India Ratings and Research (Ind-Ra) projects that US-focused pharmaceutical companies will continue to see revenue growth in FY25 due to ongoing drug shortages in the US market. These shortages are expected to drive volume growth while limiting price erosion to single digits over the next 12-18 months, resulting in improved returns. Additionally, with fewer original abbreviated new drug application (ANDA) filings and approval delays from the USFDA, the current drug shortage offers Indian pharmaceutical companies with the necessary approvals an opportunity to gain market share in this competitive yet lucrative market.
The United States is currently experiencing an active shortage of 233 drugs across 22 therapeutic categories. This shortage is primarily caused by the discontinuation of drug production, rising demand, and delays in shipments. To address this issue, expanding supply chains and increasing participation from manufacturers across various therapeutic categories are seen as ideal long-term solutions. Ind-Ra believes that Indian pharmaceutical companies, with their strong track record, recent cost rationalizations, and enhanced research and development capabilities, can capture a significant market share in many of these therapeutic categories.
According to Vivek Jain, Director of Corporate Ratings at Ind-Ra, “The price erosion in the US generics market is expected to remain in single digits in the near future, primarily due to drug shortages. Indian generic companies catering to the US market have experienced strong financial performance during FY24, driven by lower raw material costs and stable pricing. With the increasing complexity of products and recurring supply chain issues leading to uncertainty, we expect the pricing scenario in the US to remain supportive. High working capital financing requirements continue to be managed through the non-recourse account receivables purchases scheme.”
Overall, Indian pharmaceutical companies are well-positioned to benefit from the current drug shortages in the US market. Their ability to maintain strong financial performance and adapt to evolving market conditions will be crucial in capturing increased market share and achieving sustained revenue growth in the coming years.
Understanding the Major Reasons Behind Drug Shortages
Competitive Industry with Low Margins:
The generic pharmaceutical manufacturing industry is highly competitive, characterized by low profit margins. This competitive pressure has led to significant price erosion, primarily due to the concentration of purchasing power among a few large buyers, such as major pharmacy chains and healthcare providers. These buyers leverage their purchasing power to negotiate lower prices, squeezing the profit margins of generic manufacturers. Additionally, the increasing regulatory costs associated with compliance, quality control, and manufacturing standards have further strained the financial viability of many generic drugs. As a result, several US-based generic pharmaceutical manufacturers have halted the production of products that are no longer financially sustainable.
Exiting Non-Profitable Molecules:
Large Indian generic pharmaceutical companies, which play a crucial role in the global supply of generic drugs, have also contributed to drug shortages by discontinuing the production of non-profitable molecules. These companies have strategically exited from manufacturing certain generic drugs that do not offer sufficient commercial returns. This decision, while necessary for maintaining overall business health, has exacerbated drug shortages, as fewer manufacturers remain to produce these essential medications.
Specific Reasons for Delays in Drug Availability
1) GMP Compliance Requirements:
Good Manufacturing Practice (GMP) compliance is essential for ensuring the quality and safety of pharmaceutical products. Meeting these stringent standards often requires significant investments in quality control systems, infrastructure, and personnel training. The time and resources needed to achieve and maintain GMP compliance can delay production and availability of generic drugs.
2) Shortage of Active Ingredients:
The availability of active pharmaceutical ingredients (APIs) is critical for drug manufacturing. Any disruption in the supply chain of these ingredients, whether due to geopolitical issues, natural disasters, or supplier challenges, can lead to a shortage of the final drug product. Delays in sourcing high-quality APIs are a significant contributor to drug shortages.
3) Delays in Shipping:
The pharmaceutical supply chain is complex and highly globalized. Delays in shipping, whether due to logistical issues, customs clearance, or transportation disruptions, can impede the timely delivery of drug products. These delays affect the entire supply chain, from raw materials to finished products, leading to shortages in the market.
4) Increased Demand for Drugs:
Sudden surges in demand for certain medications, often due to public health emergencies, seasonal illnesses, or changes in medical guidelines, can outstrip the production capacity of manufacturers. When demand increases rapidly, it can take time for manufacturers to scale up production to meet the new levels, resulting in temporary shortages.
5) Discontinuation of Drug Manufacturing:
6) As mentioned earlier, the financial non-viability of certain drugs leads manufacturers to discontinue their production. This discontinuation can be due to a variety of reasons, including low demand, high production costs, and regulatory challenges. Once production stops, it can create significant gaps in the availability of essential medications.
7) Other Regulatory Delays:
Regulatory processes, such as obtaining approvals for new drug applications, amendments to existing approvals, or resolving compliance issues, can be time-consuming. Delays in these processes can postpone the introduction of new generics to the market or the continued availability of existing drugs. Regulatory bottlenecks thus contribute to drug shortages.
Slowdown in Original ANDA Filings
Acknowledging the ongoing drug shortages, the USFDA has enhanced its approval and tentative approval rates for original ANDAs (Abbreviated New Drug Applications) submitted by pharmaceutical companies. Despite this improvement, there has been a consistent decline in the number of original ANDA filings. This reduction is attributed to increased filing complexities, which necessitate higher research and development expenditures per molecule. Consequently, the median approval timeline has risen to 26 months, marking a six-quarter high from the previous 21 months. The reduced intensity of ANDA filings is expected to improve the pricing scenario due to decreasing competition.
Rise in Bulk Drug Exports to the US
In the first quarter of 2024, exports of Indian bulk drugs to the US surged by 20% year-on-year. This increase reflects the growing demand for Indian bulk drugs in the US market. Although pricing erosion remains an issue, it is likely to be mitigated in the near term as the US drug shortage worsens and the decline in original ANDA filings reduces competitive pressures.
Performance Improvement for US-Catering Pharma Companies
The import of pharmaceuticals and related products by the US has reached an eight-quarter high. This trend is mirrored in the revenue growth of Indian pharmaceutical companies. Many companies that have reported their FY24 results have shown strong double-digit revenue growth from the US market. Additionally, all these companies have experienced year-on-year improvements in their operating EBITDA margins.
Significant Improvement in Financial Profile
Issuers rated by India Ratings and Research (Ind-Ra) that generate substantial revenues from exports to the US have seen notable improvements in their revenue and operating EBITDA. This enhancement has also strengthened their financial risk profiles, as evidenced by recent positive rating actions on one of the entities. The improvement in financial performance underscores the resilience and growth potential of these companies in the current market environment.
In summary, the pharmaceutical industry is navigating significant challenges and opportunities driven by drug shortages, regulatory complexities, and shifting market dynamics. The slowdown in original ANDA filings, coupled with the rising demand for Indian bulk drugs, underscores a pivotal shift towards stabilizing prices and enhancing competition. As US imports of pharmaceuticals hit an eight-quarter high, Indian pharmaceutical companies are experiencing robust revenue growth and improved financial profiles. These developments highlight the industry’s resilience and capacity to adapt, positioning it for continued growth and stability in the face of evolving market conditions.
Source: Drug shortage in the US to prove beneficial for Indian pharma companies
Indian Pharmaceutical Companies
Indian Pharmaceutical Companies
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