Sluggish US market to pull down domestic Pharma growth to 7-10%: Icra

Key market is slowing down with fewer large sized drugs going off patent, and increased competition

Rating agency Icra feels that Indian pharmaceutical industry is likely to grow at a moderate rate of 7 to 10 per cent between FY18 and FY20. This is on the back of slowing growth from the US. The industry saw a mid to high double-digit growth over last five years. 

Icra says the growth in the US is slowing 'given the relatively moderate proportion of large size drugs going off patent, increased competition leading to price erosion in high single digits to low teens, generic adoption reaching saturation levels and, regulatory overhang along with base effect catching up.'

According to Gaurav Jain, vice president and co-head, corporate sector ratings, ICRA , "The growth momentum is likely to face further pressure going forward, led by limited near term first-to-file (FTF) generic opportunities and pricing pressure on generic base business. Besides increased regulatory scrutiny and consolidation of the supply chain in US market resulting in pricing pressures along with increased R&D expenses will also have an impact on the profitability of Indian pharmaceutical companies. Revenue growth from the US during FY2012-17 period for ICRA's sample set experienced a CAGR of 19.3 per cent, though growth from the US has come down from 14.4 per cent in FY2016 to 4.0 per cent in FY2017 with Q4FY2017 registering negative growth despite consolidation and currency benefits."

Overall the aggregate revenues of 21 leading players grew by 0.2 per cent during the Q4FY17 with FY17 growth at 7.4 per cent as against 10.1 per cent growth in FY16. "The revenue growth has been subdued for the US as well as domestic market in Q4 FY17 with base business in the US continuing to face high single digit to low teens price erosion, regulatory overhang for select companies and impact of impending GST implementation/demonetization on domestic growth to an extent," the ICRA report said.

As for the domestic formulations business, companies registered growth of 4.5 per cent in Q4 FY17 as against 9.3 per cent in Q3 FY17 led by destocking initiative following impending GST implementations and lag effect of demonetisation.

In ICRA's view, there are limited major first-to-file generic launches in US market in near term and base business is expected to continue to face competitive pressures affecting growth from US market. Aggregate revenue growth for ICRA's sample is projected at 7-10 per cent over FY18 to FY20 after mid to high double digit growth over last five years.

Despite these ongoing challenges, several Indian pharma companies have ramped up their R&D expenditure, targeting pipeline of speciality drugs, niche molecules and complex therapies.

Industry's profitability has remained relatively stable with aggregate EBITDA margins for ICRA's sample at 18.3 per cent for Q4FY17 vis-a-vis 21.7 per cent in Q4 FY16 and 24.6 per cent in Q3 FY17, regardless of the growth pressures along with increased R&D and compliance related investments.

"ICRA expects the increase in R&D budgets witnessed over the past few years to continue. The aggregate R&D spends of top few domestic companies have increased from 5.9 per cent of sales in FY11 to close to 9.1 per cent in FY17. This is also due to the fact that top companies are expanding their presence in complex therapy segments such as injectables, inhalers, dermatology, controlled-release substances and bio-similars," said Jain.