API manufacturing finally getting the attention it deserves
While formulation generics flounders a bit, the data show that the Indian API industry has done better, with a five-year revenue CAGR of 15 per cent, and EBITDA margins consistently in the 24-28 per cent bracket
A recent report from Candle Partners forecasts interesting trends for India’s pharma sector. While investors seemed to be gung ho about the sector’s potential, given its central role as a saviour during the pandemic, the report suggests that the sector has been a laggard in terms of returns. The good news is that API manufacturing is finally getting the attention it deserves, from promoters, PE investors and policymakers.
The report quotes data showing that over the last 12 months, the Indian pharma industry has been a substantial under-performer with a majority of the stocks giving double-digit negative returns while the overall market (BSE Sensex) delivered a +9 per cent return. While large caps have given a –ve 7 per cent median return, mid-caps have given a –ve 20 per cent median return. While the API segment did well in the 2019-2021 phase, the segment has given a –ve 24 per cent median return in the last 12 months.
An evaluation of a decade of historical data on the sector, segregated into formulations generics and APIs suggests where the industry could be headed. A low sales growth rate over the last five years, with reported revenue growth of 7 per cent, mostly due to flat growth in the US market, is probably the single largest reason for these low returns. The silver lining is that sales from India and ROW have made up for some of this lag, with the growth of ~10-12 per cent.
However, EBITDA margins dipped 8 per cent from 28 per cent in 2014 to an average of 20-21 per cent, but only after substantial cost rationalisation and cuts in R&D spends. Of course, R&D cuts are not good news at all. From 9 per cent in FY 16/FY 17 to the current 5-6 per cent levels, we could be reversing years of gains and future profits from R&D assets to survive in the near term.
But while formulation generics flounders a bit, the data show that the Indian API Industry has done better, with a five-year revenue CAGR of 15 per cent, and EBITDA margins consistently in the 24-28 per cent bracket.
However, both formulation generics and APIs have higher than desired working capital