Growth for Indian pharmaceutical companies is likely to get a boost as countries are increasingly focusing on affordable health care. However, failure to comply with the stringent quality requirements in developed markets is a key risk. That's according to a report titled "Indian Pharmaceutical Companies Have A Global Opportunity, If They Conquer Compliance Issues," that Standard & Poor's Ratings Services published yesterday.
 
"Expansion into developed markets, especially the US, is positive for the credit profiles of Indian pharmaceutical companies. The market's size and the absence of price controls are likely to support the revenue growth and profitability," said Standard & Poor's credit analyst Vishal Kulkarni.
 
The growth prospects are particularly high for Indian companies in the specialty and complex generic drugs segment in the US Most of these companies have a limited presence in this segment, but we expect them to gradually move up the value chain.
 
Compliance with regulations is a key requirement for Indian pharmaceutical companies to realize their growth potential, the report notes. Failure on this  front would seriously hurt creditworthiness. It could lead to disruptions in production, import bans, remediation costs, and--above all—reputational and litigation risks.
 
The largest 10 Indian pharmaceutical companies are much smaller in terms of  revenue than their global generics peers.
 
"What the Indian companies lack in size is largely offset by their strong product pipeline, presence in emerging markets, and conservatively maintained financial health," said  Kulkarni.
 
Indian companies' focus on research and development (R&D) will continue to help them build a sustainable product pipeline, in our view.
 
Standard & Poor's expects the role of Indian companies in mergers and acquisitions in the global pharmaceutical market to be moderate to marginal. Their acquisitions are likely to be measured against the backdrop of elevated valuations, longer integration periods, problems with operational synergies,
and the managerial bandwidth required to reap benefits from such acquisitions.
 
"We believe many Indian companies have the financial capacity to make modest  acquisitions. However, they have strong scope to grow business organically, minimizing the need to aggressively add size through acquisitions," said Kulkarni.
 
We believe Indian pharmaceutical companies will find it difficult to improve profitability as they look to expand, although they should still maintain healthy EBITDA margins of 20%-30%. A drop in formulations coming off-patent over the next three to four years and increasing competition could limit  margin gains. Increasing spending on R&D, regulatory compliance, and legal costs will also dent margins.
 
Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.