ICRA Limited, an associate of Moody’s Investors Service recently released a study according to which despite the high-base of the previous year, the Indian pharmaceutical industry would continue to experience strong growth in the near-term. However, the study cautioned that there would be some moderation in the growth trajectory. According to the study, principally, the generic opportunities in US will continue to drive revenue growth for Indian pharma companies.

According to ICRA, this would be an outcome of the sizeable generic opportunity (drugs with brand value of US$ 80 billion are expected to face generic competition) over the next four to five years, along with strong product pipeline of pending ANDAs with high increasing proportion of complex generics and market share improvement given the relatively small base (share of leading Indian companies is less than 10 per cent in the US generics space). In addition, acquisitions by Indian companies to add technical capabilities and focus on strengthening branded business (albeit on a small scale) are also likely to drive growth going forward as companies feel the need to diversify, the study states.

While growth momentum in the domestic formulation industry slowed down in 2012-13 owing to a confluence of reasons (discussed above), ICRA believes that the industry would revert to its long-term growth trajectory in the medium-term as structural growth drivers continue to remain impervious. The growth momentum has picked-up over the past few months and with pricing policy related matters behind us, ICRA expects the industry to revert to a growth of 10-12 per cent in 2013-14.

The impact of new DPCO though expected to be limited, could also get offset by volume expansion and efforts of industry participants to take price hike in rest of the portfolio. In Europe, the performance of Indian companies improved in 2012-13 in comparison to the prior year led by primarily new product launches which helped to offset the impact of pricing pressure. However, given the pace of healthcare reforms and the way competitive landscape is changing in Europe, ICRA believes that the performance of generic companies would remain contingent on new product introductions.

As many of the European markets are gradually shifting character from being ‘branded generic’ to ‘un-branded generic’ and from being ‘physician-influenced’ to ‘payor-influenced, a relook at business plans also appears to be a common theme across companies. Generics companies are increasingly focusing on expanding presence in relatively underpenetrated markets (i.e. France, Spain and Italy), branded generic markets of East Europe and niche areas like complex generics, OTCs etc. In general, Indian pharma companies generate a relatively lower share of revenues from Europe with profitability also subdued compared to other markets, the study point outs.

In addition US generics, emerging markets present one of the most promising growth opportunities for Indian pharmaceutical companies. As growth prospects normalise in developed markets, companies are increasingly focusing on emerging markets through portfolio expansion, alliances or JVs and acquisitions, said ICRA.

According to ICRA, given the distinct nature of some of the markets being tapped, managing regulatory hurdles (i.e. delays in receiving approvals in Brazil, healthcare reforms in Russia) and execution however remains the key. Indian companies though have an inherent advantage given their experience with ‘branded generics’ in India. Amongst new frontiers, evolving generic market in Japan (world’s second largest pharmaceutical market with only 23 per cent generic penetration) and biosimilars provide alternative growth prospects for Indian companies. While product filings and approvals will be gradual in Japan, hurdles in biosimilars could be multi-fold, stemming from higher R&D outlay for clinical trials and uncertainties related to pathway for regulatory approvals.

In 2012-13, operating profitability indicators of the pharma companies remained fairly stable in comparison to the prior year led by strong scale-up in the US generics business onback of high margin FTF opportunities and favourable foreign exchange environment. Steady growth momentum in some of the branded generic emerging markets also aided to the earnings profiles. Overall, margin pressures were limited to few companies and lack of new product introductions in the US, higher expenditure on R&D, one-time charges related to the implementation of GDUFA and increase in manpower costs were the most common factors.

ICRA study states that the margins of Indian pharma companies are currently sensitive to broadly four key factors – a) the implementation of the new pricing policy in India, b) relatively lower proportion of blockbuster generic opportunities in the US in CY 2013 compared to CY 2011 and CY 2012, c) expectation of increasing R&D spending and d) evolving regulatory reforms across many of the emerging markets which may impact margins. The sharp volatility in foreign exchange and the recent depreciation of INR vis-à-vis US$ will also have influencing role to play given the dependence on international markets. That said, company specific factors would however continue to impact earnings profile and quality of product pipeline with higher share of limited competition launches will be the single most differentiating factor. Earnings of companies with debt profile skewed in favor of foreign exchange borrowings would be exposed to MTM losses.

Investments in R&D and acquisitions expected to gain momentum in Indian pharmaceutical industry. Over the years, Indian pharma companies have developed capabilties to target complex segments like injectables, inhalers, ophthalmics and even biosimilars. Given the increasing focus on these segments, pharma companies have been investing a higher proportion of their sales in R&D activities over the past few years and have guided to spendeven higher amounts as they continue to broaden their product portfolio of complex compounds.

ICRA believes that there three key drivers for higher R&D spending by Indian companies – a) increased pace of product filings in US and Europe, b) focus on complex generics, some of which require clinical trials to demonstrate basic safety and efficacy and c) investments in developing biosimilars for emerging markets and eventually for developed markets.

In addition, ICRA expects in-organic investments to also gain momentum in the medium-term as companies plan to create stronger presence in emerging markets and build expertise in select therapy areas. In particular, fast-growing branded generics markets in South-East Asia, Latin America and even some of the markets in East Europe will be of interest to Indian companies. Besides, market-entry driven acquisitions, we also expect investments to add technical capabilies in selected therapy areas or delivery systems to also continue going forward in view of increasing focus on complex generics.