Given the growing market share for generic drugs, patient investors might want to consider two Indian pharmaceutical firms that are among the 10 largest generic drug companies in the U.S. -- Dr. Reddy’s Laboratories Ltd. (RDY) and Lupin Limited (NSE:LUPIN.NS).
Although regulatory and currency issues have had a dramatic impact on the two Indian companies’ share prices, they are well positioned to capitalize on the burgeoning market for copies of brand-name drugs. In the U.S. alone, the generic drugs market was $66 billion in 2015, with several more familiar names among the leading providers, including Teva Pharmaceutical Industries (TEVA), Mylan N.V. (MYL) and the Sandoz unit of Novartis AG (NV).
Generics already represent 45% of the global market, and their share will continue to increase thanks to the demand for cost-effective medications, rising healthcare expenditures, greater government support, expiring patents on blockbuster drugs and the aging population.
Dr. Reddy’s operates across the globe. About 85% of the company’s sales are outside its home country, with approximately 40% from the U.S. and 12% from Europe.
The company’s three primary businesses are pharmaceutical services and active ingredients, global generics and proprietary products. Its major therapeutic areas of focus are gastro-intestinal, cardiovascular, diabetes, oncology, pain management and anti-infectives.
In the past five years, Dr. Reddy’s shares have climbed about 60%, based on its recent price of just over $46. But that’s still well off of its 52-week high of $68 in October. Since last year, the company has been plagued by FDA concerns about procedures at its plants. In March, things got worse after the company got warning letters from the FDA for three of its local facilities, causing investors to back off further. And management’s weak guidance for the quarter ending in March materialized: The company reported fourth-quarter fiscal 2016 earnings per ADS of 7 cents, down more than 52% from the year-ago quarter. Its revenues of $567 million were 3% lower, primarily due to a decline in the ruble and continued constrained operations in Venezuela.
But there are reasons to be optimistic, assuming Dr. Reddy’s can resolve its FDA issues. In March, the company received FDA approval for a generic version of Aloxi. When introduced—in September 2018 or maybe even earlier -- annual sales of the anti-nausea drug are expected to be about $100 million, helping drive the company’s growth.
Lupin shares have been battered, too, as all Indian plants have come under greater FDA scrutiny. Already facing currency issues in the Russian market, the company lost about a quarter of its market value in March following an analyst report that said costs to resolve compliance issues at its Mandideep unit would be a drag on results.
Lupin shares bounced back somewhat after the company calmed concerned investors by emphasizing that the FDA observations were minor and had already been addressed. “We believe the outcome of the audit will be voluntary action only and there will be no remediation required,” according to a Lupin statement. Morgan Stanley wasn’t concerned. The firm held steady on its overweight rating on the company with a 12-month target of nearly $32 from its current price of $22 a share.
Lupin, along with other Indian generic drug companies, has had to overcome a slowdown in the speed of approvals after the FDA revamped its review process. To help offset its ability to bring generics to market sooner, the company made its largest acquisition last year, paying $880 million for GAVIS Pharmaceuticals. The purchase gives Lupin a group of specialty generic drugs that are more difficult to develop and in a market where competition is limited.
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