Complex generics, domestic demand to help pharma weather regulated market de-growth

Revenue growth of 9% and healthy cash flows to support credit profiles

CRISIL believes the Indian pharmaceutical industry will weather the current headwinds of slowdown in exports caused by regulatory scrutiny1 and intensifying competition, by monetising opportunities in complex products2 in the regulated markets, and because of resilient domestic demand.

The sector’s revenue is seen growing at ~9% per annum over three years ending fiscal 2020. Exports, which account for nearly 45% of industry revenue, will see another year of tepid ~1% growth in fiscal 2018, gradually recovering thereafter.

Over half of exports are to the regulated markets. The latter is set to de-grow ~5% this fiscal, after growing ~3% last fiscal, for two reasons: greater price erosion in existing products because of intensifying competition, and delayed launches of new products or import ban on existing products following scrutiny from the US Food and Drug Administration (FDA).

This trend, however, is set to reverse. Revenue growth from regulated markets will gradually increase to >7% annually over the medium term, and also augment overall exports growth to ~6% annually. Faster product approvals from the FDA, especially for complex products, will be the driver.

“We are seeing successful resolution of regulatory actions from remediation efforts made over the past three years, even as regulatory scrutiny remains intense. For instance, warning letters on 9 Indian plants were resolved in the past 15 months, which is considerably higher than the 4 seen between fiscals 2013 and 2016,” said Anuj Sethi, Senior Director, CRISIL Ratings.

Besides remediation efforts, firms are increasing their research and development (R&D) spends to capitalise on the $20 billion-a-year complex products opportunity in the regulated markets. We expect R&D spend to increase ~700 basis points over fiscal 2017 to reach 30% of annual revenue from the regulated markets over the medium term.

Another factor offsetting the slowdown in exports is steady revenue growth from the domestic market, which accounts for 55% of industry revenue. Strong demand will help firms maintain 10-11% growth and healthy profitability, despite intense competition and frequent regulatory actions.

Growth in domestic demand will sustain backed by better access to healthcare, higher penetration of health insurance and increasing lifestyle diseases.

“Steady growth, strong profitability and modest capital expenditure will drive healthy cash flows from the domestic market, and support enhanced R&D spend for the regulated markets,” said Akshay Chitgopekar, Director, CRISIL Ratings.

CRISIL rates over 300 pharmaceutical firms, over 55% of which have an international presence. Besides business strength and diversity, the credit profiles for most firms are backed by low reliance on debt. This is reflected in the credit ratio (upgrades to downgrades) exceeding 1.5 times for CRISIL-rated pharmaceutical portfolio since fiscal 2015. CRISIL believes these credit profiles will sustain backed by healthy cash flows despite near-term challenges in the regulated markets.