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Brexit impact: Should the Indian pharma industry worry?

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Sameer Walia, Managing Director, The Smart Cube examines the potential implications of Brexit on the overall pharma industry in India

In early 2016, multiple reports from different research houses estimated >15 per cent y-o-y growth for the Indian pharma market during 2016–2020. While Brexit speculations were doing the rounds that time as well, no one knew that it would really come true. Now that Brexit will actually happen, the market is flooded with mixed reactions—while some believe that the impact of the weakening GBP is likely to be short term, others consider that the uncertainty, and hence the impact, is likely to extend to the medium term. However, experts unanimously agree that the UK’s decision to divorce the EU will create, and has already created, commotion in the Indian pharma industry.

Let’s examine the potential implications of Brexit on India’s pharma industry.

Limited exposure, limited impact on revenue

Majority top Indian pharma companies—Aurobindo Pharma, Cadila, Cipla, Dr Reddy’s Laboratories, Glenmark, Lupin and Sun Pharma—have low revenue dependence on the EU, especially from the UK (refer to Table 1); in fact, the US is the key market for most of them. As a result, these companies are likely to face limited impact of the currency devaluation following the Brexit referendum results.

Table 1: Exposure of Indian pharma companies to EU/UK

Company

Percentage of Sales Exposed to EU/UK

Aurobindo Pharma

1.5% (UK)

Cadila Pharma

3% (EU)

Cipla

4.5% (EU), including <1% (UK)

Dr. Reddy’s Laboratories

11% (EU)

Glenmark Pharma

9.5% (EU); 2.5% (UK)

Lupin

3% (EU)

Sun Pharma

4% (EU)

Source: Bank of America Merrill Lynch

The Indian Credit Ratings Agency (ICRA) also believes that the event will have negligible impact on the Indian pharma industry as a whole, as European markets account for 10–13 per cent of the total industry revenue.

However, because of GBP devaluation, the country’s drug exporters have incurred losses of ~Rs 500 crores (as of 27 June 2016). Drugmakers with significant sales exposure to the EU/the UK are also likely to witness a decline in revenue.

Going beyond revenue: Regulatory delays and opportunities for M&A

As the UK ends its relationship with the EU, London-based European Medicines Agency (EMA)—which approves treatments for all EU countries—will have to relocate to a country within the EU. This will increase uncertainty around the drug approval process, leading to regulatory delays—which further leads to lost revenues.

Although, uncertainties offer opportunities too. Indian companies, for instance, can actually look at M&A activity in the UK. M&As, especially at a time when the GBP is on a depreciating trajectory, indeed offer an effective strategy to enhance footprint.

The road ahead…

Brexit impact on Indian pharma is going to be minimal, as the UK and the EU account for less than 13 per cent of the overall Indian pharma revenues. The impact will primarily be driven by movements in the currency. One thing that remains to be seen is how the Indian rupee is likely to react to the US dollar, as any depreciation will act as a natural hedge for Indian pharma companies. Most importantly, we cannot rule out the recent approval for 74 per cent FDI under the automatic route, as it opens up a plethora of opportunities for companies in the UK and EU.

While some drug makers and experts have voiced opinions about the potential impact, others are taking stock of the situation before reaching a conclusion. From the above information, it seems that at present, the Indian pharma industry is immune to the UK’s association with the EU, although only time can tell the future of the industry.

(with inputs from Mayank Taneja, Senior Analyst, The Smart Cube)

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