The Indian pharmaceutical companies have registered strong growth over last decade driven mainly by US market with CAGR of revenue growth from US during FY2011-15 period for our sample set at 33 per cent on back of patent cliff with large brands going off patent and sizeable organic and inorganic expansion. However, going forward there are challenges, given the relatively moderate proportion of large sized drugs going off patent, increased competition, generic adoption reaching saturation levels in US market along with base effect catching up.
According to Subrata Ray, senior group vice president for Corporate Ratings at ICRA, “Increased regulatory scrutiny as reflected in growing issuance of warning letters/import alerts and consolidation of supply chain in US market resulting in pricing pressures will have an impact on competitiveness of Indian pharmaceutical companies”.
Still given increased R&D expenditure of Indian pharmaceutical companies with product pipeline comprising of specialty drugs, niche molecules and complex therapies, the growth outlook for Indian pharmaceutical companies remain stable. The domestic pharmaceutical industry has 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 US market.
Aggregate revenues of 21 leading players in ICRA’s sample grew by 8.5 per cent YoY in 9M FY2016 as against 11.4 per cent and 16.2 per cent in FY2015 and FY2014 respectively with growth from domestic market and US market at 10.5 per cent and 10 per cent respectively for 9m FY2016 YoY. The growth from US market has come down from high double digits to 8-10 per cent given lack of major new launches, regulatory overhang and increased pricing pressures. The domestic market growth, though moderating from FY2015 level, remains healthy driven by favorable socio economic factors. The key concern for domestic market relates to continued regulatory interventions in form of expanded list of NLEM along with recent ban on 344 fixed dose combination (FDC) drugs. The FDC ban could potentially impact domestic pharma sales of Rs. 30-38 billion though given most of the banned FDC drugs have substitutes, sales are expected to shift to other alternatives available to an extent. The ban has been challenged in court and actual impact remains to be seen. The operating environment in emerging markets (EMs) like Latin America, CIS countries and South Africa has been affected by confluence of factors including devaluation of currency, frequently evolving regulatory landscape, increasing competition and weakening macro environment across some of the commodity dependent economies.
Despite growth pressures along with increased R&D and compliance related investments, profitability for the industry has remain relatively stable with aggregate EBITDA margins for ICRA’s sample at 24.9 per cnet for 9M FY2016. Certain companies has been facing margin pressure on back of slowing growth in US along with remediation costs though improving product mix and productivity has provided overall cushion to margins.
“The aggregate R&D spends of top companies in domestic pharmaceutical market have increased from 6 per cent of sales in FY2011 to more than 9 per cent in FY2016. We expect this trend to continue as most of the leading companies are in the midst of expanding their presence in complex therapy segment such as injectables, inhalers, dermatology, controlled-release substances and biosimilars”, added Subrata Ray, senior group vice president for Corporate Ratings at ICRA Ltd.
The credit metrics of leading pharmaceutical companies are likely to remain stable in view of steady growth prospects in regulated markets and limited dependence of Indian pharmaceutical companies on bank borrowings. 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.