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

Our Bureau, MumbaiWednesday, July 11, 2018, 16:40 Hrs  [IST]

The growth trajectory for Indian pharmaceutical industry is likely to be moderate, in single digit on the 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 double digit, generic adoption reaching saturation levels and regulatory overhang along with base effect catching up.

According to Gaurav Jain, vice president, ICRA Ltd, “The revenue growth from US has come down from 14.4% in FY 2016 to 4.0% in FY 2017 and -13.1% in FY 2018 despite consolidation benefits for ICRA’s sample set. The growth momentum is likely to face further pressures going forward, led by limited near term first to file (FTF) generic opportunities, pricing pressures and product rationalization for US base business. Besides increased regulatory scrutiny, consolidation of supply chain in the US market resulting in pricing pressures along with sustained investments in R&D will also have an impact on profitability of Indian pharmaceutical companies.”

Aggregate revenues of ICRA’s sample comprising 21 companies grew at 6.7% in Q4 FY 2018 vis-à-vis the prior year as against FY 2018 growth of 0.1%. The year-on-year revenue growth for Q4 FY 2018 was supported by low base for US business which saw the onset of pricing pressure arising out of channel consolidation from Q4 FY 2017. The overall revenue growth remains subdued with base business in US continuing to face high single digit price erosion and regulatory overhang for select companies.  

As for the domestic formulations business, the growth rebouned with Q4 FY 2018 and FY 2018 growth of 8.9% and 4.6% respectively compared to -8.8% in Q1 FY 2018 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 Q1 FY 2018. Channel inventory levels are expected to further improve during CY 2018 leading to higher primary sales though achieving pre-GST levels remains to be seen.

Growth from European markets benefited from higher tender wins, new product introduction in B2B segments and low base effect though healthcare reforms resulting in price cuts continue to pose challenge.

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 the US market.

Aggregate revenue growth for the sample is projected at 7 % to 10% over FY 2018 to FY 2020 after mid-to-high double-digit growth over last five years. In the past, several Indian pharma companies have ramped up their R&D spend, targeting pipeline of specialty drugs, niche molecules and complex therapies.

Led by challenging US market conditions characterized by steep pricing pressures, high competitive intensity led by faster ANDA approvals and lower than expected revenue growth, companies are optimizing their R&D spend. With competitive pressures expected to sustain in the near to medium term, companies are exiting product development of easy to manufacture, simple generics with multiple players and focusing on complex generics, difficult to manufacture products with limited competition.

“The aggregate R&D spends of top few domestic companies which had increased from 5.9% of sales in FY2011 to close to 9.0% in FY2017, moderated to 8.8% during FY2018. ICRA expects R&D budgets to slightly moderate from FY 2017 levels though expected to remain at 8.6%-8.8% given the growing focus both on regulated markets and complex molecules/therapy segments such as injectables, inhalers, dermatology, controlled-release substances and bio-similars. Indian companies 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,” added Jain.

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 20.2% for Q4 FY 2018 (vis-à-vis 24.3% in Q3 FY 2017 and 21.3% in Q3 FY 2018). Though margins remain healthy, the lower margins for Q4 FY 2018 are due to pricing pressures for the US base generics business and lack of limited competition products.

Higher share of domestic business during the quarter and operational efficiencies has however provided overall cushion to margins.

The credit metrics of leading pharmaceutical companies are expected to remain stable in view of growth prospects in regulated markets and relatively strong balance sheets. The capital structure and coverage indicators are expected to remain strong despite 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.