CRISIL analysis: Exports, domestic demand to drive pharma sector's growth

Healthy exports and steady domestic demand will drive pharma growth. Steady raw material prices and higher volumes are expected to support margins, while credit profiles remain stable.

  After growing 10 per cent in the last financial year, the pharmaceutical sector is projected to expand 8-10 per cent in this financial year and 9-11 per cent in the next, led by sustained overseas demand, particularly for formulations, and steady domestic demand. The international market, accounting for 53 per cent of the industry’s revenue, surged 13 per cent in FY24 (in rupee terms) and is projected to grow 10-12 per cent in FY25 and 11-13 per cent in the next. This growth is driven by new product launches, better pricing, and diversification into untapped markets.

  In regulated markets, exports to the US, which account for over a third of India’s formulations exports, are likely to witness healthy growth due to easing pricing pressures, continued drug shortages, and India’s higher share in abbreviated new drug approvals. Beyond generics, larger players are focusing on specialty products, biosimilars, and complex generics, which will 

be key medium-term growth drivers.

  Exports to semi-regulated markets (35 per cent of overall exports) are also expected to gain pace, supported by demand revival, improving foreign exchange reserves, strengthening local currencies against the dollar, and easing economic crisis in select African and Latin American countries. Companies venturing into smaller and newer markets in Asia and Africa through new product launches and institutional sales will likely maintain their growth lead in these regions.

  Bulk drug exports are expected to see moderate increases, supported by volume growth from new launches, customised synthesis, and rising demand for complex drugs.

  The domestic market, which grew 7 per cent in FY24, is expected to expand 7-9 per cent in FY25 and 8-10 per cent in FY26, driven by higher prices and new product launches. Volume growth for existing products, especially in the acute therapy segment, may remain modest, similar to FY24. However, the chronic segment—drugs for neurological, cardiac, respiratory diseases, and diabetes—will continue to support overall growth due to structural demand.

  The sector’s operating margin is likely to improve by 70-80 basis points (bps) to 22.5 per cent in FY25, following a 100 bps expansion in FY24, driven by better operating leverage and easing pricing pressures in the US, along with stable input costs. Additionally, moderate rupee depreciation against the USD will support export profitability. Operating profitability is expected to remain range-bound next fiscal, benefiting from an increasing scale of operations.

  Credit profiles of rated players are expected to remain stable, supported by low leverage, well-planned R&D expenditure, moderate capital expenditure plans, and healthy liquidity. The debt-to-Ebitda ratio is projected to remain stable at 0.9-1.1 times this financial year and the next. 

Firms are also pursuing inorganic growth in the active pharmaceutical ingredient (API) and formulation space, aiming to diversify product portfolios by acquiring brands or businesses and consolidating market share in targeted therapeutic areas. While strong balance sheets provide a cushion, any sizeable debt-funded acquisitions will be closely monitored.

  The production-linked incentive scheme is likely to improve domestic manufacturing, but over half of the capacity additions under the scheme focus on para-aminophenol and penicillin. As a result, import dependency for other bulk drugs will persist. However, at an aggregate level, new capacities under the scheme are expected to reduce import dependency for bulk drugs by nearly a fifth over the medium term.

  Unanticipated increases in litigation costs in ongoing US antitrust suits, FDA import alerts, delays in resolving pending regulatory issues, and potential price caps on domestic products remain key risks to watch.   

Market trend 

- Pharma sector grew 10% in FY24; expected to expand 8-10% in FY25

- This is driven by sustained overseas demand and steady domestic demand

- International market projected to grow 10-12% in FY25

- Domestic market grew 7% in FY24; expected to grow 7-9% in FY25