Indian Pharmaceutical Industry – Is The Tide Turning ?

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Some key Take Aways From CRISIL Webinar On Pharmaceutical Industry Titled ‘The Tide Is Turning’

After a bruising two years, the Indian pharmaceutical industry appears to be set for a sharp turnaround in fiscal 2019. The projected good run is premised on a decline in regulatory alerts for larger companies as well as a bigger pipeline of high-value drugs compared with last two years.

Cash flows are expected to improve due to improvement in operations and forex tailwinds. The reversal in fortune will be primarily on the back of strong growth in the overseas market, particularly in the regulated markets of the US and the EU, amid continued healthy growth in the domestic market. Although exports account for 50% of the revenue of the Indian pharmaceuticals industry, its contribution at the EBITDA level is higher owing to relatively superior profitability of products sold in regulated markets like the US.

The last two years can be pinned squarely on dwindling exports to regulated markets, particularly the US and the EU. These two regions together account for over 90% of regulated market exports and close to 50% of formulation exports from India. Lower generic opportunity, rising competition, supplier consolidation, and increase in regulatory alerts on Indian plants were the major headwinds.

The green shoots are already visible in the first quarter of FY 20 of the listed drug-makers, which account for three-fourths of the pharma industry revenue.

The US and the domestic markets contribute on average 30 per cent and 35 per cent of their revenues, respectively. The US market is witnessing an upturn after de-growth in five of the last eight quarters through June 2018, Domestic revenues of big pharma companies is expected to grow 12-13 per cent this fiscal, given better access to healthcare and deeper penetration of health insurance.

The volume share of Indian pharma companies in the US generic market has grown to nearly 40% in August despite regulatory woes and pricing pressures. A steady increase in drug approvals and portfolio rationalization by MNCs resulted in India’s volume share rising by 5% over the last few months, though value is still impacted due to price erosion.

The US, the most lucrative generics market valued at around $60 billion, accounts for 40-60% of revenues of most domestic companies.

Key Points

  • With the worst over for the Indian pharma sector , CRISIL expects revenue to rebound to 11-12% over fiscal years 2018-2020 , from 3.5% in fiscal 2016-18. Strong Fundamentals to drive domestic growth of 10-12% over the next two fiscals and export growth to rise to 12% over next two fiscals, helped by higher export to the US.
  • Domestic market has recovered from the GST induced hurdles, barring government, the domestic segment is stable and strong. We are seeing increasing health care penetration, growing incidence of lifestyle disease and new product launches by companies to sustain growth.
  • Drug makers need to sharpen focus on specialty and biosimilar segments as opportunities in conventional generics dwindle, Opportunities in the conventional generic market will be lower in the next five years, and higher number of biologics going off patent, about $65 billion worth of biologic patents are expected to expire in the US over the next 5 years.

China’s Comparative Advantage

China’s supply disruption under the constant threat of the Trump Administration will offer short term opportunity for bulk drug and formulation players catering to semi regulated markets. Chinese have the advantage over India in bulk drugs and intermediates manufacturing given economies of scale as cost of bulk drug manufactured in India is 20-25% higher the landed cost of Chinese API imports.

Concluding Remarks

  • Profitability to remain stable despite higher input prices.
  • Formulators profitability to improve 50-100 basis points by fiscal 2020.
  • Forex benefit in export markets and improved growth momentum in regulated markets to improve margin.
  • R&D as a percentage of sales was stable at 8-8.5% over the past three fiscals.
  • Domestic players have limited ability to pass on increase in input price as 20% of portfolio is under the NLEM
  • Marginal pressure in profits of bulk drug players
  • Supply disruptions in china have increased input prices for bulk drug players and formulators.
  • Bulk drug players have a sufficient capacity to meet the increased demand with supply constraints.
  • Focus on Acquisition to establish foothold in the export market.
  • Seven acquisitions announced in 2018 , with the total deal value crossing $2 billion till September 2018 , half of this is Aurobindo acquisition of Sandoz business. These deals are lucrative to improve presence in target export markets to enter into new markets
  • Private equity interest in the sector has also increased investments in mankind, glen mark brand investment by true north.
  • Export players to have elevated working capital requirement over the medium term. Increased bargaining power of channel partners in the US market led to higher working capital in recent years

Recent Mergers & Acquisitions 

Cipla’s Acquisition of Avenue Aurobindo’s Acquisition of Sandoz Business Torrent Acquisition of Bio Pharm Inc
Value : $215 million Value: $900 million Value : $70 million(est)
Strengthen presence in US markets – improving product offering in specialty business Expand product offering in the US and become second largest dermatology player by prescriptions Improve manufacturing and R&D presence in US

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