Living up to its moniker of a defensive bet, the Rs 2.8 lakh crore Indian pharmaceutical sector is set to emerge more or less unscathed from the Covid-19 pandemic this fiscal.

The sector is well-diversified with exports and domestic formulations accounting for almost equal share. This fiscal, growth in exports at 11-12% (as against 10% last fiscal) will outpace growth in domestic formulations expected at 5-6% (from 10% in fiscal 2020), leading to 8-9% overall growth, down just 150 basis points on-year.

Operating profitability for ~350 CRISIL-rated pharmaceutical companies, representing ~70% of sector revenue, would soften by 100-150 bps but remain healthy at ~19% despite higher input prices. Credit profiles will continue to be supported by healthy balance sheets.

The export pie is divided into regulated markets such as the US and Europe (~45%), rest of world (ROW) markets (~35%) and bulk drugs (~20%). Exports growth is expected to remain strong at 10% and above in each of the segments.

The growth in the regulated markets will be supported by steady increase in new product launches from compliant plants, lower pricing pressure on existing generics, and a visible easing in scrutiny by the United States Food and Drug Administration (US FDA) in recent months.

Says Isha Chaudhary, Director, CRISIL Research, “India accounted for almost half the abbreviated new drug application, or ANDA, approvals provided by the US FDA since fiscal 2019. This strong pipeline, coupled with lower import alerts and warning letters in recent months, should ensure a steady pace of new launches, which will help sustain export momentum to regulated markets.”

Exports to ROW markets, too, are expected to rebound to ~10% compared with 7% in fiscal 2020, driven by opportunities in under-penetrated generic markets such as Africa and Latin America. Also, bulk drug exports will benefit from moves worldwide to reduce dependence on China.

Says Tanvi Shah, Associate Director, CRISIL Ratings, “Higher exports should offset some of the reduction in domestic formulation sales because of pandemic-led disruptions, especially in the acute therapies segment (~60% of domestic formulation sales). Lower footfalls in hospitals and fewer field visits by medical representatives have affected prescription-based sales in acute therapies, as evident from the steep moderation in the first-quarter sales of anti-infectives and gastro-intestinals. On the other hand, steady demand for chronic therapies pertaining to lifestyle diseases should help keep domestic formulation sales growth at ~5-6%.”

Despite the slight moderation in business performance, credit profiles of domestic companies would remain largely steady, benefiting from healthy balance sheets and liquidity. Equity infusions from private equity funds have also helped improve credit metrics in recent times. CRISIL expects prudence in capital and research and development spending, as well as efficient working capital management, will enable companies manage transition through the current challenging times. For instance, the median gearing for CRISIL’s sample set is expected at less than 0.4 times in fiscal 2021 (0.42 times in fiscal 2020).

That said, a few large pharmaceutical companies are facing anti-trust suits in the US. Any unanticipated litigation costs or adverse developments such as increased US FDA scrutiny impacting new product launches will be monitorables.

Over the medium term, the government’s production-linked incentive scheme for local bulk-drug manufacturing could support domestic growth. Development of, and contract manufacturing opportunities in, Covid-19 vaccines could also support revenues.