The stability is led by healthy demand in the domestic and emerging markets
The year 2021 was a mixed bag for the Indian pharmaceutical industry. The industry benefitted from healthy demand in the domestic and emerging markets for Covid-19 vaccines as well as acute therapies, as pandemic related disruptions eased in some parts of the world. Simultaneously opportunity also knocked on the doors of some industry players that catered to global Covid-19 vaccines. The key emerging markets for the industry include Brazil, South Africa and Russia, which have witnessed healthy growth over the past year, supported by new launches, low base, strong demand and rupee depreciation.
In the domestic market, a combination of steady normalization in hospital footfalls and field force operations (given the relatively lower restrictions on account of Covid-19) supported Q1 2021 growth. However, with the onset of Covid second wave, volume ramp up of Covid-19 molecules and allied drugs, strong growth in acute therapies and better pricing environment supported healthy revenue growth for the domestic pharma market in Q2 & Q3 2021. Going forward, performance of the Covid-19 and allied drugs portfolio will depend on the trajectory of Omicron while mobility levels (impacting hospital footfalls and field force operations), revenue growth momentum of the acute therapies, and performance of new launches will remain key monitorables.
On the flip side, the industry faced headwinds in the form of considerable pricing pressure in the US market, supply chain related issues with respect to rising freight costs and firming raw material prices. Indian pharma companies continued to witness muted growth in the US market owing to high single digit to low teens price erosion and past inventory liquidation given the Covid-related uncertainties. Industry players are focusing on specialty products, injectables, complex generics including first-to-file opportunities to improve margins for the US business, which has been impacted by the pricing pressure. It is expected that in medium-to-long term, improved product mix will contribute to price stabilisation.
With companies continuing to focus on complex generics, first to file opportunities, specialty products and related activities, entailing higher R&D expenses are expected to stabilise at current levels and remain in the range of 6.5-7.5% of revenues. Companies will opt for co-development of biosimilars that need expensive clinical trials to diversify their risk across portfolio of such products while benefitting from commercial and marketing prowess of their front-ending partners. Stable investments in R&D to develop such products will support growth and margins over the medium term.
A key area of concern is that more than 65% of the APIs/KSMs (Key Starting Material) required by pharma companies are imported from China. Recent events such as Covid-19 pandemic leading to supply chain disruptions coupled with geo-political issues has brought to forefront the risk of such high import dependence. However, the recent introduction of the production-linked incentive (PLI) schemes and promotion of bulk drug parks augur well for the industry by reducing dependence on imports of critical APIs as well as promoting production of value-added products such as biosimilars, complex generics, etc. This is also expected to result in higher capex outlay for the industry in 2022 after capex levels declined in 2021.
The fundamental growth drivers for the industry continue to remain intact led by inelastic demand for products coupled with diversified geographical presence and strong manufacturing capabilities. The Indian pharma industry has gained adequate scale and generic drug development capabilities over a decade, which will keep them in good stead to capture bigger opportunities, especially in the specialty/niche segments in the regulated markets. The abating headwinds from pricing pressure in the largest regulated market i.e., the US, stable growth for the Indian market driven by increasing healthcare spend and better accessibility are likely to drive the growth for the Indian pharma companies.
The outlook for the Indian pharma market remains stable led by healthy demand environment in the domestic as well as emerging markets besides growing traction in the contract manufacturing segment. Moreover, with the resurgence in Covid-19 cases globally, major pharma companies are also likely to benefit from demand for booster shots of vaccines as well as Covid-19 related drugs.
Overall, industry revenue growth is estimated at 9-11% in 2022, supported by 13-15% growth in the domestic market, 14-16% growth in the emerging markets and 9-11% growth in the European business even as growth under the US business is expected to remain muted given the pricing pressure. The growth for key markets also remains sensitive to depreciation of the INR against various currencies.
With rising raw material prices amid supply chain and power issues across the world and particularly in China, API manufacturers continue to reel under pricing pressure. While part of these cost increases is expected to be passed on to formulation players in the near-term, cost pressures will take some more time to stabilise.
For formulation players, headwinds such as pricing pressures and rising raw material costs are expected to result in some contraction in margins over the near term. Further, Covid-19 related improvement in profit margins (driven by cost optimisation measures and lower field force expenses) are expected to taper down. That said, margins will continue to remain healthy. Capital structure and coverage indicators of the industry players are also expected to remain comfortable despite higher capex and sizeable R&D expenses given the robust cash levels.
(Authored by Deepak Jotwani, Assistant Vice President & Sector Head, ICRA and Mythri Macherla, Assistant Vice President & Sector Head, ICRA)
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of IPP and IPP does not assume any responsibility or liability for the same.
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