Revenue growth of the Indian pharmaceutical sector will moderate to 9% this fiscal, compared with a healthy 12.5% in the last, owing to slower growth in exports, notwithstanding some support from Covid-19 vaccine opportunities and a pick-up in demand in the domestic formulations market.

Operating profitability will shrink, too, by as much as 300 basis points this fiscal, due to a sharp increase in input and other costs. Well-managed balance sheets and prudent capital spends will, however, help keep credit quality ‘stable’.

A CRISIL study of 207 pharmaceutical companies that account for 55% of the Rs 3.2 lakh crore-a-year sector revenue indicates as much.

To be sure, the sector is well-diversified, with exports and domestic formulations accounting for almost equal share of revenue. Exports comprise formulation sales — to regulated markets such as the US and Europe (~45% of exports), rest of the world (~36% of exports) — and exports of bulk drugs (~19% of exports).

Exports have been sluggish because of intense competition among generic players amid intensifying pricing pressure in the US market and lower visibility of new product launches due to delay in closure of regulatory actions on manufacturing plants by the US Food and Drug Administration (US FDA). Consequently, despite some support from Covid-19 vaccine shipments, overall growth in exports is expected to moderate to 5-6% this fiscal. This is in stark contrast to last fiscal, when exports had logged healthy growth of 23-25%, led by sale of Covid-19 related drugs and vaccines in regulated and semi-regulated markets.

On the other hand, domestic demand is witnessing a steady recovery after a tepid performance last fiscal.

Says Isha Chaudhary, Director, CRISIL Research, “With normalcy returning to healthcare delivery services, domestic formulations revenue, led by acute therapies, is estimated to grow 14-16% this fiscal, compared with 2% last fiscal. Further, with ramped-up capacities and improving pace of vaccination, Covid-19 vaccines also provide additional domestic growth potential this fiscal.”

Operating profitability for players, meanwhile, is expected to come down by 300 bps to ~20% this fiscal due to a sharp increase in prices of key starting ingredients and active pharmaceutical ingredients imported from China, along with higher freight costs, and marketing and travelling costs. Additionally, continued pricing pressure in the US and price cap for products under the Drug Price Control Order in the domestic market will limit the players’ ability to pass on the rise in input prices.

Operating profitability had reached a record high of 23% last fiscal due to cost-control initiatives and lower selling and marketing costs because of the pandemic-induced travel restrictions.

Says Tanvi Shah, Associate Director, CRISIL Ratings, “Despite the moderation in operating profitability, credit profiles of players rated by CRISIL Ratings would remain largely stable, benefitting from healthy balance sheets and solid liquidity. Capital spending is likely to remain moderate due to sufficient capacity, while R&D spends will also remain stable. Debt levels are expected to increase due to higher working capital cycles, as exporters will have to contend with higher receivables and extended inventory cycles amid supply-chain logjams. Despite this, debt protection metrics will stay healthy, with the ratio of debt/earnings before interest, tax, depreciation and amortisation rising to 1.3 times from just under 1 time last fiscal.”

Any unanticipated litigation costs in ongoing US anti-trust suits, adverse regulatory developments such as increased US FDA scrutiny, further delay in the closure of pending regulatory issues — thereby impacting launch of new products — and further price caps on products in the domestic market will be the key monitorables.