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More pain before the gain


20170115ep03An ICRA quarter update on the pharmaceutical  sector does not have very encouraging news for 2017. Growth from the US market, once the sweet spot of many Indian companies, has come down to less than nine per cent in H1 FY2017 despite consolidation and currency benefits. The report predicts that there will be more pain, as going forward the growth momentum is likely to face further pressure.

Other markets like LATAM, CIS countries and South Africa are yet to bounce back. Companies will take some time to gain the confidence to re-start serving these markets. For instances, Glenmark had to effect sizeable write-offs in Venezuela and is still in dialogue with the government to repatriate their dues.  Remediation costs of product recalls and 483s from the US FDA  is also a drag on the performance of some companies.

While there was some cheer on the domestic formulations side, with companies in the ICRA sample registering double the growth, 14.1 per cent in Q2 FY2017 as against seven per cent in Q2 FY2016, future regulatory action on FDCs, expansion in the NLEM will see further erosion.

But some companies have used these shrinking margins to take a closer and more critical look at their business strategies. Companies have reworked their product mix as well as introduced productivity improvement measures which have reduced the stress on the balance sheet. These measures will result in incremental savings over a period of time.

However, beyond sector-specific regulatory action, the biggest reform measure of the Modi government, demonetisation, is set to put FY17earnings at risk, according to the latest report from Prabhudas Lilladher. The implementation has not lived up to the intention and it is anyone’s guess how other factors like the shortage of cash in rural and even semi- urban areas, etc, will impact the sales of medicines. As as of now, the pharma companies are in a wait and watch mode. Online pharmacies have no doubt benefitted from demonetisation as well as the push towards a digital economy and this could have a positive impact on inventory control and tracing counterfeit medicines as well.

A sign of the maturity of leading pharma companies is that inspite of shrinking margins, R&D spends are increasing, not decreasing. According to the ICRA report, pharma companies have increased their R&D budgets significantly, from six per cent of sales in FY2011 to close to nine per cent now. Glenmark recently revealed their strategic blueprint for the next decade, and R&D spends up to 11 per cent is clearly the company’s intention. This is because these companies have graduated from low-margin to high margin complex product strategy, such as injectables, inhalers, dermatology, controlled-release substances and biosimilars.

All in all, 2017 promises to be yet another year of change, with more pain before the gain. The cover story in the Jan 1-15, 2017 presents a round up of experts who analyse these trends and make their predictions about the best strategies for the year ahead.

Viveka Roychowdhury

[email protected]

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