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Indian Pharma Market remains sluggish; focus now shifts to GST impact

* The Indian Pharma Market’s (IPM) growth remained subdued in May’17, with the overall growth rate at 7%. We attribute the ongoing slowdown partly due to the continuing government intervention in the sector.

* The key reasons for the poor sector growth has been the declining price growth and softer volume growth. Declining price growth is attributed to the crackdown on FDCs (Fixed Dosage Combinations) where companies had greater leeway in pricing.

* Weak volume growth in the past has been a function of anemic economic activity. We believe some of the recent tepid volume trend may also be due to demonetization.

* The past 3 years’ data clearly shows that price growth has declined in the Indian market since early CY16 and is now the lowest for nearly 18 months. This despite the WPI index (on which price revisions are indexed) rising over the same period. We believe that the weakness in price growth seems to have coincided with the government’s unsuccessful crackdown on FDCs, which constitute c45% of the IPM by value. While the move was stayed by courts, our discussions with industry players clearly indicate that most companies are now trying to move away from the lucrative FDC-led growth model. We believe this has had a significant impact on the overall price growth in the sector.

* Surprisingly, volume growth has also been sluggish. Overall volume growth, which averaged well over 5-5.5% in CY16, is well below 3% in YTD CY17. Weak volume growth usually is accompanied by either muted economic growth or poor underlying wage growth. The only data shoring up the overall IPM seems to be NI growth, which though trending downward, is still healthy at c5%. We have detailed the impact on continuing govt. led crackdown impacting sector growth in our note titled Healthcare industry in government crosshairs dated 5th May 2017.

* We believe that the street would focus on the extent of disturbance caused by the impending GST implementation and its impact on the industry growth. This would last only for a quarter, but post that we expect focus to return to whether IPM growth can revert to mid-teens, which given the above data appears difficult. We believe that in the medium term, the overall IPM growth would be sluggish for most companies.

* May 2017: Domestic pharma market grew by 7% (as per IMS)

* IPM reported sales of Rs97.6bn in May’17, a growth of 7% against 6% in Apr’17.

US FDA shows it has a bark and a bite

* New US FDA commissioner acts on his promise to limit access to opioid substances by requesting Endo Pharma to withdraw opioid brand Opana ER from the market

* The new regime at FDA had specifically highlighted abuse of opioid medicines and faster generic approval timelines with lower backlogs as key targets for the agency

* Indian generic industry has limited exposure to Opioids space but with the agency showing that it is serious about pursuing its agenda, should be cause for concern for the entire generic industry from an increasing competitiveness perspective.

The US FDA last week has asked Endo Pharma (ENDO) to withdraw its opioid painkiller Opana ER (oxymorphone hydrochloride) from the market on the grounds that risks from the product far outweigh its benefits (Link here). Opioid addiction is a public healthcare crises in USA where by painkiller/controlled substances are often misused for addiction. To put this in context, in India similar reasons have been expounded by the government in order to restrict or ban (unsuccessfully) certain codeine based syrups.

* While the Indian generic companies has limited exposure to Opioid business (largely with SUNP and CDH), the development is still very important from the perspective of the US FDA getting more serious on the issues it has highlighted to resolve. The new US FDA commissioner Scott Gotlieb has been quite vocal on two specific issues 1). To limit or restrict access to Opioid drugs in order to contain the opioid epidemic plaguing US healthcare system & 2).to get the FDA to step up the pace of generic approvals including streamlining the approval process to allow ANDA filings to jump queues, prioritize ANDA applications where drug costs are high, eliminate within a year the backlog of 2640 generic drug applications etc. We have written extensively on this earlier in our note titled Radical moves by new US FDA head for shorter generic timelines dated June 7, 2017.

* While ENDO likely to explore legal options in order to continue the Opana franchise, the FDA acting against Endo shows its strong intent to pursue the objectives set out under the new regime at the agency. Note that this is the first time that FDA has taken steps to remove a currently marketed opioid product from the market place.

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