Persisting growth challenges in Indian pharma sector likely to curtail aggregate growth to single digit


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 low–to–mid-teens, generic adoption reaching saturation levels and, regulatory overhang along with base effect catching up.

According to Gaurav Jain, Vice President & Co-Head, Corporate Ratings, ICRA, “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 and H1FY2018 registering negative growth despite consolidation benefits. 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 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.”


Aggregate revenues of ICRA’s sample comprising 21 companies grew marginally at 0.8% in Q2FY2018 vis-à-vis the prior year as against Q1 FY2018 growth at -8.8%. The revenue growth has been subdued for US with base business in US continuing to face low-to-mid teens price erosion and regulatory overhang for select companies.  As for the domestic formulations business, the growth rebouned to 10.3% in Q2FY2018 compared to -8.8% in Q1FY2018  with recovery in trade channel stock post GST implementation. Though healthy, the domestic formulations industry growth was adversely impacted by accounting norms where revenues are reported net of GST compared to including excise till Q1FY2018. The channel inventory levels is expected to further improve during H2FY2018 leading to higher primary sales though achieving pre-GST levels remains to be seen. Growth from key emerging markets benefitted from currency tailwinds though macro-economic challenges remain.

Demand prospects from domestic market are likely to remain healthy given increasing spend on healthcare along with improving access though regulatory interventions, especially relating to price control and mandatory genericisation remain a concern. 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 the 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.

Owing to growth pressures along with increased R&D and compliance related investments industry’s profitability has moderated over the last few quarters with aggregate EBITDA margins  at 21.3% for Q2FY2018 (vis-à-vis 24.7% in Q2 FY2017 and 17.3% in Q1 FY2018). Though margins remains healthy, the lower margins for Q2FY2018 are due to steep pricing pressure for the US base generics business and lack of limited competition products. Certain companies has been facing margin pressure on back of slowing growth in US along with remediation costs though improving product mix and operational efficiencies 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 though few companies are optimizing R&D in view of lower revenue growth. 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 and 8.8% H1FY2018.  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,” added Mr. 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.