Growth of Indian pharma industry to be driven by domestic and emerging markets in the next few quarters
The revenue growth for ICRA’s sample of 21 Indian pharmaceutical companies was moderate at 6.4 per cent in Q2 FY2022, down from 16 per cent in Q1 FY2022. The normalisation of the base and pricing pressures in the US market were the major reasons for slowing growth momentum in Q2 FY2022, even as growth under domestic and emerging markets remained healthy. The sample-set reported a 15.3 per cent Y-o-Y growth in domestic revenues, against a ~14.6 per cent Y-o-Y growth for the IPM.
A combination of steady normalisation in hospital footfalls and field force operations (given the relatively lower restrictions on account of COVID-19), continued traction in acute therapies and better pricing supported healthy revenue growth across companies. Going forward, sustenance of trends in doctor visits and elective surgeries gave the news around the Omicron variant, and performance of new launches in addition to revenue growth momentum in the acute segment will remain key monitorable.
As for the US market, the revenue growth for the sample set remained muted at 1.9 per cent during the second quarter owing to high single-digit to low teens price erosion and past inventory liquidation was given the Covid-related uncertainties. Companies are focusing on speciality products, injectables, complex generics including first-to-file opportunities to improve margins for the US business, which has been impacted by the pricing pressure. Going forward, an improved product mix is expected to contribute to price stabilisation. Overall, ICRA expects mid to high single-digit price erosion in FY2022.
The emerging markets were the star performer clocking a robust 30.6 per cent Y-o-Y growth in Q2 FY2022. Growth for the sample set was primarily led by new launches, low base, strong demand and INR depreciation. The companies in the sample set witnessed healthy Y-o-Y revenue growth of 12.3 per cent from the European business. This was mainly driven by improving demand for non-Covid products in addition to new product introductions, INR depreciation and expanding market coverage. This was despite heightened competitive intensity in some geographies.
The operating profit margins (OPM) for the sample set stood at 23.7 per cent in Q2 FY2022 and 24 per cent in H1 FY2022. Margins for the sample set showed marginal improvement in H1 FY2022 vis a vis H1 FY2021 due to the turnaround of operations of one player. Excluding the same, the margins remained flat on a Y-o-Y basis. With rising raw material prices and logistic costs, margins contracted by 50 bps to 23.7 per cent in Q2 FY2022. The full impact of input price hikes is expected to be seen in H2 FY2022 due to the lag effect.
Mythri Macherla, Assistant VP & Sector Head, ICRA, said, “Revenue growth for ICRA sample set is estimated at 9-11 per cent in FY2022 and FY2023, supported by gradual recovery post the impact of COVID-19. In FY2022, the sample set is estimated to have witnessed a growth of 13-15 per cent in the domestic market, 14-16 per cent in the emerging markets and 9-11 per cent in the European business even as growth under the US business is expected to remain muted given the pricing pressure. The growth for the US and European markets also remains sensitive to the depreciation of the INR against the USD/GBP/EUR.”
ICRA expects the R&D expenses to stabilise at current levels and remain in the range of 6.5 per cent-7.5 per cent of revenues for its sample set as companies continue to focus on complex generics, first to file opportunities, speciality products which entail higher R&D expenses. Stable investments in R&D to develop such products will support growth and margin improvement over the medium term.
“Going forward, ICRA expects the COVID-19 related improvement in margins to taper down. This combined with headwinds such as pricing pressures and rising raw material costs are expected to result in margins of the sample set contracting to 22.5 per cent in FY2022 and further to pre-covid levels of 21-22 per cent in FY2023, though the same will continue to remain healthy,” adds Deepak Jotwani, Assistant VP and Sector Head, ICRA.
The outlook for the pharma sector remains Stable led by healthy revenue growth and margins. ICRA expects the sample set’s capital structure and coverage indicators to remain comfortable despite higher capex and R&D expenses given the robust cash levels.
