Quite chaotically, the Indian pharmaceutical industry was thrust back to prominence in Q1FY22. With the second Covid-19 wave and soaring infection rates, pharmaceutical companies acted fast. Some abandoned regular operations and focused on vaccine production, while others focused on drugs to treat Covid-19 and ancillary respiratory diseases.

In the midst of it all, the important revenue-generating market of the United States (US) was ignored. This took a toll on several pharmaceutical companies’ top line in the quarter, but they expect revenues to bounce back in the coming quarters. However, as the US deals with a resurgence of Covid-19 cases, pharmaceutical companies are still in a fix. With Covid-19 cases in India easing but rising in the west, which market should Indian pharmaceutical companies look at? More importantly, which market will lead to higher growth in revenues for these companies, and returns for investors?

India market to remain the frontrunner in Q2

In Q1FY22, pharmaceutical companies shifted their focus to the domestic market as Covid19 cases in India rose. This shift added to pharmaceutical companies’ revenues in Q1FY22. HDFC Securities in a note said that the Indian Pharmaceutical Market  (or IMP) revenues in Q1FY22 rose by 39% YoY. However, the growth was more pronounced for companies of two kinds. 

The first kind was companies catering to multiple regions globally. A case in point is Aurobindo Pharma (80% of revenue comes from the US and Europe) which reported a 6% sequential decline in Q1FY22 revenues compared to Cipla (80% of revenues from India, the US, Africa, and emerging markets) which reported a 20% sequential increase in Q1FY22 revenues.

The second kind of companies to benefit were those with a strong portfolio of acute drugs (short-term illness curing drugs), particularly immunity booster and respiratory drugs. These businesses recorded a sharp growth in sales. Take Alkem Laboratories (Alkem), for instance. Alkem’s sales in Q1FY22 rose by 36% YoY to Rs 2,713 crore due to a 65% growth in its domestic business led by a recovery in the sales volume of its acute therapy drugs. Companies that saw a similar YoY recovery in acute therapy sales were Cipla, Indoco Remedies, and Sanofi India. The recovery differed based on the proportion of acute therapy drugs within a company’s overall portfolio.

Brokerages suggest that pharmaceutical companies’ focus on acute drugs will decrease in coming quarters and shift to chronic and sub-chronic drugs. Chronic drugs are used to treat long-term illnesses like diabetes, cardiac and gastrointestinal problems. In Q1FY22, as lockdowns decreased outdoor movement, patients did not venture into clinics to get tests done. Hence, the demand for chronic drugs decreased. 

According to IQVIA, a healthcare research company, in Q1FY22 the domestic chronic segment grew by just 19.4% YoY compared to a 33% growth in the non-chronic segment, and a 39% growth in IPM revenues. This was on a low base in the year ago period during the national lockdown. The growth in acute therapy was primarily in short-term immunity boosters and respiratory drugs amid the second wave.

A sharp recovery, however, is expected in Q2 and Q3. KR Choksey estimates the domestic demand for chronic therapeutic drugs (especially respiratory, cardiology, gastrointestinal tract, diabetes) will drive growth for pharmaceutical companies.

Take Eris Lifesciences (Eris), a pharma company primarily making chronic anti-diabetic, gastrointestinal, and veterinary drugs. Chronic and sub-chronic drugs accounted for 91% of Eris’ Q1FY22 revenues. During the Q1FY22 earnings call Amit Bakshi, the Managing Director of Eris said the chronic drugs market was subdued in Q1FY22 as Covid-19 treatment drugs and acute drugs took center stage. However, Bakshi expects the market to recover in the coming quarters. Historically, demand for Eris’ chronic drugs increased in Q2 and Q3 compared to Q1 and Q4.

Other companies with a strong chronic drugs portfolio include Torrent Pharmaceuticals, Lupin, and J B Chemicals and Pharmaceuticals.

In Q1FY22 as India was engulfed in the second wave, the public took necessary precautions in the short term. This led to an improvement in sales of acute drugs, particularly in the immunity-boosting category. Due to lockdowns, outdoor movement was restricted, leading to a decline in demand for long term therapies and chronic drugs. Analysts and pharmaceutical companies expect the demand for these drugs to jump in Q2 and normalize in Q3 as outdoor movement ramps up. Further, the Indian market will remain in focus in Q2, especially for those companies with a strong domestic base.

US markets hit hard due to the resurgence of Covid cases, downturn to persist till Q3

In the first half of FY21, Indian pharmaceutical companies’ sales in the US market were unusually high because of the pandemic. As Chinese supply of pharmaceuticals, in addition to other products like specialty chemicals and agrochemicals, declined, Indian pharma companies increased their supply to the US market. 

Between June 2020 to September 2020, Indian pharma companies’ US revenues grew steadily. This was led by higher sales of respiratory, diabetes, and generic drugs. For most companies with a large revenue share coming from the US market, revenues peaked in Q2FY21, and since then declined sequentially.

The US Food and Drug Administration (FDA) also sped up the approval process of pharma companies’ abbreviated new drug applications (or ANDAs). This increased new drug launches in the US market. Take the case of Aurobindo Pharma, which filed 24 ANDAs in Q2FY22, compared to 55 ANDAs filed in FY20 and FY21 each.

This momentum in the US market tapered off in Q4FY21 and Q1FY22, as pharma companies’ focus shifted to the domestic market given the second Covid-19 wave in India. In Q1FY22, some pharmaceutical companies’ US sales rose marginally but it declined for the larger market. Companies with a weak base in the year ago period, due to the national lockdown and supply chain issues, saw a marginal YoY improvement of 4-9% in US sales. However, companies with normal sales the year ago period saw US revenues decline by nearly 20% YoY according to brokerage Anand Rathi. 

