Pharmaceuticals - Waning ANDA Approvals Pace; Sector Update :: Edelweiss, link

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Sales and profitability of generic companies are inextricably levered to ANDA approvals. Hence, the recent dearth of approvals despite introduction of Generic Drug User Fee Act (GDUFA) is indeed a potent risk to the sector’s premium valuations. Though the act is bound to deliver long-term benefits, the current tardy approvals scenario does not inspire much near-term confidence. In this backdrop, we believe companies with more mature ANDAs (and fewer filings in Cohort I / II) and ability to bag complex generic approvals are better placed.

Rising ANDA backlog despite GDUFA

Since implementation of GDUFA, the rate of ANDA approvals has not picked up perceptibly (Chart 1); in fact, it dipped in Q3FY15. The issuance of complete response letters (CRL) too has plummeted meaningfully, worsening the ANDA backlog (up 50%) as filings keep surpassing GDUFA’s estimates. This is a cause of concern for generics as it could take a toll on growth.

Shift to Cohort III to not move the needle significantly

ANDA approval timelines are likely to pick up as the GDUFA programme enters the Cohort III phase from October 2014 (Fig. 1). Given the predefined goals on USFDA’s responses as part of Cohort III/IV/V, the agency’s focus will shift to ANDAs filed on/after October 1, 2014. We believe while this may improve approval efficiency, it will bring in its own set of challenges (higher refusal to receive RTR ANDAs). Hence, we do not anticipate meaningful drop in approval timelines in the near term.

June filings rush: Low confidence in GDUFA?

The sudden filings spurt in June 2014 (Chart 5), just 3 months before the (faster) Cohort III phase, is a little surprising. Though a part of the surge can be undoubtedly attributed to desire to avoid new stability data guidance and related costs effective July 2014, it is also a testimony to low confidence in GDUFA’s ability to render final approvals.

Snail’s pace of approval risk to Indian companies

ANDA approvals for Indian companies under our coverage have also slowed down considerably. Fresh approvals are vital for near-term growth as high contribution products of companies too have attracted additional competition. Hence, if GDUFA fails to deliver its goals, long-term growth could also be at risk given that more than 800 ANDAs (52% filed in Cohort I and II phases) await approval.

Focus on business development: Growth catalyst

Dr. Reddy’s (DRRD), Sun Pharma (SUNP) and Lupin (LPC) score better than others (Chart 9) on maturity of ANDAs, ‘niche’ness of pipeline and complex generic approvals and are hence better placed. More activity on the business development front (authorised generic deals, M&A, in-licensing, etc) could help Indian players tide over the challenging approvals scenario.

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