CRISIL expects the capital expenditure (capex) of India's top 20 pharmaceutical companies, which contribute nearly two-third of the country's exports, to increase 40 per cent to over Rs. 50,000 crore till fiscal 2018, compared with about Rs. 30,000 crore seen in the last four fiscals with more and more focus on the regulated markets. The significant patent expiries and to meet ever-increasing demand for generics from regulated markets will require higher investment in capex.

Out of this lot of 20, the capex spending of 8 companies which currently generate a majority of revenues domestically will almost double by fiscal 2018, growing at a much faster pace compared with the rest that are already focused on the regulated markets.

Ramraj Pai, president, ratings, large corporates said, “Increasing domestic pressures will force Indian companies to seek greener pastures abroad. This will lead to higher expenditure related to compliance, research, and manufacturing capacities. We see their capex rising around 200 basis points to nearly 8 per cent of operating income by fiscal 2018 from 6 per cent now.”

Three factors will drive the increase in capex. First is the need to adhere to the compliance regulations of the US FDA. FDA scrutiny of Indian manufacturing plants has been increasing of late, so companies will have to invest in upgrading facilities proactively to enjoy uninterrupted benefits from the opportunities coming up.

Secondly, research spending will rise because companies will need FDA approval to be able to sell their generic medicines in the regulated markets. Consequently, annual filing of abbreviated new drug applications (or ANDA, which seeks approval to sell generic versions of patented medicines) by Indian companies is expected to increase to over 100. As on March 31, 2014, the top 20 companies had around 1,000 AND as pending approval from the US FDA compared with around 715 as on March 31, 2010.

And thirdly, investments to build FDA-approved manufacturing facilities and processes will rise. Revenue from the regulated markets is poised to increased by about 1.7 times in the next four years through fiscal 2018. This will mean a significant ramp-up of existing capacities due to sharper focus on the regulated market.

Indian drug makers will continue to benefit from low debt and steady cash flows, which will mitigate or offset any potential impact of large capital spending on balance sheets. Anuj Sethi, director, CRISIL Ratings said, “Aggregate gearing of the 20 companies has remained healthy at around 0.5 times over the last three fiscals. Liquidity is strong, too, with cumulative cash and liquid investments of nearly Rs. 15,000 crore as on March 31, 2014. Both these strengths will support their credit profiles.”