Disclaimer: The Blog on Indian Pharmaceutical Industry is not a recommendation to buy / hold / sell any stock. The published post is for information purpose only. The intention to share write ups on this blog is to create a repository of ideas so that investors can have a look at various frameworks & approaches. Please read the detailed disclaimer at the bottom of the post.
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.
- 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.
- 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|
The information herein is used as per the available sources of bseindia.com, company’s annual reports & other public database sources. Alpha Invesco is not responsible for any discrepancy in the above mentioned data. Investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents
Future estimates mentioned herein are personal opinions & views of the author. For queries / grievances – email@example.com or call our support desk at 020-65108952.
SEBI registration No : INA000003106
Readers are responsible for all outcomes arising of buying / selling of particular scrip / scrips mentioned here in. This report indicates opinion of the author & is not a recommendation to buy or sell securities. Alpha Invesco & its representatives do not have any vested interest in above mentioned securities at the time of this publication, and none of its directors, associates have any positions / financial interest in the securities mentioned above.
Alpha Invesco, or it’s associates are not paid or compensated at any point of time, or in last 12 months by any way from the companies mentioned in the report.
Alpha Invesco & it’s representatives do not have more than 1% of the company’s total shareholding. Company ownership of the stock : No, Served as a director / employee of the mentioned companies in the report : No. Any material conflict of interest at the time of publishing the report : No.
The views expressed in this post accurately reflect the authors personal views about any and all of the subject securities or issuers; and no part of the compensations, if any was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.
Stay Updated With Our Market Insights.
Our Weekly Newsletter Keeps You Updated On Sectors & Stocks That Our Research Desk Is Currently Reading & Common Sense Approach That Works In Real Investment World.