India’s largest drug maker Sun Pharmaceutical Industries Ltd’s revenue and profits continued to be under pressure, its second quarter results indicate. Global sales and profits slumped, though the latter was higher than analysts’ expectations, offering some relief to an otherwise lacklustre performance.

In this quarter too, there was no resolution in sight to problems that the US Food and Drug Administration (FDA) raised in its Halol manufacturing plant in 2015, causing the company to slow down exports to its most lucrative US market. Sales in the US, which at one time was the biggest contributor to its business, further declined in the second quarter by 44 % to $ 309 million. US generic sales account for 30% of Sun Pharma's revenues.

“A challenging US generic pricing environment coupled with continued investments in building our global specialty business has impacted our Q2 performance," said Dilip Shanghvi, managing director of the company, said in an earnings release.

Sun Pharma share prices, which briefly made Shanghvi the richest Indian, ahead of Mukesh Ambani, have declined 17% this year, compared with the 24% gain in The S&P BSE Sensex, the benchmark index. The stock is, however, trading 21% above its 52-week low of Rs 433.

Sun Pharma and its Indian counterparts have been facing two sets of problems in relation to the US market. One, several Indian companies have received notices from the US FDA which has curtailed their exports to the world’s biggest pharmaceutical market. Some like Wockhardt, Dr Reddy’s, and Lupin have also had issues with the FDA in the recent past, causing their share prices to fall too.

The second and a more fundamental problem has been a change in the nature of the US market, after a prolonged exposure to cut-throat competition from generic firms. Low margins in the US trade business is forcing a consolidation among the large drug distributors, which is having a cascading effect on the supplier of generic drugs. Their margins are getting squeezed further, as more suppliers compete to fill for fewer distributors.

Mylan NV, which posted quarterly earnings that missed analysts’ expectations, said prices of generic drugs in North America were falling at an even faster rate than previous quarters. Israeli drug maker Teva Pharmaceutical Industries Ltd, the biggest generics players in the US, reported similar results earlier this month.

While Sun Pharma is trying to rectify the issues raised in its Halol plant, Shanghvi is also re-shaping his strategy for the US market. Over the years, the number of new chemical entities (drugs) launched in the US has come down drastically, thereby making fewer available to go off patent. Since off patent drugs form the product pipeline for generic companies like Sun Pharma, their business has been seriously affected. The US government has also become more vigilant about price increases of generics, slapping several companies with charges of price-fixing. Some of the biggest gains for players like Sun Pharma and Mylan came from quick price increases in some of their branded specialty generic formulations. Analysts expect a further consolidation of generic companies in the US and that will require Shanghvi to put his house in order to fight bigger competitors.

The rest of the story seems on track as sales of branded formulations in India for the second quarter were up 11% to Rs 2,221 crore and accounted for 34% of total sales. Sun Pharma is ranked No. 1 and has an approximately 8.5% market share in the over Rs. 114,000 crore Indian pharmaceutical market according to research firm AIOCD-AWACS September report. For Q2FY18, the company launched 14 new products in the Indian market in the second quarter.

Emerging market sales rose 16% to $196 million in Q2 led by broad-based growth across various markets, and was also partly boosted by the consolidation of the Biosintez acquisition in Russia. Rest of World (ROW) markets, excluding the US and emerging markets were at $111 million in Q2FY18, registering a growth of 40% - driven by consolidation of revenues from the acquisition of 14 brands from Novartis in Japan. Active Pharmaceutical Ingredients (API) business largely meant for captive consumption rose 6% to Rs 388 crore. Consolidated R&D expense for Q2FY18 was Rs. 511 crore, or 7.7% of sales compared to Rs. 570 crore or 7.4% of sales in Q2 last year.