Margin pressure to persist for pharma companies: ICRA

The growth and profitability of Indian pharmaceutical companies in current financial year will be constrained by regulatory interventions like price controls in domestic market and compulsory genericisation in overseas market, according to ICRA Ratings.

The investment information firm has forecast the growth trajectory for pharma industry to remain at 11 to 13 per cent in FY20 on the back of healthy demand from domestic market due to increasing spend on healthcare along with improving access. New launches and market share gains for existing products and consolidation benefits will drive growth.

"But revenues continue to be impacted by price erosion, product rationalisation and continued effect of regulatory overhang for certain companies which put supply constraints," said Gaurav Jain, Vice President and Co-Head of Corporate Ratings at ICRA.

The revenue growth for Indian pharmaceutical industry in Q1 FY20 stood at 12.4 per cent supported by US and Europe markets. The US market grew by 19.8 per cent led by new product launches, few limited competition products, moderation in pricing pressure and marketshare gains.

However, faster generic approvals and continued regulatory overhang with respect to manufacturing quality deficiencies highlighted during US Food and Drug Administration (USFDA) audits remains key concern. The pace of abbreviated new drug application (ANDA) approvals has increased by 44 per cent during 2015-18 period, leading to higher competitive intensity.

But the pace of official action post USFDA audit has also increased during January to August this year with 11 warning letters compared to 7 last year.

The Europe market continues to demonstrate good growth at 9.8 per cent, though few companies reported decline in revenues. "Growth from European markets benefitted from higher tender wins, new product introduction in B2B segments and low base effect though healthcare reforms -- resulting in price cuts which continue to pose challenge," said Jain.

ICRA said the credit metrics of leading pharma companies are expected to remain stable in view of future growth prospects in regulated markets and relatively strong balance sheets. The capital structure and coverage indicators are expected to remain strong despite pressure on profitability and marginal rise in debt levels given inorganic investments.

But the key sensitivity to ICRA's view remains productivity of R & D expenditure, increasing competition in the US generics space and operational risk related to increased level of due diligence by regulatory agencies.

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