The outlook remains strong for CDMOs and CROs even as the escalating pricing pressures and regulatory actions strain revenues of Indian generic players. Global pharma surveys indicate that drug pricing is likely to have the greatest negative impact on the pharmaceutical business in the year 2019.
 
Intensifying competition resulting from the FDA’s fast tracking of generics approval process along with the consolidation of pharma distribution chains over the last few years, have led to a large-scale erosion of trade margins. The pharmaceutical formulations business in the U.S. made up 34% of Sun Pharma’s $4 billion sales in FY2018. The figures were 3% more than what India’s largest drug maker earned from its own country.
 
Lupin, another player with a substantial share in the generic space, gained 38% of its total $2.14 billion revenues from the world’s top pharma market in 2018, according to India Brand Equity Foundation.
 
Aurobindo Pharma, the 5th largest generic pharmaceutical company as per the IMS National Prescription Audit earned $1,292 million or 46% of the company’s consolidated revenue from U.S. sales in FY19, measured by total prescriptions dispensed for the twelve months ending June 2018. During that period, the company launched 50 new products including 12 injectables.
 
As of March 31st, 2019, Dr. Reddy’s Laboratories has 110 cumulative filings pending for approval with the U.S. FDA including 107 ANDAs and 3 NDAs. Revenues from North American generic sales stood at $213 million with 2% sequential growth, according to a Hyderabad-based firm in the 4Q FY19 earnings call. Dr. Reddy’s believes that the trend of rising pricing pressure will continue to adversely affect manufactures as the drug wholesalers, retail drug chains, private insurers, and other purchasing organizations continue to consolidate and integrate.
 
To counterbalance the effects of pricing pressures, the companies are energizing efforts to boost domestic sales. Many of the leading pharmaceutical companies reported double-digit growth in their local sales, which in turn supported overall industry growth and was found to be 11% during FY19, according to a recent report by Fitch Ratings.
 
Fitch Ratings believes Indian drug makers’ efforts to expand specialty and novel drug portfolios will help to reduce their dependence on the fiercely competitive generic business. However, Fitch does not expect a “meaningful shift” away from generics during FY20. Companies with an appropriate cGMP compliance record will be better placed to mitigate the effect of pricing pressure in the U.S., according to Fitch.
 
In addition, most of these companies are facing compliance issues with the U.S. drug regulation process. For example, Lupin has listed regulatory compliance as the top priority item for the coming financial year.
 
While these global cues leave the pharma index wavering, shares of the contract service companies look somewhat resilient. A recent market report that listed 6 stocks forecasted to see sharp earnings growth in the years 2019-2020, featured two pharma companies: Jubilant Life Sciences and Dishman Carbogen Amcis.
 
Jubilant’s spectrum of activities covers the manufacturing and supply of solid dosages, injectables, radiopharmaceuticals, APIs, specialty intermediates, as well as drug discovery solutions. The company reported record performance in revenue and profitability in FY19. Analysts point out that earnings of this midcap firm are estimated to rise substantially this year, partially due to recent long-term contracts in specialty pharma.
 
Dishman Carbogen Amcis reported a 36% growth in earnings in the last fiscal year. The outsourcing company offers a portfolio of development, scale-up, and manufacturing services. The firm offers a variety of services from early stage process research to the manufacturing of finished products. Dishman is also one of the very few listed companies that offers state-of-the-art containment facilities for high potent APIs. Unlike generics, the API business is more sustainable and is also insulated from pricing pressure.
 
Syngene is among the CROs which showed impressive growth. This discovery and development services provider reported a 28% jump in its profit for FY2019. The company attributes the strong performance to strengthened partnerships with key strategic clients such as Baxter, Merck KGaA, BMS, Amgen and GSK.