Indian Pharma's Credit Profiles To Remain Stable Despite Revenue Growth Dip In FY25: Icra

The rating agency Icra expects the revenues of its sample set of 25 Indian pharmaceutical companies (which account for 60 per cent of the overall Indian pharmaceutical industry) to grow by 8 to 10 per cent in FY2025, post a year-on-year (YoY) increase of 13 to 14 per cent in FY2024. 

Following the high base of FY2024, the revenue growth momentum from the US and Europe markets is expected to moderate to 8 to 10 per cent and 7 to 9 per cent, respectively, from the YoY expansion of 18 to 20 per cent and 16 to 18 per cent, estimated for FY2024. 

The domestic market is expected to see stable growth at 6 to 8 per cent, while the emerging markets may log in an 8 to 10 per cent rise in FY2025, against 16 to 18 per cent in FY2024. 

Mythri Macherla, Assistant Vice President and Sector Head, Icra said “The operating profit margin (OPM) for the sample set companies is expected to improve to 22 to 23 per cent in FY2024 and remain stable in FY2025, against 20.7 per cent in FY2023. This will be supported by new product launches, especially in the US market, backed by the increased focus on complex generics/speciality molecules, relatively lower pricing pressure in the base business in the US, and some benefits of volume expansion.”

The rating agency anticipates the overall credit profile of the Indian pharmaceutical companies remain healthy, supported by their stable earnings profile, comfortable leverage and coverage metrics, and strong liquidity position. 

"Moreover, Icra expects the research and development expenses for its sample set of companies to remain at 6.5 to 7 per cent of their revenues as they optimise their spending, focusing more on complex molecules and speciality products against plain vanilla generics," added Macherla.  

The revenue growth of the sample set companies in the US market in FY2024 has been supported by increased new product launches, product shortages in select therapeutic segments, and healthy performance of complex generics (first to file). 

However, as the base effect plays out, growth is expected to taper in FY2025. While low single-digit pricing pressure in the US market is likely to be sustained, Indian pharmaceutical companies remain focused on enhancing their revenue contribution from the complex generics in the US market.

In the European market, revenue growth for the sample set picked up considerably in the current fiscal, largely on the back of a low base, uptick in the base business (both branded and generics segment), new product launches (especially injectables) and incremental revenues from new tender wins (in countries such as Germany). 

In contrast to the healthy growth from the US and European markets, growth in the domestic market in FY2024 was impacted to an extent by the change in composition of the National List of Essential Medicines (NLEM), which led to a decline in realisations for certain drugs, in addition to an uneven monsoon, which affected acute therapy sales. Furthermore, a one-time reduction in channel inventories by one of the sample set companies also impacted the overall growth. 

That said, the 6 to 8 per cent YoY expansion in revenues is supported by sales force expansion and increased medical representatives’ (MR) productivity, new product launches with enhanced reach and market share gains for some of the sample set companies. 

Going forward, sustained price growth and revival in volumes, supported by new product introductions, are expected to continue to support revenue growth from the domestic market. That said, developments on the trade generic policies would be a key monitorable, Icra added.

Macherla said, “The number of warning letters and import alerts issued by the USFDA to Indian pharmaceutical manufacturing companies have increased in the past year. These have led to delays in product launches, translating into failure to supply penalties and entailing significant cost burden towards remedial measures like hiring consultants and consuming additional management bandwidth, thus impacting the profit margins."

Macherla added that given the heightened scrutiny by the USFDA, regulatory risks persist. Further, while the ongoing Red Sea crisis has not had an impact on the Indian pharmaceutical companies as of now, any adverse impact in the form of supply chain disruptions or increase in logistics costs will be a key monitorable. 

"In the domestic market, since price growth has been a key revenue driver, any developments favouring genericisation and the inclusion of more products under the NLEM remain key risks for the industry players," Macherla stated.