'Indian Pharma Sector Growth Likely To Come Down To Single Digit'

The growth trajectory for Indian pharmaceutical industry is likely to be moderate, according to Indian credit ratings agency ICRA.

In a statement, ICRA has attributed this 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 high single digits to low teens, generic adoption reaching saturation levels and, regulatory overhang along with base effect catching up.

According to Gaurav Jain, Vice President & Co-Head, Corporate sector ratings, ICRA, “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 generic 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. 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 per cent in FY2017 with Q4 FY2017 registering negative growth despite consolidation and currency benefits.”

Overall the aggregate revenues of 21 leading players grew by 0.2 per cent during the Q4 FY 2017 with FY2017 growth at 7.4 per cent as against 10.1 per cent growth in FY2016.

The revenue growth has been subdued for US as well as domestic market in Q4 FY2017 with base business in US continuing to face high single digit to low teens price erosion, regulatory overhang for select companies and impact of impending GST implementation/demonetization on domestic growth to an extent.  

As for the domestic formulations business, companies registered growth of 4.5 per cent in Q4 FY2017 as against 9.3 per cent in Q3 FY2017 led by destocking initiative following impending GST implementations and lag effect of demonetisation. Growth from key emerging markets benefitted from currency tailwinds though macro-economic challenges remain.

In ICRA’s view, continued regulatory interventions in domestic market will put some pressure in near term though long term growth prospects remain healthy given increasing penetration, accessibility and continued new launches by players.

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.

Despite growth pressures along with increased R&D and compliance related investments, industry’s profitability has remained relatively stable with aggregate EBITDA margins for ICRA’s sample at 18.3 per cent for Q4 FY2017 vis-à-vis 21.7 per cent in Q4 FY2016 and 24.6 per cent in Q3 FY2017. The lower margins are due to steep pricing pressure for the US base generics business, lack of limited competition products as well as inventory write-offs reported by few players.

“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. 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 per cent in FY2017.  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,“ concludes Gaurav Jain.