We expect Indian pharma companies to generate strong revenues from the US generic market due to the receipt of many ANDA approvals from US FDA

We expect Indian pharma companies to generate strong revenues from the US generic market due to the receipt of many ANDA approvals from US FDA. In the first seven months of 2013, Indian companies received approvals for ~40% of the total ANDAs approved by US FDA. Moreover, they are well placed in the US generic market because of integration. Among Indian companies, Sun Pharma (SPIL) and Aurobindo Pharma (APL) emerged winners with 21 and 20 ANDA approvals respectively. We expect both SPIL and APL to immensely benefit from these approvals and their strong generic pipeline in the US.

Indian companies – front runners: Between Jan-July’13, Indian pharma companies received ~40% of all ANDA approvals from US FDA. ANDA approval is a pre-requisite for marketing generic products in the US. Hence, these companies are likely to benefit as they can market their generic products in the US market. These companies may also have first mover advantage due to the early filing of ANDAs with US FDA.

Integrated players: Indian generic companies are integrated players with a presence in both Active Pharmaceutical Ingredients (API) and generic formulations. Hence their margins are higher than that of other global generic companies who out source API. Moreover, personnel cost and operating expenses in India are lower than in other developed countries. Hence, Indian generic companies have emerged as the most cost competitive in the global generic market.

Benefit from rupee depreciation and risks: The Indian pharma companies have benefited from ~9% depreciation of rupee against the dollar in Q1FY14. The rupee has been steadily sliding down against the dollar and hence these companies were able to report higher revenues from the US market. Any improvement in rupee from current levels will affect the revenues and profitability of Indian generic companies. Moreover, these companies face risks from regulatory authorities who constantly monitor their world-class manufacturing facilities.

Sun Pharma (SPIL) and Aurobindo Pharma (APL) remain our preferred picks: SPIL and APL continue to be our best picks in the sector on account of SPIL’s acquisition of Dusa and URL’s generic business in the US and APL’s recent US FDA approval of its three manufacturing facilities after reinspection and price hikes in the domestic market. SPIL and APL have strong pipelines of 320 and 191 approved ANDAs respectively for the US generic market. We expect this strong pipeline to drive growth in the US.