The growth trajectory for Indian pharmaceutical industry is likely to be moderate, according to credit rating agency ICRA.
Owing to slow growth from US given the relatively moderate proportion of large size drugs going off patent, increased competition leading to price erosion in low-to-mid-teens, generic adoption reaching saturation levels, and regulatory overhang along with base effect catching up; the Indian pharma sector is likely to curtail aggregate growth to single digit.
"Revenue growth from US during FY2012-17 period for ICRA's sample set experienced a CAGR of 19.3 percent though growth from US has come down from 14.4 percent in FY2016 to 4.0 percent in FY2017 with Q4FY2017 and H1FY2018 registering negative growth despite consolidation benefits. 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 base business," said vice president and co-head, corporate ratings, ICRA, Gaurav Jain.
"Besides increased regulatory scrutiny and consolidation of supply chain in US market resulting in pricing pressures along with increased R&D expenses will also have an impact on profitability of Indian pharmaceutical companies," Jain added.
In spite of these ongoing challenges, several Indian pharma companies have ramped up their R&D spend, targeting pipeline of specialty drugs, niche molecules and complex therapies.
The companies have gained adequate scale and drug development capabilities over the last decade of growth which will keep them in good stead to capture new opportunities in the developed market.
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Moreover, the demand prospects from domestic market is likely to remain healthy given the increasing spend on healthcare along with improving access.
But regulatory interventions, especially relating to price control and mandatory genericisation remain a concern.
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 the sample is projected at 7-10 percent over FY2018 to FY2020 after mid-to-high double digit growth over last five years.
"ICRA expects the increase in R&D budgets witnessed over the past few years to continue, given the growing focus both on regulated markets and complex molecules/therapy segments though few companies are optimizing R&D in view of lower revenue growth," Jain concluded.
The credit metrics of leading pharmaceutical companies are expected to remain stable in view of steady growth prospects in regulated markets and relatively strong balance sheets.
The capital structure and coverage indicators are expected to remain strong despite some pressure on profitability and marginal rise in debt levels given inorganic investments.
The key sensitivity to ICRA's view remains productivity of R&D expenditure, increasing competition in the U.S. generics space and operational risk related to increased level of due diligence by regulatory agencies.