CRISIL has projected India's pharmaceuticals sector growth of 11-12 per cent during 2015-16 led by domestic formulations and a rebound in exports and it is expected that the growth rate to sustain in the next fiscal as well.
The domestic formulation sales are projected to increase by 13-14 per cent, propelled by continued high demand in chronic-care drugs such as anti-diabetics and cardiovasculars. The government notified the new National List of Essential Medicines 2015, bringing more drugs under price control. However, in value terms, the extent of control increases only from 17 per cent now to 18 per cent in terms of market value. Therefore, CRISIL believe this will have a negligible impact on growth.
Growth in formulations exports to the US will remain strong for players not facing regulatory scrutiny currently. Even in Europe and Latin America, high volume growth is likely to offset the impact of currency fluctuations leading to improvement in prospects.
Bulk drug exports are projected to achieve growth by 7-9 per cent, driven largely by volumes, while domestic consumption of bulk drugs would expand by 11-13 per cent.
Large Indian formulation manufacturers will enjoy an EBITDA margin of 24-25 per cent in the current fiscal, as growth in the US market improves for few. Further uptick in profitability, though, will be offset by higher US FDA compliance costs and R&D expenses. On the other hand profitability for mid – and small-sized formulation manufacturers is estimated to witness greater improvement in 2015-16, aided by successful launches by a few companies and decline in raw material expenses. For bulk drug companies as well, declining crude oil prices and pricing of linked commodities will aid higher margin growth this fiscal. But margin growth for the industry is likely to remain range-bound in 2016-17 because of higher expenditure on R&D and regulatory compliance.
The sector witnessed increased scrutiny from the FDA in 2015 with the regulatory issuing warning letters and import alerts to several large Indian firms, including Sun Pharma, Dr Reddy's Laboratories and Ipca Laboratories. This is emerging as one of the key challenges as it can potentially delay approvals and product launches in the US. This is emerging as one of the key challenges as it can potentially delay approvals and product launches in the US.
The domestic market will remain exposed to any expansion of the prie control regime by the national pharmaceutical pricing authority. Healthy volume growth, driven by increasing income levels and incidence of lifestyle diseases, will continue to translate in healthy cash flow for India-focused companies.
Large players have been active in the M&A space. While expansion to new geographies and access to the generic pipeline of mid-sized companies are the key drivers for inbound deals, outbound deals are driven by the need to thwart increasing competition, gain access to unpenetrated markets, acquire distribution networks and build a specialty product portfolio. CRISIL expect the sector to continue to be in the limelight in the next fiscal. Larger players have the wherewithal to absorb moderate-sized acquisitions given their steady cash flows and strong balance sheets.
The budget was largely neutral for the pharmaceutical industry. Reduction in weighted research and development (R&D) deduction to 150 % from fiscal 2018 is likely to increase the industry's tax outgo in the long run but not immediately. Nevertheless, companies will continue to spend on R&D as they focus on tapping lucrative export opportunity in regulated markets such as the US.
Some of the key credit metrics – such as interest coverage ratios, debt to EBIDTA ratio and capital structure – have remained steady for majority of the players in 2015-16, buoyed by a diverse revenue profile and healthy operating profitability. This is likely to continue in fiscal 2017 as well, except for players with significant exposure to the emerging markets.
Strong revenue growth, diversity in revenue profile and steady profitability, apart from robust financial profile, will continue to sustain ratings of large players, despite challenges on the export front. For mid-sized players, diversification of geographic reach, widening of customer base, while sustaining profitability and reducing working capital intensity, will drive rating upgrades.