Indian pharma industry continues to face headwinds; aggregate growth expected to come down to single

ICRA expects growth trajectory for Indian pharmaceutical industry to moderate on back of slowing growth from the US, increased competition, and regulatory overhang along with base effect catching up.

As per ICRA’s sample study, revenue growth from US during FY11-15 period, experienced CAGR of 33 per cent though growth from US has come down to 15 per cent in FY2016 and 12 per cent in 9M FY2017 despite consolidation and currency benefits. In ICRA’s view, going forward the growth momentum is likely to face further pressure. Increased regulatory scrutiny and consolidation of supply chain in the US market resulting in pricing pressures along with increased R&D expenses will have an impact on profitability of Indian pharma companies. In spite of these ongoing challenges, several Indian pharma companies have ramped up their R&D spend, targeting pipeline of speciality drugs, niche molecules and complex therapies. The domestic pharma 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.

Aggregate revenues of ICRA sample of leading players grew by 9 per cent in Q3 FY2017 y-o-y with 9M FY2017 growth at 8.9 per cent as against 10.1 per cent growth in FY2016.

Subrata Ray, Sr Group Vice President, ICRA, "The revenue growth for Indian pharma industry remains moderate for US, with base business in US continuing to face high single digit price erosion, regulatory overhang for select companies and temporary impact of demonetiation on domestic growth to an extent. The domestic formulations business of companies within our sample registered growth of 9.3 per cent in Q3 FY2017 as against 14.1 per cent in Q2 FY2017 with demonetisation resulting in channel de-stocking though the growth should come back in the next few months."

Growth from key emerging markets benefitted from currency tailwinds though macro-economic challenges remain. In ICRA’s view, continued regulatory interventions in domestic market are expected to put some pressure in near term though long-term growth prospects for domestic pharma market remain healthy given increasing penetration, accessibility and continued new launches. There are limited major FTF 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 ICRA’s sample is projected at 9-11 per cent over FY2017 to FY2019 after mid to high double digit growth over last five years.

Despite growth pressures along with increased R&D and compliance related investments, profitability for the industry has remain relatively stable with aggregate EBITDA margins for ICRA’s sample at 24.8 per cent for Q3 FY2017. Certain companies has been facing margin pressure on back of slowing growth in US along with remediation costs though improving product mix and productivity improvement has provided overall cushion to margins.

Over the past few years, pharma companies have increased their R&D budgets significantly in view of their growing focus both on regulated markets and complex molecules/therapy segments. The aggregate R&D spends of top few companies in domestic pharma market have increased from 6 per cent of sales in FY2011 to close to 9 per cent now. 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.

The credit metrics of leading pharma 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 US generics space and operational risk related to increased level of due diligence by regulatory agencies.