According to the recent reports released by CRISIL (formerly Credit Rating Information Services of India Limited), the Indian pharmaceutical industry will weather the current headwinds of degrowth in exports. This slowdown is happened because of the high market competition and regulatory scrutiny, also by monetizing scope in complex products in the regulated markets. Resilient domestic demand is also one of the reasons for the slowdown.
The Pharma sector revenue is giving a positive hope of growth 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.
Anuj Sethi, Senior Director, CRISIL Ratings said that we are seeing a fruitful determination of administrative activities from remediation endeavors made in the course of recent years, even as administrative investigation stays exceptional. For example, cautioning letters on 9 Indian plants were settled in the previous 15 months, which is impressively higher than the 4 seen between fiscals 2013 and 2016.
Pharma firms are also working to increase their research and development (R&D) expenses to capitalize on the $20 billion-a-year complex products opportunity in the regulated markets, besides remediation efforts. CRISIL expecting R&D expense to increase ~700 basis points over fiscal 2017 to reach 30% of annual revenue from the regulated markets over the medium term.
Steady revenue growth from the domestic market is also one of the main factors for the market slowdown, 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.
According to Akshay Chitgopekar, Director, CRISIL Ratings “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”.
Over 300 pharmaceutical units, over 55% of which have an international presence get rates by CRISIL. And credit profile of most of the pharma firms are backed by low reliance on debt, besides their business strength and diversity. Since Fiscal 2015, the credit ratio exceeds 1.5 times for CRISIL-rated pharmaceutical portfolio. CRISIL is positive about the credit profiles and growth and they will sustain with healthy cash flows despite near-term challenges in the regulated markets.