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Indian Pharma Firms Set to Benefit from US Drug Shortages

The US is currently experiencing a shortage of 233 drugs across 22 therapeutic categories. Ind-Ra suggests that Indian pharmaceutical companies with strong track records, recent cost-rationalization, and enhanced research and development capabilities can capture greater market share in the US. Image Credit: Freepik.com

• By Pooja Chaturvedi Sah
• New Delhi
• May 28, 2024

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India Ratings and Research (Ind-Ra) projects sustained revenue growth for Indian pharmaceutical companies targeting the US market in fiscal year 2025, driven by ongoing drug shortages. These shortages, along with limited price erosion expected to stay in single digits over the next 12-18 months, position Indian drug manufacturers for potential volume growth and improved returns. 

This scenario is particularly advantageous given the limited new drug application filings and approval delays by the US Food and Drug Administration (USFDA). 

Impact of US Drug Shortages

The US is currently experiencing a shortage of 233 drugs across 22 therapeutic categories. These shortages result from production discontinuations, increased demand, and shipment delays. Expanding supply chains and boosting manufacturer participation across these therapeutic categories are seen as crucial long-term solutions to these shortages. 

Ind-Ra suggests that Indian pharmaceutical companies with strong track records, recent cost-rationalization, and enhanced research and development capabilities can capture greater market share in many of these categories. 

Financial Upswing for Indian Pharma 

Indian generic drug manufacturers, such as Dr. Reddy's, Cipla, and Sun Pharma, have shown robust financial performance in FY24 due to lower raw material costs and stable pricing. For instance, Dr. Reddy’s reported a 29% increase in North American sales, while Cipla saw an 11% revenue rise in the latest quarter. 

Vivek Jain, Director of Corporate Ratings at Ind-Ra, highlighted the outlook: "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.” 

Addressing Regulatory and Market Challenges

The competitive nature of the generic pharmaceutical industry, combined with rising regulatory costs, has led to production halts and increased complexity in filing new drug applications. This has resulted in a significant slowdown in the filing of original abbreviated new drug applications (ANDAs). 

The median approval timeline has increased to 26 months, reflecting the higher research and development expenses per molecule. Despite these challenges, Indian pharma companies are expected to continue their strong revenue performance and improve their financial profiles. 

As a result, the Indian drugmakers, heavily reliant on the US market, are projected to sustain revenue growth in FY25, according to the India Ratings and Research. 

With companies like Dr. Reddy's, Cipla, and Sun Pharma dominating the bulk generic drug manufacturing sector, the US and Europe contribute significantly to their revenue streams. 

According to the Utah Drug Information Service and the US Food and Drug Administration, the shortage of drugs in the US, is driven primarily by production discontinuations, heightened demand, and shipment delays.  

Expanding Market Share and Exports

Exports of Indian bulk drugs to the US increased by 20% year-on-year in the first quarter of 2024. This rise in demand from the US market is expected to mitigate price erosion in the near term, as the drug shortage persists and competition from new ANDA filings decreases. 

The positive financial outlook is further underscored by the improved operating EBITDA margins reported by Indian pharma companies, reflecting their enhanced financial risk profiles and increased revenue from the US market. 

Reasons Behind the Shortages 

Generic pharma manufacturing is a highly competitive industry with low margins. Price erosion due to purchase concentration, increasing regulatory costs, and limited commercial viability has led many US-based generic pharma manufacturers to halt the production of financially unsustainable products. Major Indian generic players have also exited non-profitable molecules, contributing to the increasing shortages. 

Regulatory Delays and Approval Challenges: 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 due to increased filing complexities, leading to higher research and development expenditures per molecule. 

The median timeline for approval has increased to 26 months from 21 months, reflecting a six-quarter high. This reduced ANDA filing intensity is expected to improve the pricing scenario amid decreasing competition. 

Performance and Financial Improvements: The US's import of pharmaceuticals and related products is at an eight-quarter high, reflected in the revenue growth of Indian pharma companies. Most companies declaring FY24 results have shown strong double-digit growth in revenues from the US. 

Furthermore, all companies have seen year-over-year improvements in operating EBITDA margins. Ind-Ra rated issuers earning major revenues from exports to the US have seen significant improvements in their revenue and operating EBITDA, enhancing their financial risk profiles and resulting in positive rating actions. 

The ongoing drug shortages in the US present an opportunity for Indian pharmaceutical companies to strengthen their market position and achieve sustained revenue growth. As Indian drugmakers continue to expand their exports and improve their financial performance, it leads them to play a crucial role in alleviating the current drug shortages in the US market, and ultimately benefiting both their business operations and the broader healthcare system.