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MOSL: HEALTHCARE- US base business to remain weak; Potential approvals remain key for growth

HEALTHCARE: US base business to remain weak; Potential approvals remain key for growth

 

Sandoz’s 1QCY18 results indicate that its generics business is impacted by 6% YoY price reduction

Novartis’ generics arm, Sandoz reported 4% YoY reduction in 1QCY18 net sales on constant currency basis. The decline is largely due to 6% YoY price erosion, mainly in the US market. The price decline was partially offset by 2% YoY increase in volumes. Ex-US business grew 5% YoY on constant currency basis.

 Interestingly, Sandoz’s base business has seen consistent price erosion for three years now

We examined Sandoz’s price data for the past 12-13 quarters. The base business has seen consistent price erosion of 6-8% (3QCY15 data-point being exceptional) in CY15, CY16 and CY17. Even the 1QCY18 data point implies continued pricing pressure in base business. Novartis has guided in-line to slightly lower revenue for Sandoz in CY18. Since ex-US business continues to grow well (5% YoY on constant currency basis in 1QCY18), the guidance implies continued weakness in US base business.

 Lack of potential approvals for coverage companies has impacted financial performance for past one year

Though Sandoz’s generics business has continued to show price decline for the past three years, the pharmaceuticals companies under our coverage have shown phenomenal growth during the period. This implies that though the base business for most of the companies continued to decline, new approvals and subsequent launch of higher value-added products not only offset the adverse impact on base business but also helped deliver growth in sales and profitability. YoY contraction in 9MFY18 US revenue for most of the companies under our coverage implies lack of high-value approvals or price cuts in key products due to faster ANDA approvals by USFDA. The high base of last year and continued price erosion in older products further worsened the situation.