ICRA expects growth trajectory for Indian pharmaceutical industry to moderate on back of slowing growth from US given the relatively moderate proportion of large size drugs going off patent, increased competition, generic adoption reaching saturation levels, regulatory overhang along with base effect catching up.
The Indian pharmaceutical companies have registered strong growth over last decade driven mainly by US market with CAGR of revenue growth from US during FY11-15 period for our sample set at 33% on back of patent cliff with large brands going off patent and sizeable organic and inorganic expansion. However growth from US has come down to 15% in FY2016 and going forward the growth momentum is likely to face further pressure. Increased regulatory scrutiny as reflected in increased issuance of warning letters/import alerts and consolidation of supply chain in US market resulting in pricing pressures will have an impact on profitability of Indian pharmaceutical companies.
In spite of these ongoing challenges, several Indian pharma companies are increasing their R&D spend, targeting pipeline of specialty drugs, niche molecules and complex therapies. 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.
The domestic formulations business of companies within our sample registered growth of 7.0% in Q1 FY2017 as against 11.7% in FY2016 on back of WPI linked price cuts taken for NLEM portfolio, regulatory interventions in form of expanded list of NLEM along with recent ban on 344 fixed dose combination (FDC) drugs which resulted in liquidation of stocks by traders.
‘Continued regulatory interventions in domestic market are expected to put some pressure in near term though long term growth prospects for domestic pharmaceutical market remain healthy given increasing penetration, accessibility and continued new launches’, says Subrata Ray, senior group VP, ICRA ratings.
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 and weakening macro environment across some of the commodity dependent economies. Select pharmaceutical companies have taken sizeable write offs in Venezuela due to currency devaluation and have stopped dispatches there on back of repatriation issues. The local currency growth, though, was healthy across markets like Brazil, South Africa and Russia.
Over the past few years, pharmaceutical companies have increased their R&D budgets significantly in view of their growing focus both on regulated markets and complex molecules/therapy segments.
Subrata Ray added “The aggregate R&D spends of top few companies in domestic pharmaceutical market have increased from 6% of sales in FY2011 to more than 9% in FY2016. ICRA expects 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.”