Questions that global generic behemoth Teva's results raise for Indian pharma

On August 3rd, the largest generic company operating in the US, Teva Pharmaceutical Industries (Teva in quickspeak) put out results that arguably jolted the world of global generic medicines.  Yitzhak Peterburg,  the company's Interim CEO, Interim President & Director, at the earnings call after the announcement of the results, said "All of us at Teva understand the frustration and disappointment our shareholders are feeling."

As is already reported everywhere, Peterburg said: "We reported today lower-than-expected Q2 results. Revenues in this quarter were dollar5.7 billion, resulting in a non-GAAP net income of 1.1 billion dollar and non-GAAP EPS of 1.02. dollar Cash flow from operation was soft, amounting to 741 million. dollar We have also lowered our 2017 revenue outlook to 22.8 billion dollar to 23.2 billion dollar and our non-GAAP EPS outlook to 4.30 dollar to 4.50. dollar"

Note the revenues in the quarter. The number is bigger than the annual revenues of India's largest pharma company Sun Pharma.

As is apparent, the first obvious question it raises is does scale really matter now? In fact, one mid-sized company's head honcho observed, "today, bigger the scale, bigger the impact." Or is it because, Teva's challenges need to be viewed keeping in mind that it has gathered girth largely though the number of acquisitions it has done over the years. Or is it because its cost economics would be different from Indian companies, who have operations largely out of India?

But then, a larger and related question is: Did the Indian pharma companies not see this all coming? After all, they have all being talking about it for more than a year. But what have they done? Dr Reddy's for instance, while announcing their financial results for 2016-17, did talk of entering newer geographies , have a 'rep' office in China, expand foodhold in Colombia, Brazil, Chila, North Africa, Algeria and in Europe look beyond Germany and the UK. But then, are these measure not rather late in the day?

After all, consider this: Teva in the latest results attributed much of the impact on the results to "price erosion, decreased volume, mainly due to customer consolidation, greater competition as a result of an increase in generic drug approval by the FDA and some new product launches that were either delayed this quarter or got subjected to more competition." But then, Indian companies knew it was happening. Pick up any of the past statements issued by Indian pharma companies and they talk about this. Take for example, the earnings call of Sun Pharma last year, Dilip Shanghvi, founder and managing director of Sun Pharmaceutical Industries, while reviewing FY 16, said: "Our performance in US has been adversely impacted by price competition, customer consolidation, and supply constraints. Our emerging market performance has been impacted by currency fluctuations and supply constraints."
 
Or consider Lupin: Kamal K Sharma, vice chairman, Lupin, while reviewing the results for the full year of 2016, told in the earnings call: "So, when we speak about the trends, something which has been very prominent in the recent past, is the erosion in prices in the US. And as you are aware that there has been substantial consolidation of the channel partners, and therefore it has obviously helped them to improve their bargaining power and the differential price in that one could earlier enjoy that is no more there." But then, fast forward to latest results: Here is what the Credit Suisse by its research analyst Anubhav Aggarwal has to say about the company: "Lupin's stock has corrected 40 per cent over the past year and the key reason has been earning downgrade.Return profile of the US market has significantly deteriorated with rising price erosion. Lupin has sharply cut FY18 EBITDA margin guidance to 21-23 per cent from 26-28 per cent given in May 2017. This was driven by a sharp erosion in high-margin Glumetza in 1Q18 and the impact of Mckesson and Walmart alliance (in our view, impact was about 3-4 per cent)."

Is there nothing that Indian companies, given their cost advantages, have done about it? Be it attempts at sharpening their product portfolio, improving the cost competitiveness, reducing the costs in key markets like US for instance?

But then, now, linked to future earnings, there is another question and it again stems from developments at Teva. It is around the correctives that Teva is putting in place? Is there anything for Indian companies in this? Or shall we say, what does it mean for an Indian company  when Teva says: By the end of 2017, it expects "to realize cumulative net synergies and cost reduction of approximately dollar1.6 billion, which is a further reduction of 100 million dollar, compared to what communicated previously. As part of the cost base reduction, by the end of 2017, reduce headcount by approximately 7,000 people since the closing of the Actavis Generics deal, which is approximately 2,000 above our initial plan. Plus, closing or divesting 6 plants in 2017 and 9 plants in 2018 and by the end of 2017, exit 45 markets globally but then also in 2017, expect to generate more than 50 per cent of  generic revenues outside the U.S." Are Indian pharma companies looking at ways they can fill in the gaps that these changes  at Teva may throw up for them?

