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Persisting growth challenges in Indian pharma sector likely to curtail aggregate growth to single digit: ICRA

Kolkata, Jan 3 (UNI) The growth trajectory for Indian pharmaceutical industry is likely to be
moderate on back of slowing growth from US given the relatively moderate proportion of large
size drugs going off patent, increased competition leading to price erosion in low–to--mid-teens, generic adoption reaching saturation levels and, regulatory overhang along with base effect
catching up.
Vice President and Co-Head, Corporate Ratings, ICRA Gaurav Jain said, “Revenue growth from US during FY2012-17 period for ICRA’s sample set experienced a CAGR of 19.3 per cent though growth from US has come down from 14.4 per cent in FY2016 to 4.0 per cent in FY2017 with Q4FY2017 and H1FY2018 registering negative growth despite consolidation benefits.”
“ The growth momentum is likely to face further pressure going forward, led by limited near
term first to file (FTF) generic opportunities and pricing pressure on base business. Besides increased regulatory scrutiny and consolidation of supply chain in US market resulting in pricing pressures along with increased R&D expenses will also have an impact on profitability of Indian pharmaceutical companies,” he said.
Aggregate revenues of ICRA’s sample comprising 21 companies grew marginally at 0.8 per cent
in Q2FY2018 vis-à-vis the prior year as against Q1 FY2018 growth at -8.8 per cent. The revenue growth has been subdued for US with base business in US continuing to face low-to-mid teens
price erosion and regulatory overhang for select companies.
As for the domestic formulations business, the growth rebouned to 10.3 per cent in Q2FY2018 compared to -8.8 per cent in Q1FY2018 with recovery in trade channel stock post GST implementation. Though healthy, the domestic formulations industry growth was adversely
impacted by accounting norms where revenues are reported net of GST compared to including excise till Q1FY2018.
The channel inventory levels is expected to further improve during H2FY2018 leading to higher primary sales though achieving pre-GST levels remains to be seen. Growth from key emerging markets benefitted from currency tailwinds though macro-economic challenges remain.
Demand prospects from domestic market are likely to remain healthy given increasing spend on healthcare along with improving access though regulatory interventions, especially relating to price control and mandatory genericisation remain a concern.
There are limited major first-to-file generic launches in US market in near term and base business is expected to continue to face competitive pressures affecting growth from US market. Aggregate revenue growth for the sample is projected at 7-10 oer cent over FY2018 to FY2020 after mid-to-high double digit growth over last five years.
In spite of these ongoing challenges, several Indian pharma companies have ramped up their R&D spend, targeting pipeline of specialty drugs, niche molecules and complex therapies. They have 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 developed market.
Owing to growth pressures along with increased R&D and compliance related investments industry’s profitability has moderated over the last few quarters with aggregate EBITDA margins
at 21.3 per cent for Q2FY2018 (vis-à-vis 24.7 per cent in Q2 FY2017 and 17.3 per cent in Q1 FY2018).
Though margins remains healthy, the lower margins for Q2FY2018 are due to steep pricing pressure for the US base generics business and lack of limited competition products. Certain companies has been facing margin pressure on back of slowing growth in US along with
remediation costs though improving product mix and operational efficiencies has provided overall cushion to margins.
“ICRA expects the increase in R&D budgets witnessed over the past few years to continue,
given the growing focus both on regulated markets and complex molecules/therapy segments though few companies are optimizing R&D in view of lower revenue growth. The aggregate R&D spends of top few domestic companies have increased from 5.9 per cent of sales in FY2011 to
close to 9.1% in FY2017 and 8.8% H1FY2018. This is also due to the fact that top companies are expanding their presence in complex therapy segment such as injectables, inhalers, dermatology, controlled-release substances and bio-similars,” added Mr Jain.
The credit metrics of leading pharmaceutical companies are expected to remain stable in view
of steady growth prospects in regulated markets and relatively strong balance sheets. 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.
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