The growth trajectory for Indian pharmaceutical industry is likely to be moderate on back of slowing growth from US given the relatively moderate proportion of large size drugs going off patent, increased competition leading to price erosion in high single digits to low teens, generic adoption reaching saturation levels and, regulatory overhang along with base effect catching up.
According to Gaurav Jain, Vice President & Co-Head, Corporate sector ratings, ICRA, “The growth momentum is likely to face further pressure going forward, led by limited near term first to file (FTF) generic opportunities and pricing pressure on generic base business. Besides increased regulatory scrutiny and consolidation of supply chain in US market resulting in pricing pressures along with increased R&D expenses will also have an impact on profitability of Indian pharmaceutical companies. Revenue growth from US during FY2012-17 period for ICRA’s sample set experienced a CAGR of 19.3% though growth from US has come down from 14.4% in FY2016 to 4.0% in FY2017 with Q4FY2017 registering negative growth despite consolidation and currency benefits.”
Overall the aggregate revenues of 21 leading players grew by 0.2% during the Q4 FY 2017 with FY2017 growth at 7.4% as against 10.1% growth in FY2016. The revenue growth has been subdued for US as well as domestic market in Q4 FY2017 with base business in US continuing to face high single digit to low teens price erosion, regulatory overhang for select companies and impact of impending GST implementation/demonetization on domestic growth to an extent. As for the domestic formulations business, companies registered growth of 4.5% in Q4 FY2017 as against 9.3% in Q3 FY2017 led by destocking initiative following impending GST implementations and lag effect of demonetization. Growth from key emerging markets benefitted from currency tailwinds though macro-economic challenges remain.
In ICRA’s view, continued regulatory interventions in domestic market will put some pressure in near term though long term growth prospects remain healthy given increasing penetration, accessibility and continued new launches by players. There are limited major first-to-file generic launches in US market in near term and base business is expected to continue to face competitive pressures affecting growth from US market. Aggregate revenue growth for ICRA’s sample is projected at 7-10% over FY2018 to FY2020 after mid to high double digit growth over last five years.
In spite of these ongoing challenges, several Indian pharma companies have ramped up their R&D spend, targeting pipeline of specialty drugs, niche molecules and complex therapies. They have gained adequate scale and drug development capabilities over last decade of growth which will keep them in good stead to capture new opportunities in the developed market.
Despite growth pressures along with increased R&D and compliance related investments, industry’s profitability has remained relatively stable with aggregate EBITDA margins for ICRA’s sample at 18.3% for Q4 FY2017 vis-à-vis 21.7% in Q4 FY2016 and 24.6% in Q3 FY2017. The lower margins are due to steep pricing pressure for the US base generics business, lack of limited competition products as well as inventory write-offs reported by few players. Certain companies has been facing margin pressure on back of slowing growth in US along with remediation costs though improving product mix and productivity improvement has provided overall cushion to margins.
“ICRA expects the increase in R&D budgets witnessed over the past few years to continue, given the growing focus both on regulated markets and complex molecules/therapy segments. The aggregate R&D spends of top few domestic companies have increased from 5.9% of sales in FY2011 to close to 9.1% in FY2017. This is also due to the fact that top companies are expanding their presence in complex therapy segment such as injectables, inhalers, dermatology, controlled-release substances and bio-similars “ concludes Gaurav Jain.
The credit metrics of leading pharmaceutical companies are expected to remain stable in view of steady growth prospects in regulated markets and relatively strong balance sheets. The capital structure and coverage indicators are expected to remain strong despite some pressure on profitability and marginal rise in debt levels given inorganic investments. The key sensitivity to ICRA’s view remains productivity of R&D expenditure, increasing competition in the U.S. generics space and operational risk related to increased level of due diligence by regulatory agencies.