Factors that are Leading to Moderation in Indian Pharmaceutical Industry Export Growth Rate
Vidhayasagar L
Associate Director - Corporate Ratings
CARE Ratings Ltd

D Naveen Kumar
Senior Manager - Corporate Ratings
CARE Ratings Ltd

The growth in the domestic pharma market although is expected moderate as compared to past, the sales are expected to improve primarily due to an increase in the penetration of health insurance, improving access to healthcare facilities, rising prevalence of chronic diseases and rising per capita income. The growth rate of Indian Pharmaceutical exports which contributed substantially to margins are expected to taper going forward, the reflection of the same is reported during FY17 and 9MFY18. The factors that are contributing for moderation of such growth are delineated in the article

The Indian pharmaceutical industry(IPI) holds a strong position in terms of production volumes in the global pharma market as the country contributes around 10 percent of the world production volumes and share of about 3 percent of value globally. As per CARE Ratings, IPI has registered revenue of around USD 36 billion in FY17. As per estimates, the industry size is expected to grow at a CAGR of 10 per cent from USD 36 billion in 2017 to USD 48 billion by 2020 given the huge export potential coupled with steady growth in the domestic formulation market.

The Indian pharmaceutical industry is largely dominated by generics drugs as the industry earns around 70 percent of its revenues from the same. This can also be implied from the fact that India holds 13th position in terms of production value in spite of holding third position in terms of production volume globally. Lower cost of production coupled by efficient scientific and technical skills of human resources are the prime reasons for growth in exports from India. The growth in the domestic pharma market although is expected moderate as compared to past, the sales are expected to improve primarily due to an increase in the penetration of health insurance, improving access to healthcare facilities, rising prevalence of chronic diseases and rising per capita income. The growth rate of Indian Pharmaceutical exports which contributed substantially to margins are expected to taper going forward, the reflection of the same is reported during FY17 and 9MFY18.

Following are the factors which are impacting the growth trajectory of Indian pharmaceutical industry exports;
1) Reasons for moderation of export sales

Out of the total exports by Indian pharmaceutical companies, sales to USA were about one third in FY2016-17 (refers to the period April 1, 2016 to March 31, 2017). USA also provides significant opportunities for generic players across the globe. However, during last decade, the industry has undergone transition resulting in pressure on the profitability margins of the companies for whom exposure to US market is substantial. In this article , CARE Ratings has identified four primary contributors for the decline in margins, viz, (i) consolidation of pharmaceutical distributors in the USA, (ii)mergers among major drug players, (iii)significant increase in Abbreviated New Drug Application (ANDA) approvals and (iv)heightened scrutiny by US Food and Drug Administration (USFDA).

2) Consolidation of pharmaceutical distributors in USA

About a decade ago, USA had several pharmaceutical distributors with more than 10 distributors contributing to about 80 percent of the USA’s generic market. Nevertheless, the last decade has seen a seamless transition which led to consolidation of the distributors and during CY2016 (refers to the period January 01 to December 31), the top four pharmaceutical distributors contributed about 80 percent of the USA's generic market share.

The prime intention and driving factor for consolidation of the pharmaceutical distributors is to draw the pricing efficiency from the generic players and extract benefits of economies of scale. The expected benefits derived due to consolidation of the distributors would lead to the savings of anywhere between USD 100 mn and USD 1 bn. While the aforesaid synergies benefit US pharmaceutical industry, the actual adverse impact would be exerted on generic companies which in turn lead to pricing pressure and thus affecting the EBIDTA margins of Indian pharmaceutical companies. The bigger generic players are likely to sustain the impact to some extent due to larger scale of operations and diversification into other geographies. However, its impact on the smaller generic players would be felt more acutely. CARE Ratings expects the Indian pharmaceutical companies to witness decline in margins on account of this consolidation deals from FY18 onwards, although simmering of the same has begun since FY17.

3) Merger among major global drug players

In order to report robust growth rates, the key strategies deployed by the pharmaceutical companies are penetrating marketing network, strong brand recall, wide therapeutic coverage and good number of new products in pipe line which require substantial investments in R & D.

Consolidation of the global players has led to broadening the therapeutic segments which reduced the risk for these players as they would be capitalising on their existing strengths while netting off their mutual drawbacks. The need to strengthen the the marketing and distribution network also played vital role in consolidation which has led to deeper penetration of the combined entity products thus improving the generated revenue. Consolidation promulgates larger revenue base which helps to support the large R & D budgets required to be spent on developing strong product pipeline.

Furthermore, the combined entity will be deriving benefits from mutual skilled and experienced human resources along with optimum utilization of the R & D infrastructure to explore on developing innovative durgs for various theraeputic segments. All the above factors culminate in improved economies of scale and efficient utilization of resources while maintaining its operational profit margins amidst competition. Thus the strenghening of India's counterparts in their home land would inadvertently impact the growth prospects of domestic firms.

4) Increasing trend of ANDA approvals leading to deflationary trend in generic drug prices in US

Change in perceptible dynamics of approval process by USFDSA during last five years has boosted competition leading to pricing pressure in the US market in the medium term, especially on plain vanilla products. USA contributes about 33 percent of India's pharma exports and in this context the pace of granting ANDA approvals by USFDA plays vital role. It is observed that US, which is the major contributor of the generic market has increased its pace of ANDA approvals. The same is expected to improve with effective implementation of Generic Drug User Fee Amendments II (GDUFA). The total number of ANDA approvals granted by USFDA during CY2017 as compared to CY2014 has increased by 120 percent.

Further with implementation of GDUFA, the number of ANDA approvals for Indian pharma companies has increased from 201 in CY2016 to 304 in CY2017 and in terms of contribution it has increased from 34 to 36 percent during the said period and same has increased to 46 percent during Q1CY2018. The aforesaid demonstrated growth would have adverse bearing on the pricing of generic drug manufactures thus affecting Indian Pharma players growth rate .

5)Heightened scrutiny by USFDA regulatory authority

The issuance of the import alerts and warning letters for domestic manufacturing facilities have increased significantly over the past years following USFDA's increasing focus on compliance of guidelines of cGMP. This restricts the manufacturing units to supply drugs to the US market from that facility resulting in the decline of revenue for the companies particularly to US market and also from other markets subsequently if the issues are not closed out. In turn, the companies, in order to cover their fixed and operational expenses, sell their products in unregulated markets, rest of world markets and domestic markets to book revenue for the year where the competition is fierce and profit margins are unattractive.

As inferred from the above table, the total number of warning letters issued to Indian pharmaceutical companies has increased from 11 during CY2016 to 14 during CY2017.In the current environment of pricing pressures faced by the companies on account of increasing competition, developments like these are likely to hamper the profitability margins of the pharmaceutical companies.