Questions that global generic behemoth Teva's results raise for Indian pharma

On August 3rd, the largest generic company operating in the US, Teva Pharmaceutical Industries (Teva in quickspeak) put out results that arguably jolted the world of global generic medicines.  Yitzhak Peterburg,  the company's Interim CEO, Interim President & Director, at the earnings call after the announcement of the results, said: "All of us at Teva understand the frustration and disappointment our shareholders are feeling." As is already reported everywhere, Peterburg said: "We reported today lower-than-expected Q2 results. Revenues in this quarter were 5.7  billion dollar, resulting in a non-GAAP net income of 1.1 billiondollar and non-GAAP EPS of 1.02. dollar Cash flow from operation was soft, amounting to dollar741 million. We have also lowered our 2017 revenue outlook to 22.8 billion dollar to 23.2 billion dollar and our non-GAAP EPS outlook to 4.30 dollar to 4.50 dollar."

Note the revenues in the quarter. The number is bigger than the annual revenues of India's largest pharma company Sun Pharma. As is apparent, the first obvious question it raises is does scale really matter now? In fact, one mid-sized company's head honcho observed, "today, bigger the scale, bigger the impact." Or is it because, Teva's challenges need to be viewed keeping in mind that it has gathered girth largely though the number of acquisitions it has done over the years. Or is it because its cost economics would be different from Indian companies, who have operations largely out of India?

But then, a larger and related question is: Did the Indian pharma companies not see this all coming? After all, they have all being talking about it for more than a year. But what have they done? Dr Reddy's for instance, while announcing their financial results for 2016-17, did talk of entering newer geographies , have a 'rep' office in China, expand foodhold in Colombia, Brazil, Chila, North Africa, Algeria and in Europe look beyond Germany and the UK. But then, are these measure not rather late in the day?

After all, consider this: Teva in the latest results attributed much of the impact on the results to "price erosion, decreased volume, mainly due to customer consolidation, greater competition as a result of an increase in generic drug approval by the FDA and some new product launches that were either delayed this quarter or got subjected to more competition." But then, Indian companies knew it was happening. Pick up any of the past statements issued by Indian pharma companies and they talk about this. Take for example, the earnings call of Sun Pharma last year, Dilip Shanghvi, founder and managing director of Sun Pharmaceutical Industries, while reviewing FY 16, said: "Our performance in US has been adversely impacted by price competition, customer consolidation, and supply constraints. Our emerging market performance has been impacted by currency fluctuations and supply constraints."
 
Or consider Lupin: Kamal K Sharma, vice chairman, Lupin, while reviewing the results for the full year of 2016, told in the earnings call: "So, when we speak about the trends, something which has been very prominent in the recent past, is the erosion in prices in the US. And as you are aware that there has been substantial consolidation of the channel partners, and therefore it has obviously helped them to improve their bargaining power and the differential price in that one could earlier enjoy that is no more there." But then, fast forward to latest results: Here is what the Credit Suisse by its research analyst Anubhav Aggarwal has to say about the company: "Lupin's stock has corrected 40 per cent over the past year and the key reason has been earning downgrades.Return profile of the US market has significantly deteriorated with rising price erosion. Lupin has sharply cut FY18 EBITDA margin guidance to 21-23 per cent from 26-28 per cent given in May 2017. This was driven by a sharp erosion in high-margin Glumetza in 1Q18 and the impact of Mckesson and Walmart alliance (in our view, impact was about 3-4 per cent)."

Is there nothing that Indian companies, given their cost advantages, have done about it? Be it attempts at sharpening their product portfolio, improving the cost competitiveness, reducing the costs in key markets like US for instance?

But then, now, linked to future earnings, there is another question and it again stems from developments at Teva. It is around the correctives that Teva is putting in place? Is there anything for Indian companies in this? Or shall we say, what does it mean for an Indian company  when Teva says: By the end of 2017, it expects "to realize cumulative net synergies and cost reduction of approximately 1.6 billion dollar, which is a further reduction of 100 million dollar, compared to what communicated previously. As part of the cost base reduction, by the end of 2017, reduce headcount by approximately 7,000 people since the closing of the Actavis Generics deal, which is approximately 2,000 above our initial plan. Plus, closing or divesting 6 plants in 2017 and 9 plants in 2018 and by the end of 2017, exit 45 markets globally but then also in 2017, expect to generate more than 50 per cent of  generic revenues outside the U.S." Are Indian pharma companies looking at ways they can fill in the gaps that these changes  at Teva may throw up for them?