Exports to regulated markets maintained a volatile growth since FY15 after recording a notable CAGR of 26.3% over FY11-FY14. The volatility is attributed to the largest regulated market, the US (71.6% of regulated market exports) which witnessed a weak growth in FY15, although recovered in FY16 and observed a sharp moderation in FY17. While regulatory overhang continues to be an event risk since FY14, price erosion on account of ongoing structural shifts such as channel consolidation and heightened competition following lumpy approvals has initiated a paradigm shift in growth expectations. Weakening of currencies in Europe (since FY15) and the UK (since FY17) on account of political issues have also kept Indian exports under pressure.
In FY17, Indian exports of pharmaceutical formulations to the US peaked to a seven year high of 39.4% of the overall exports. The agency expects base businesses for large players to contract 5%-10% per annum, amid pricing pressures from consolidating buyer groups and waning exclusivities leading to pressures on operating margins. Ind-Ra expects competitive intensity to be high for high value chronic opportunities (market size above 200 million) targeted by Indian exporters consisting speciality and complex products aggregating to an estimated market size of USD42.6 billion in patent expiries between FY18 and FY31. This is on account of a high average number of filers and approvals or tentative approvals per Abbreviated New Drug Applications. Regulatory amendments by the United States Food & Drug Administration in 1HFY18 are poised to accelerate drug access and increase competition by streamlining and further expediting generic product approvals while compliance cost rise unabated. The heightened competition is likely to accelerate price erosion and weigh on growth expectations from future US patent expires.
Indian exporters have targeted niche opportunities to build speciality franchise across Europe. Portfolio restructuring for margin security and inorganic portfolio expansion are the key strategies adopted to maintain growth momentum. While favourable demographics reinforce market fundamentals, restrained budgets are likely to impact market growth for patented and generic drugs due to pricing pressures. Despite the euro making a modest recovery in 1QFY18, any currency shock due to political or monetary policy stance is likely to hurt exports.
A 16.6% decline in pound post Brexit, slumped exports to the UK during FY17. The weakness in the pound is likely to sustain over the next one to two years, thus keeping Indian exports under pressure. As a result, Ind-Ra expects negative-to-lowly positive growth in exports in the near to medium term.
Ind-Ra believes contribution from other regulated markets is unlikely to grow significantly in the near to medium term, given limited significance to Indian exporters. Exports to North America are likely to be modest, while exports to Australia and New Zealand will have limited growth headroom owing to price controls. Exports to Japan are likely to be in a recovery mode driven by a large geriatric care opportunity, but participation is likely to be limited owing to stringent regulatory standards.
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