Drug shortage in the US to prove beneficial for Indian pharma companies

India Ratings and Research (Ind-Ra) expects US-focused pharma companies to sustain their revenue improvement trend in FY25 on account of heightened drug shortages in the US market. This will not only provide potential for volume growth, but also limit price erosion to single digits over the next 12-18 months, leading to improved returns. Also, given the limited original abbreviated new drug application (ANDA) filings and delays in approvals provided by the USFDA, the drug shortage in the US provides an opportunity for Indian players with necessary approvals to gain market share in a competitive-but-attractive market.

The US is facing an active shortage of 233 drugs across 22 therapeutic categories, led mainly by discontinuation of drug production, rising demand and delays in shipments. Expanding the supply chains and increasing participation from manufacturers across therapeutic categories are ideal long-term solutions to address the problem. The agency believes Indian pharma companies with a reasonable track record, recent cost rationalisation and enhanced research & development capabilities can capture a higher market share in many of these therapeutic categories.

“The price erosion in the US generics market is expected to remain in single digits in the near future, primarily due to drug shortages. US-catering Indian generic players have seen a strong financial performance during FY24, due to lower raw material cost and stability in pricing. With improving complexity of products and recurring supply chain issues leading to uncertainty, we expect the pricing scenario in the US will remain supportive. High working capital financing requirements continue to be managed by the non-recourse account receivables purchases scheme”, as per to Vivek Jain, Director, Corporate Ratings, Ind-Ra.

Major Reason for Shortages: Generic pharma manufacturing is a competitive industry with low margins. Price erosion on account of purchase concentration, increasing regulatory costs and limited commercial viability in some cases has led to many US-based generic pharma manufacturers to halt the production of financially unsustainable products. Large Indian generic players have exited non-profitable molecules, contributing to increasing shortages.

Original ANDA filings slowing down: Taking cognisance of the drug shortages, there has been an improvement in USFDA approvals and tentative approvals of the original ANDAs filed by pharma companies. However, there has been a consistent decline in the filing of original ANDAs on account of increased filing complexities, leading to higher research & development spend per molecule. The median timeline for approval has increased to 26 months which is a six-quarter high, from 21 months. With the reduced ANDA filing intensity, the pricing scenario will improve amid decreasing competition.

Bulk drug exports to US on a rise: Exports of Indian bulk drugs increased 20 per cent YoY during 1Q24. This reflects the growing demand from the US for Indian bulk drugs. Pricing erosion, which remains a reality, is likely to be arrested in near term, as the US drug shortage worsens and the fall in original ANDA filings reduces competition. 

Performance Improvement for US-catering Pharma Companies: US’s import of pharmaceuticals and related products is at an eight-quarter high. The same is also reflected in revenue growth of Indian pharma companies. Most companies which have declared FY24 results have shown a strong double-digit growth in revenues from the US. Furthermore, all the companies have seen a YoY improvement in operating EBITDA margins.

Material Improvement in Financial Profile: Ind-Ra rated issuers earning major revenues from exports to the US have seen a significant improvement in their revenue and operating EBITDA. This has also helped them improve their financial risk profile, which is reflected in the latest positive rating action on one of the entities.

Edits made by EP News Bureau