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September 11, 2017

Sector Report: Pharmaceuticals

This report is available to users in India for ₹40,000 + applicable taxes

 

Formulation exports growth to slowdown in next five years

 

Blockbuster drugs going off patent and marketing exclusivity aided the growth (14% CAGR) for the Indian exports formulation players during 2011-12 to2015-16. However, regulatory woes, wholesale consolidation in US market and rising competition substantially impacted Indian players in 2016-17,leading to a flat growth during the fiscal. In the 2017-18, formulation exports is expected to remain flat to negative on account of weak FTF pipeline forthe players coupled with price erosion in base business.

 

During FY17-FY22, CRISIL Research expects the growth to slow-down to 6.5-7% CAGR vis-a-vis previous 5 year period, as the overall opportunity inthe conventional generic space is set to drop. As per CRISIL Research estimates, ~$130 billion of drugs are expected to go off patent during theperiod, as compared to ~$195 billion during the previous five year period. Further, pricing pressure in the base business is expected to continue due towholesale consolidation. Therefore, growth will be specific to players who launch complex molecules or secure para IV approvals. Though exportsgrowth is expected to slowdown, revenue from exports markets for Indian players is expected to grow at a faster rate as companies will seek inorganicroute for growth during next five years.

 

Domestic market growth to remain moderate over medium term

 

After registering a healthy ~15% CAGR during FY07 to FY12, domestic market growth slowed down to ~11% CAGR during FY12-FY17 on account ofpricing regulations from 2013-14 onwards. NLEM (2015) primarily impacted the growth for the fast growing chronic segment, as large number of cancerrelated drugs were included under price control. Going forward, CRISIL Research expects the growth to remain range-bound at 10-11% CAGR, asGovernment is likely to continue to keep a hold on pricing. Volume growth is expected to be healthy in both chronic as well acute segment with formersegment growing at a slightly faster pace. Further, increase in healthcare demand in the country as indicated by rising healthcare insurance and overallper capita health expenditure will continue to drive growth for domestic market

 

Growth in bulk drug segment to mimic the trend in formulation exports

 

During FY12 to FY17, bulk drug exports grew at 10% CAGR supported by the strong growth in the global generic market. However, going forward, thegrowth is expected to slow-down to 7-8% CAGR, as pricing pressure in the regulated markets will weigh on the players. However, players are lookingto increase their share of revenue from specialty segment due to lower competition faced in the segment. On the domestic front, growth is expected toslow-down by ~200 bps to 9% CAGR during the next five years, as pricing pressure due to addition of drugs under NLEM will impact the players.

 

Large formulators' profitability to see a steep dip in 2017-18

 

Due to accelerating price erosion and weak product pipeline in 2017-18, the operating margin for large formulation players is expected to drop by500-600 bps on-year in 2017-18. The margins for mid-sized players are also expected to drop by 300-400 bps on-year in 2017-18. However, themargins for large players are expected to revive by 200-300 bps on-year in 2018-19 due to FTF launches during the year. On the other hand, marginsfor mid-sized players is expected to revive by ~100 bps only due to lower high value launches.

 

Margins for bulk drug players are likely to drop at a much slower pace (as compared to large players) of 200-300 bps on-year due to better productprofile for the players in regulated markets. However, the players will continue to face competition from Chinese players in other regions.