The brokerage estimates sales growth in the US market for pharma companies will remain muted in Q2FY22 because many companies deferred new drug launches to the second half of FY22.

Further, US-focused Indian pharma companies were forced to cut prices in specific drug categories due to higher competition. A case in point is the market for albuterol, a respiratory drug used to treat asthma and chronic pulmonary diseases, and its generic version Proventil in the US. Among Indian companies, Cipla is the frontrunner in the albuterol market followed closely by Lupin (which launched its albuterol drug in Q2FY21). 

In Q4FY21 Sandoz, a subsidiary of pharmaceutical company Novartis, launched its albuterol drug priced 15-18% lower than Cipla’s and Lupin’s generic variants. This forced Cipla and Lupin to write off inventories worth nearly Rs 65-70 crore each in Q1FY22 to make up for Novartis’ pricing advantage in the albuterol market.

During the peak of the Covid-19 wave in Q1, Cipla’s management pushed new albuterol drug launches to FY23 from FY22. But during the Q1FY22 earnings call in August 2021, its management said the traction in the US albuterol grew steadily in Q1FY22 and is expected to continue in coming quarters. Lupin’s management echoed a similar sentiment, stating that the US albuterol market performance in Q1FY22 was strong. Based on this, the company will accelerate albuterol manufacturing in Q3FY22, hoping to increase its albuterol market share in the US to 18-20%. As of June 2021, Cipla and Lupin’s albuterol market share in the US was 17% and 13%, respectively.

Based on this outlook, the US sales growth is expected to remain subdued in Q2FY22 due to two reasons. First, the year ago period saw higher sales as Indian pharmaceutical companies took advantage of the lack of supply to the US from China. This resulted in higher sales and drug launches for the rest of FY21. Second, due to the second wave in Q1FY22, the focus shifted to the domestic market. This allowed foreign competitors to enter the US market and delayed new drug launches. Brokerages expect US sales to recover only in Q3 and pharmaceutical companies have deferred new drug launches to FY23.

Covid-19 drugs revenue teeters as cases drop, but a market leader emerges

During Q1FY22, domestic demand for drugs used to treat mild to severe cases of Covid-19 like remdesivir, fabiflu, and favipiravir rose in April 2021. The most notable increase was in the demand for remdesivir, an antiviral drug, which was in short supply amid the second wave. India’s remdesivir supply, as of March 2021, was 31.6 lakh vials a month, which was increased by 22% to 38.8 lakh vials a month in April. 

Seven pharma companies manufacture the bulk of India’s remdesivir supply — Hetero Drugs, Cipla, Cadila Healthcare (Cadila), Mylan, Dr. Reddy’s Laboratories (Dr. Reddy’s), Jubilant Ingrevia, and a partnership between Syngene International and Sun Pharmaceutical Industries (Sun Pharma). However, sensing a market opportunity, Cipla and Cadila increased their production of remdesivir between April to June.

Cipla increased its remdesivir production by nearly 6X to 64.7 lakh vials a month, greater than the combined production capacity of other remdesivir makers. What’s more, Cipla decreased its price per vial the least out of the seven manufacturers. Cipla reduced its remdesivir price to Rs 4,000 per vial from Rs 3,000 per vial, a 25% decrease. Other companies reduced remdesivir prices by 40-60%. The rapid increase in production helped Cipla take a 53% market share by July, from 20% in April.

This rapid increase in remdesivir production resulted in a growth in Cipla and Cadila’s quarterly revenues in Q1FY22. Cadila’s revenues grew by 11% YoY to Rs 4,025 crore, mainly due to higher sales of its Covid-19 drugs. Cipla’s revenues grew by 26% YoY to Rs 5,504 crore. This was because of higher sales of remdesivir and generics and consumer respiratory drugs amid the second wave.

However, analysts do not expect rising revenues, owing to Covid-19 drug sales, to sustain in the coming quarters. In fact, as Covid-19 cases fell in June and July, so did these drugs’ sales. India’s Covid-19 cases peaked in May and since then dropped, the same was seen in Cipla’s sales of remdesivir and favipiravir. In July, the monthly sales of these drugs were 65-75% lower than in May.

Another company that benefited from higher sales of Covid-19 drugs is Glenmark Pharmaceuticals (Glenmark). Glenmark reported its highest quarterly revenues ever at Rs 3,023 crore, a 25% increase YoY due to higher sales of favipiravir and fabiflu. According to a note by Prabhudas Lilladher, what Cipla did with the remdesivir market, Glenmark did with the favipiravir market. 

Sensing an opportunity, Glenmark ramped up its favipiravir production in April to increase its market share. This was despite 25 companies competing in the favipiravir market offering discounts of nearly 60% during the peak of the second wave. As of July 2021, Glenmark held the majority share of the favipiravir market. 

Much like Cipla’s teetering revenue from remdesivir, Glenmark’s favipiravir revenue fell since May. In July, favipiravir sales were Rs 24 crore, a 93% decline from May. Prabhudas Lilladher added that these sales will normalize further in the coming quarters as vaccination increases. 

Even with the pace of vaccinations rising, many countries are facing a resurgence of Covid-19 cases, including the United States and Canada. If a third wave does arise, the demand for Covid-19 treatment drugs will once again increase. This will add to the revenues of the aforementioned pharmaceutical companies. However, the ones that will benefit the most in the short term will be the market leaders — Cipla in remdesivir, and Glenmark in favipiravir.

The pharmaceutical market is adequately poised. For some the opportunity is sans Covid-19, focusing on the global market and domestically focusing on long term diseases. For others, the opportunity is pegged on the virus, with Covid-19 treatment drugs and short term diseases. Pharmaceutical companies are likely closely watching the case counts. They may be waiting to enter markets that are not just engulfed with cases, as India was, but also markets that are recovering from high cases, as India is