarter of fiscal 2017, the pharma sector’s performance was impacted by sudden decrease in US sales.

GST adds to pain

Back home in Indian market, the industry’s performance during the first quarter of financial year 2018 is likely to be affected by GST-led de-stocking of inventory. The implementation of the Goods and Service Tax (GST) has impacted the primary sales and profitability of pharma companies in the domestic market and aggravated their overall performance. 

Performance Metrics

The top-line of the industry is expected a single-digit decline on year to year basis for the companies covered under the umbrella. The profitability will decline due to both lower sales of exclusive products such as gGleevec, gGlumetza and gAbilify, and compensation for lost tax credits offered to dealers in the face of GST implementation.

During the fourth quarter of 2017, the operating performance had decreased and now during the fiscal 2018, companies such Cadila Healthcare Ltd (CDH), Glenmark Pharmaceuticals Ltd (GNP), Aurobindo Pharma (ARBP) and Lupin (LPC) are receiving higher number of product approvals, leading to stronger base businesses in the US.

The Giants Fall

The Indian giants of the pharmaceutical industry occupying 70 to 80 percent of the market, includes Sun Pharma, Lupin, Dr. Reddy’s Labs and Cipla. The quarter doesn’t look any rosy for these companies either.

Sun Pharma (SUNP)

During the first quarter of fiscal’17, SUNP will report decline in its top-line item to 15 percent on a high base mainly owing to high gGleevec sales. However, even excluding gGleevec, sales will decline 9 percent year on year basis, owing to no product launches and eroding sales of Taro. Taro is a U.S based subsidiary of Sun Pharma.

Given the domestic market scenario leading to GST implementation, the domestic business of Sun Pharma is also likely to decline. Although, sequential improvement in operating margins at 25 percent is expected owing to the absence of the one-off costs of 4QFY17.

Lupin

On a high base and considering the domestic market disruption will lead to a modest top-line decline of 4 percent for Lupin. The pharma major is expected to report better EBITDA margins sequentially, with the absence of several one-off cost, on account of increased R&D spend and the decreasing contribution of gGlumetza and gFortamet. Lupin’s key measurable will be visibility of significant product launches in the US market in fiscal’18.

Dr Reddy’s Labs

Dr Reddy’s (DRRD) first quarter is expected to increase its revenue by 4 percent on year to year basis and improve its margin by 7 percent over the first quarter of fiscal’17, which included significant remediation cost related to US Food and Drug Administration (USFDA) plants.

The aspect to look out for the drug-maker is the update on the regulatory matters concerning its manufacturing facility at Duvvada, Visakhapatnam. The USFDA has made 13 observations relating to deviation from good manufacturing practices (GMP) at the company’s cancer formulations facility.

Cipla

During the first quarter of 2018, Cipla’s will likely post negligible revenue growth given its heavy domestic heavy portfolio. Also, owing to an unfavourable business mix during the quarter, its operating margins will decline as well. Key measures to look out for Cipla is its domestic business recovery during second quarter of financial year’18 and visibility on the US product launches.

Cadila Healthcare

Cadila Helathcare’s US business to grow quickly with receiving 18 approvals during the first quarter of 2018. This will also compensate for any domestic business disruption due to GST. Growth is expected to increase by 7 percent on year to year basis.

Glenmark Pharmaceuticals Ltd

Despite a 5 percent decline in its domestic business, Glenmark is likely to report overall better revenue at 20 percent growth on year to year basis with margins improved at 23 percent. After a tepid last quarter of 2017, gZetia sales is likely to improve in this quarter. Key monitorables for the company are updates on further balance sheet clean-up plans, write-offs and progress of its novel pipeline products.

 

neha.seth@outlookindia.com

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