ICRA maintains stable outlook for Indian pharma companies

Domestic pharma cos expected to grow at a CAGR of around 10-12 per cent between FY2019-2022

ICRA has maintained a stable outlook on the Indian pharmaceutical industry. The abating headwinds from pricing pressure in largest regulated market the US, stable growth for the Indian market driven by increasing healthcare spend and better accessibility are likely to drive healthy growth for the Indian pharma companies, coupled with comfortable balance sheet structure. However, increased cost related to regulatory compliances especially for the US market, price controls across markets and mandatory genericisation for Indian market remains key risks. The domestic pharma industry has gained adequate scale and generic drug development capabilities over a decade of growth which will keep them in good stead to capture bigger opportunities especially in the Specialty/niche segments in the regulated market. The FY2019-2022 CAGR is expected to be around 10-12 per cent for domestic pharma companies.

The credit metrics of leading pharma companies are likely to remain stable in view of steady growth prospects in regulated markets and limited dependence of Indian pharma companies on bank borrowings. The OPBITDA/Interest and TD/OPBITDA for ICRA set of 21 entities in Indian pharma industry has been healthy at 10.0x and 2.1x for FY2019. They are expected to remain in similar range in medium term despite some pressure on profitability and marginal rise in debt levels, given inorganic investments. The key sensitivity to our outlook remains productivity of R&D expenditure, operational risk related to increased level of due diligence by regulatory agencies and price controls.

The growth from US picked up in FY2019 to 12.1 per cent after seeing a decline of -13.1 per cent in FY2018. The growth was supported by higher market share for Indian players as several generic MNC players optimised product portfolios along with new product launches. While the US growth is expected to remain at high single digit to low double digit, it will face headwinds given the relatively moderate proportion of large size drugs going off patent, generic adoption reaching saturation levels in the US market and increased regulatory scrutiny as reflected in increased issuance of warning letters/import alerts. The pricing pressure led by consolidation of supply chain in the US market and faster ANDA approvals is abating and is expected to remain in mid-single digit in FY2020 compared to low teens in FY2018.

ICRA expects the industry profitability to remain healthy supported by cost optimisation undertaken by several players though variables such as increased regulatory compliance costs, R&D costs for commercialising specialty product pipeline and currency volatility related challenges in emerging markets (EM)s may have an adverse impact. Overall, company specific factors would continue to play a pivotal role with quality of product pipeline (i.e. higher share of limited competition launches in the US) being the single most differentiating factor. Companies with growing portfolio comprising of niche/complex products in regulated markets, diversified geographic-mix and established brands in EMs would be better placed to manage some of the headwinds.

With R&D optimisation efforts underway to counter the US pricing pressure, we expect aggregate R&D spend to maintain at current levels despite requirements arising from expanding presence in complex therapy segment such as injectables, inhalers, dermatology, controlled-release substances and even biosimilars. Companies will opt for co-development of biosimilars that need expensive clinical trials to diversify their risk across portfolio of such products while benefitting from commercial and marketing prowess of their JV partners.

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