ICRA in its report on pharmaceutical sector said balance sheets of major pharmaceutical companies remain strong and provide adequate room for fund raising if required.
Aided by strong growth from U.S. generics business, increasing footprint in new territories and currency tailwinds, ICRA's coverage group comprising of 23 companies with diverse business models witnessed a growth of 22 percent in revenues during the first nine months of the fiscal and relatively stable EBITDA margins.
Overall, according to the ICRA report, margin pressures were limited to a few companies and lack of new product introductions in the U.S. (resulting in lower gross margins), higher R&D costs and one-time charge related GDUFA pay-out were the most common factors. Though a positive, INR depreciation impacted earnings of companies with debt profile skewed in favor of foreign exchange borrowings (i.e. MTM losses). In addition, most companies also provided for higher tax provisioning (due to conclusion of tax holidays at many locations and revised policies on taxation of partnerships), which shaved-off part of the earnings growth.
However, as the industry steps closer to a new pricing policy, it is finding itself in the midst of uncertainties as some of the nuances of the policy remain blurred. While price control remains a near-term challenge, ICRA says that it believes that the industry should revert to a growth of 13-14 percent over the medium-term as structural growth drivers remain intact.
The Government's pro-generic initiatives may not impact the industry structure at least in the medium-term as challenges in its execution, budgetary constraints, lack of resources to effectively monitor quality across manufacturing chain and more importantly a market that is predominantly self-paying in nature and largely physician-influenced, make a meaningful shift in favour of 'pure generics' unlikely according to the ICRA report. However, as the industry prepares for these challenges, focus is expected to shift in favour of niche segments (i.e. combined dosages, novel drug delivery areas), in-licensing (with innovators), building OTC business and capturing growth in tier II/III cities. Some of these initiatives may exert pressure on cost structure, especially in form of higher promotional spend (to market new products) and field force productivity, resulting in moderation in profitability indicators, which have otherwise been the best among other segments, the report stated.
U.S. Generics: Patent expirations will continue to underpin growth; focus on complex generics and attempts to diversify positive for long-run
The growth prospects for Indian companies would benefit from a) sizeable generic opportunity (drugs with brand value of ~USD 80 billion are expected to face generic competition over the next 4-5 years), b) strong pipeline of ANDAs pending approval, with high proportion of complex generics incrementally and c) market share improvement given the relatively small base (share of leading Indian companies is less than 10 percent in the U.S. generics space). Acquisitions to gain technical capabilities and focus on strengthening branded business (albeit on a small scale) are gaining momentum as companies feel the need to diversify.
Europe: Growth opportunities marred by pricing pressure and changing market dynamics Pricing pressures in wake of healthcare reforms and changing market dynamics have largely offset the impact of expanding product portfolio and geographic footprint for companies in Europe. A relook at business strategies appears to be therefore a common theme with focus on expanding presence in relatively underpenetrated markets (i.e. France, Spain & Italy), branded generic markets in East Europe and niche areas like complex generics, OTCs etc.
Emerging Markets: Offer promising growth opportunities but with caveats Apart from U.S. generics, Emerging markets present one of the most promising growth opportunities for Indian pharmaceutical Companies Amongst new frontiers, evolving generic market in Japan (world's second-largest pharmaceutical market with only 23 percent generic penetration) and biosimilars provide long-term growth prospects for Indian companies. While product filings and approvals will be gradual in Japan, hurdles in biosimilars could be multi-fold, stemming from higher R&D outlay for clinical trials and uncertainties related to pathway for regulatory approvals.
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