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Generic opportunities outweigh challenges emanating across emerging markets: ICRA

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Supported by acquisitions, geographic expansion and steadily expanding product portfolio, the top-10 pharma companies from India have achieved a CAGR of 21 per cent in revenues from emerging markets over the past five years

With approximately 20 per cent contribution to revenues of leading pharmaceutical companies, emerging markets have evolved to become an important market segment for Indian pharma industry. Although the US remains the key growth driver, pharma companies have steadily expanded their presence across some of the key emerging markets. Supported by acquisitions, geographic expansion and steadily expanding product portfolio, the top-10 pharma companies from India have achieved a CAGR of 21 per cent in revenues from emerging markets over the past five years (i.e. FY 2011-15).

Driven by improving affordability levels, government’s commitment to expanding healthcare access and rising prevalence of lifestyle related disorders, the spending on pharma products in these markets is estimated to touch almost to ~$350-390 billion by 2019 according to IMS1. Much of this growth is likely to benefit the generic segment which would gain traction on back of government-supported programmes and cost competitiveness in markets, which rely heavily on out-of-pocket spending for healthcare.

While the growth prospects in emerging markets remain undisputed, pharma companies also face their fair share of challenges. Frequent regulatory changes, government’s intervention in drug pricing (to contain healthcare costs) and efforts to promote usage of un-branded generics are some of the common themes influencing industry prospects. In some countries, the regulatory framework has also evolved to favour local industry by implementing measures like higher import duties, creating price differentiation and incentives to invest in manufacturing facilities, locally.

The impact of weakening macro-economic environment and political instability across some countries has further added to set of challenges, which has got accentuated by the sharp correction in crude oil prices and its adverse impact on exchange rates of some of the oil-dependent economies like Russia and Venezuela. The recent downgrade for Brazil is also negative from the perspective of foreign exchange scenario. These trends are likely to impact margins of companies in the near-term given the intensity of currency de-valuation and limited ability to implement price hikes.

Despite challenges, Indian pharma companies would however continue to benefit from the growth opportunities that emerging markets offer. With cost competitive manufacturing capabilities and many of the characteristics (i.e. high out-of-pocket expenditure on healthcare and preference for branded generics) similar to the Indian market, Indian firms remain in an advantageous position. Additionally, their relatively low market share also provides scope for market traction going forward.

Apart from emerging markets, Japan’s generic drug industry, which is going through another phase of government-led mandate to increase generic penetration, also offers strong growth potential for generic companies. At present, Indian companies have relatively limited presence in Japan given the stringent regulatory framework. However, ICRA expects them to increase their focus going forward.

According to ICRA, acquisitions will play an important role given the long gestation period involved in establishing branded generics business. To address competitive pressures, companies would also shift their focus towards niche therapy areas, biosimilars and segments like OTC that offer greater pricing power. As regulatory framework in some markets supports local manufacturing presence, we expect Indian companies to invest in greenfield facilities as well in select markets.

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