Export of formulations by domestic pharma companies is likely to grow 7-9 per cent in fiscal 2024, supported by lower price erosion of existing products and higher number of new product launches in the US, and steady demand from the rest of the world (RoW, includes semi-regulated and regulated countries excluding the US).
Formulation exports typically contribute about half of the total revenue of domestic pharma players, with sales to the US and RoW contributing almost equally.
In fiscal 2023, formulation exports grew 10-12 per cent, aided by depreciation in the Indian rupee and a lower base. Growth was reported in mid-single digits during fiscals 2021 and 2022 due to stiff pricing pressure in the US and delay in new product launches.
A CRISIL Ratings study of ~180 pharma companies, which accounted for half of the estimated Rs 3.8 lakh crore annual revenue of the sector in fiscal 2023, indicates as much.
Domestic companies’ manufacturing facilities catering to the US market need to be US Food and Drug Administration (USFDA) compliant and periodic inspections undertaken by the USFDA not only serve the purpose of certifying new facilities but also clear any previously issued official action initiated (OAI1 ) status for plants, thereby paving the way for new launches.
Anuj Sethi, Senior Director, CRISIL Ratings said, “Increased inspections by USFDA after the pandemic and higher withdrawals of abbreviated new drug applications due to intense competition are leading to moderation in overall supply of existing drugs. Consequently, the double-digit price erosion witnessed in the US generics market during the past couple of years should stabilise at high single-digits this fiscal. To also increase exports, large pharma companies are developing higher-margin complex/specialty drugs and introducing new generics which have only recently gone off patent and where competition is moderate. Thus, US formulation exports may grow 6-8 per cent this fiscal after an extended period of underperformance.”
He added, “We also expect domestic pharma companies should be able to register 8-10 per cent growth in revenues from RoW markets, this fiscal. Apart from US, sales to RoW markets also remain integral to the global strategy of domestic players. Increasingly, pharma companies are venturing into tender-based, institutional sales and enhancing marketing channels across the globe. Domestic pharma companies are also expanding into new semi-regulated geographies, with focus on increased market penetration and faster new product launches given less stringent regulatory requirement. That said, domestic companies may not be aggressive on driving growth in select markets such as Latin America, due to high currency volatility and geopolitical risks.”
Adds, Aditya Jhaver, Director, CRISIL Ratings, “Focus on RoW markets increased substantially over the past few years, mainly to derisk dependence on the US market and enhance geographical presence. Ergo, contribution of RoW markets to overall formulation exports is expected at ~50 per cent this fiscal, from ~44 per cent in fiscal 2020, as revenue growth in these markets continues to outpace US.”
Better volume growth in formulation exports, and softening price erosion should also help stabilise operating profitability for Indian pharma players at 20-21 per cent in fiscal 2024 after two consecutive years of margin moderation. Credit risk profiles will remain supported by strong balance sheets and healthy liquid surpluses.
That said, any unanticipated increase in litigation costs in ongoing US anti-trust suits, sizeable debt-funded acquisitions, adverse regulatory developments such as increased USFDA OAIs will remain key monitorables.