Domestic Pharma market to grow at 9-10% in FY2020
Moderation in pricing pressure, new launches and consolidation benefits to support US growth
The growth trajectory for the Indian pharmaceutical industry is likely to remain at 11-13% in FY2020, on the back of healthy demand from the domestic market given increasing spend on healthcare along with improving access. This along with moderation in pricing pressure for US market, new launches and market share gains for existing products and consolidation benefits will drive growth in FY2020. The growth would however be constrained by regulatory interventions such as price controls, compulsory genericisation and USFDA oversight for manufacturing deficiencies.
According to an ICRA report covering a sample of 21 firms in the industry, the growth during FY2019 stood at ~12.0%. The growth from US accelerated in H2FY2019 to 18.8% compared to 2.4% in H1FY2019 leading to overall growth at 10.7% FY2019. The US growth was supported by INR depreciation of 8.4% in FY2019 vis-a-vis US$. The US growth in FY2020 is expected to be supported by pricing pressure stabilization, aggressive new launches including few specialty and limited competition products and consolidation of acquired businesses. Several companies have acquired US ANDA portfolios (Aurobindo, Dr. Reddy, Glenmark) which will aid growth going forward.
According to Mr. Gaurav Jain, Vice President & Co-Head – Corporate Ratings, ICRA, “The revenue growth for Indian pharmaceutical industry in Q4 FY2019 stood at 11.8% supported by US and Europe. US grew by 21.3% led by new product launches, few limited competition products, moderation in pricing pressure and market share gains. Europe continue to demonstrate good growth at 18.8% though few companies reported decline in revenues. Growth from European markets benefitted 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.
For US market, companies (within our sample set) witnessed positive growth momentum at 21.3% Q4FY2019 and 10.7% FY2019 compared to FY2018 growth of -13.1%. Excluding the benefit of few limited competition products, base business growth was supported by new launches, market share gains and moderation in US pricing pressure as well as currency benefit. However, the revenues continue to be impacted by price erosion, product rationalization and continued effect of regulatory overhang for certain companies putting supply constraints. The aggregate domestic growth for our set was -5.6% in Q4FY2019 and 6.2% FY2019. The negative growth in Q4FY2019 was on account of change in distributor for Sun Pharma as well as muted growth for FDC portfolio post ban in August 2018. The growth in FY2020 is expected to be supported by 4.2% WPI linked price hike for NLEM portfolio.”
Unlike in the past, when several Indian pharma companies ramped up their R&D spend, targeting pipeline of specialty drugs, niche molecules and complex therapies, this time around companies are optimising their R&D spend. This is 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. Also 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 and specialty products.
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 and further to 7.8% in FY2019. ICRA expects R&D budgets to remain at 7.5%-8.0% 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.
As for industry’s profitability, the same has moderated over the last few years with aggregate EBITDA margins of 20.6% FY2019 (vis-a-vis 22.9% FY2017 and 20.1% FY2018). This is due to growth pressures along with sustained R&D and compliance related investments. Though margins remain healthy, the lower margins are due to pricing pressures for the US base generics business and lack of limited competition products. Higher share of domestic business and operational efficiencies has however provided overall cushion to margins.
Concludes Mr. Jain, “The credit metrics of leading pharma companies are expected to remain stable in view of future 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.”