More USFDA approvals needed for next up move in pharma: Prakash Agarwal, Axis Capital

Do you think pricing in pharma will be better going forward?
Price erosion is continuing but there are pockets where there are supply disruptions, where there has been better sales realisation and so it is a mixed bag. As of now, we have not seen price increases; it is just that the discounts have come down and price realisations have become partly better. The good part is the concentration risk has come down. Earlier, one product used to drive the overall EBITDA margins, now it is not so concentrated. That way we are better placed but price erosion in mid-single digits still continues on a blended basis. Although I would say, price realisations are improving.

Last time when the cycle did pick up Indian companies grew leaps and bounds from 2009 all the way to 2015 and so did the stocks along with it. Do you think Indian companies are sort of well prepared this time around also if US generic sees a big cycle up move or rather a cyclical up move?

Yes, the Indian companies are clearly better placed this time. From a high base, we are coming to a normal base; the only issue here is that USFDA approvals have slowed down. What we need to see is incrementally facilities getting cleared and that is how we would see incremental approvals. The approval rates have actually come down versus what we saw in the past couple of years. For the next up move, what we need is USFDA clearances.

Do you think there is a case at an industry level of margins recovering?

So, margins are again company-specific and product-specific. On a blended basis, companies are recovering on a low base; cost measures are being taken in terms of cost optimism. We do expect margins to improve marginally but not significantly across companies because as the US improves from a decline to a single-digit growth, there is optimisation of cost and R&D. We do expect some margin improvement.

What about the near term impact of API on pharma companies? Is there sufficient inventory for now in the light of coronavirus scare?

There are two parts to it. So from a coronavirus perspective, what companies have talked about in the conference call was the most debated topic. They have talked about one-two months' kind of inventory that includes API to key starting materials and intermediates but again if one product is not available you cannot really make the compound. The supply chain can be an issue going forward. But for a month we need to watch the situation very closely to see if it improves or not.

The second point is that two years back there were a lot of environmental issues in China and due to which some companies have actually looked at a second source -- be it India, Europe or other markets. So, the price perspective of raw materials as mentioned by a couple of companies in the call has also come off a bit. It has not increased but if this issue continues for longer, then we might see impact. Currently, there has been no impact.

When we talk about earnings especially one has seen midcap companies and how their US sales have actually panned out. From low base, larger companies like even Aurobindo Pharma, Cipla, etc, have done very well when it comes to the US geography. Would you say that these are initial signs of a pickup and if so, what could be the next possible trigger for them to be able to push their earnings only forward?

There are only two things to really follow – one is the product pipeline and the second one is if you are FDA compliant or not. Because if you are not FDA compliant, you cannot actually monetise the pipeline. So there are some supply opportunities in the companies that we spoke about. For some of these companies, a couple of products have added to the growth. So these are the two cases in points we follow.

There are few companies that on a low base can grow, there are a few companies that can grow on a high base in single-digit if they are compliant and the growth continues with the pipeline. All the companies on a blended average can grow in single digits.