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CLSA says Cadila, Dr Reddy’s could be top beneficiaries if turnaround in US generics pricing sustains

CLSA says Cadila, Dr Reddy’s could be top beneficiaries if turnaround in US generics pricing sustains

CLSA says Cadila, Dr Reddy’s could be top beneficiaries if turnaround in US generics pricing sustains
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By Mousumi Paul  Jul 19, 2019 11:22:28 AM IST (Published)

CLSA believes Cadila Healthcare and Dr Reddy's Laboratories could be the key beneficiaries if the pricing in the US comes around. the brokerage house says that the beliefs among investors on a sustained improvement in price erosion from current levels is not strong, and this is largely due to the small and mid-sized companies’ active in the US.

The US generics market has been consolidating from past twelve months due to a drop in the number of ANDAs, rising number of product withdrawals, product discontinuation and collapse in valuations of recent mergers and acquisition deals, according to a research report by brokerage CLSA.

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Moreover, many companies have been restructuring their costs base, which has resulted in industry-wide price erosion improving from double-digits in FY18 to mid-single digits now, said CLSA in its report.
However, the brokerage house says that investor beliefs on a sustained improvement in price erosion from current levels are not strong. This is largely due to the small and mid-sized companies’ active in the US.
Pertinently, though, as US compliance-related costs may continue to rise, the higher cost burden could force the onset of pricing discipline of drugs in the US.
“While we currently bake in 7-12 percent price erosion in the base business for our coverage companies, improved pricing could be a lever for sector earnings. Assuming 50 percent improvement in price erosion in FY20-21 from current expectations could boost US revenues FY20-21 by 3-9 percent and earnings by 1-6 percent”, the report added.
Therefore, CLSA believes a sustained turnaround could boost companies US revenues, and that Cadila Healthcare and Dr Reddy’s Laboratories could be the key gainers here.
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