Indian drugmakers' revenue growth in US may cool off to 7-10% over 3 years: ICRA

Indian drug makers’ revenue growth in US may cool off to 7-10 percent over the next three years after mid- to high double-digit growth over the last five years owing to rising competition, fewer blockbuster drugs going off-patent, generic adoption reaching saturation levels and regulatory overhang, according to rating firm ICRA.

The overall aggregate revenues of 21 leading players declined 8.8 percent during the first quarter ended June compared to 0.2 percent growth in Q4 FY17, ICRA said.

Revenue growth from US during FY12-17 period for ICRA’s sample set experienced a compounded annual growth rate (CAGR) of 19.3 percent. The growth from US has come down from 14.4 percent in FY16 to 4 percent in FY17 with Q4 FY17 and Q1 FY18 registering negative growth.

US contributes around 40-50 percent to sales for most of the large Indian drug makers, while the price erosion is expected to be in the range of high single digit to low teens.

“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 generic base business,” said Gaurav Jain, Vice President & Co-head, Corporate Sector Ratings of ICRA.

“Besides increased regulatory scrutiny and consolidation of supply chain in US market resulting in pricing pressures, increased R&D expenses will also have an impact on profitability of Indian pharmaceutical companies,” Jain said.

As for the domestic formulations business, companies registered growth of -8.8 percent in Q1 FY18 led by trade channel destocking initiative following GST implementation versus growth of 4.5 percent in Q4 FY17 and 9.3 percent in Q3 FY17.

ICRA said the channel inventory levels is expected to improve during the remainder of FY18 leading to higher primary sales though achieving pre-GST channel inventory levels remains to be seen.

The domestic market considered to be the safe bet for Indian generic drug makers with favorable macro-economic indicators and predictable regulatory regime is also expected to be under some pressure.

Growth from key emerging markets benefitted from currency tailwinds though macro-economic challenges remain.

ICRA also says demand prospects from domestic market is likely to remain healthy given increasing spend on healthcare.  Improving access though regulatory interventions, especially relating to price control and mandatory genericisation remain a concern.

In spite of these ongoing challenges, the ICRA report says several Indian pharma companies have ramped up their R&D spend, targeting pipeline of specialty drugs, niche molecules and complex therapies.

The aggregate R&D spends of the top few domestic companies have increased from 5.9 percent of sales in FY11 to close to 9.1 percent in FY17.

“This is also due to the fact that top companies are expanding their presence in complex therapy segment such as injectables, inhalers, dermatology, controlled-release substances and bio-similars," Jain said.

ICRA expects the credit metrics of leading pharmaceutical companies 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,” ICRA said.

“The key sensitivity to ICRA’s view remains productivity of R&D expenditure, increasing competition in the US generics space and operational risks related to increased level of due diligence by regulatory agencies,” the rating agency added.