1. Healthcare

Indian Pharmaceuticals Industry
Operating performance continues to be stable
ICRA RESEARCH SERVICES
Corporate Ratings
ICRAGhosh
RATING FEATURE
Anjan Deb
+91 22 3047 0049
[email protected]
Subrata Ray
+91 22 3047 0050
[email protected]
What’s inside?
I.
Executive Summary
II.
Financial Performance of Indian Pharmaceutical Companies
Revenue Growth: Strong growth in U.S. market continues to drive performance of Indian Pharma companies
Profitability Indicators: U.S. business continues to shield earnings despite headwinds
III.
Geography-wise Growth Trends, Challenges and Outlook
IV.
Company-wise Update on
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ICRA Limited
Aurobindo Pharma Limited
Biocon Limited
Cadila Healthcare Limited
Cipla Limited
Dishman Pharmaceuticals & Chemicals Limited
Divi’s Laboratories Limited
Dr. Reddy’s Laboratories Limited
Glenmark Pharmaceuticals Limited
Indoco Remedies Limited
IPCA Laboratories Limited
Jubilant Life sciences Limited
Lupin Limited
Natco Pharma Limited
Ranbaxy Laboratories Limited
Strides Arcolab Limited
Sun Pharmaceuticals Industries Limited
Torrent Pharmaceuticals Limited
Unichem Laboratories Limited
Wockhardt Limited
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INDIAN PHARMACEUTICAL INDUSTRY
Operating performance continues to be stable
ICRA RESEARCH SERVICES
Industry Review January 2015
Executive Summary
Strong growth in the U.S. market continues to drive performance of Indian Pharma
ICRA RATING FEATURE
 The Indian pharmaceutical industry continued to sustain its strong growth momentum in the current fiscal on back of
increasing traction in the U.S. generic space and recovery in the domestic pharmaceutical market
 With most of the leading entities now generating a sizeable proportion of their revenues from international markets,
especially U.S., the adverse impact of weakening macro-economic environment along with currency depreciation in
some of the key emerging markets and evolving healthcare reforms in Europe didn’t have much impact on the
industry’s aggregate performance. Accordingly, aggregate revenues of 22 leading players in our sample grew by 15%
during the Q2 FY 2015 vis-à-vis the prior year. The aggregate profitability indicators (of our sample set) also remained
fairly stable being skewed by select entities which generate a fairly significant proportion of their earnings from U.S.
 Within our sample, while some of the companies witnessed improvement in EBITDA margins on back of limited
competition opportunities in the U.S. and pick-up in the relatively high margin domestic business, others saw
contraction on account of a) increasing competitive pressures in some of the segments in the U.S. generics space, b)
lack of approvals for some of the entities in the U.S and c) steadily rising R&D costs owing to increasing focus on
complex therapy areas. For some companies, margin contraction was also caused by regulatory disruptions and
associated remediation costs
 We believe that while some headwinds persists, the outlook on the profitability indicators continues to be stable on
back of sizeable generics opportunities in the US, increasing focus towards complex/niche therapy segments and
improved ability to take price hikes in the domestic market (in line with DPCO guidelines). As per industry estimates,
domestic pharma companies have taken an approximate price hike of 5-6% in H1 FY 2015.
United States: Generic opportunities continue to underpin growth
 The U.S. generics remained the key growth driver for leading pharma companies as patent expirations on high-value
drugs along with limited competition launches (i.e. FTFs, complex generics) and improving market share continued to
underpin growth. Accordingly, companies within our coverage group reported a growth of 24% in revenues from the
U.S. market vis-à-vis 33% in FY 2014.
 While on an aggregate basis, companies continued to gain traction in the U.S., pricing pressure on account of
consolidating supply chain and increasing competition did impact revenue growth of some entities. In addition,
companies also witnessed the impact of lower than expected ANDA approvals.
 The U.S. generic drug industry is also facing multiple challenges in form of increased scrutiny by US FDA,
consolidation of supply-chain and need for higher investments in R&D to tap complex segments. More recently, an
investigation into price hikes of 10 select generic drugs has also been initiated. While it is too premature to comment
on the likely, such developments can adversely impact earnings of companies.
ICRA Limited
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Executive Summary
 Nonetheless, we believe Indian companies would continue to experience strong growth in the U.S. on back a) sizeable
generic opportunity (drugs with brand value of US$ 25-30 billion are expected to face generic competition) over the
next 2-3 years and b) strong product pipeline of pending ANDAs with high increasing proportion of complex generics
that compares favorably with generic majors such as Teva, Mylan and Actavis.
India: Growth momentum recovers on back of price hikes, low-base and overall pick-up in demand
 After experiencing moderation in the growth momentum in FY 2014 on back of price cuts and trade related
disruptions, the growth in the domestic pharmaceutical industry has bounced back with the industry registering a
growth of 9.9% on MAT basis (as on November 2014). Much of this recovery has been led by price hikes implemented
by companies (in line with change in WPI) in their NLEM portfolio, stabilization of supply related issues, and low-base
effect of the previous year (due to supply related disruptions). In addition, the lifestyle oriented therapy segments
have continued to grow steadily, which along with increased focus by companies towards introducing new products
and enhancing field force productivity has also contributed to industry growth
 The domestic formulations business of companies within our sample set also registered a growth of 15.8% in Q1 FY
2015 and 15.5% in Q2 FY 2015 in comparison to 11.8% in FY 2014.
 With steady demand being witnessed across therapy segments and price hikes taken by companies recently in line
DPCO guidelines, we expect growth momentum to sustain in the near-to-medium term.
 Although National Pharmaceutical Pricing Authority (NPPA) has recently included further drugs under price control but
overall the possibility of additional therapy segments coming under price control has reduced after it withdrew its
guidelines that enabled it to cap prices of drugs outside the NLEM portfolio. Given this development, the regulatory
risk that began to overwhelm the industry is likely to ease going forward.
Emerging markets: Weakening macro environment in select markets remains a near-term challenge
 While growth prospects remain unquestioned in most of the emerging markets, the operating environment has turned
relatively less benign over the past couple of years. This can be attributed to a confluence of factors including
frequently evolving regulatory landscape, increasing competition (from both local as well foreign players) and more
recently weakening macro environment across some of the oil dependent economies.
 Accordingly, the growth in the emerging markets portfolio (for our sample) slowed down from 24% in FY 2013 to 16%
in FY 2014 and further to 6% in H1 FY 2015. This trend is likely to become more visible in Q3 FY 2015 as Russian Ruble
has depreciated quite sharply over the past few months.
 To some extent by Ranbaxy’s weaker performance (due to API manufacturing issues and lower tender business), the
impact of delays in product approvals in Brazil and challenges in the CIS region also contributed to the slow down. The
performance of individual companies however continueds to vary, influenced largely by market and portfolio
strategies.
ICRA Limited
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Executive Summary
 We believe acquisitions remain the key route for Indian companies to scale-up presence in EMs as organic route has
proven to be fairly time consuming. We expect companies to remain fairly active in the M&A space and look for inorganic route to fill gaps in their portfolio.
Europe: Growth opportunities marred by pricing pressure and changing market dynamics
 The operating environment in Europe also remained challenging as ongoing healthcare reforms and resultant prices
cuts continued to impact performance of drug manufacturers. In H1 FY 2015, the revenues of Indian companies from
European markets grew by a modest 2.7% in INR terms. Within our sample, while companies with relatively low base
(Lupin and Glenmark) reported strong growth in revenues on back of their new product launches, expanding market
coverage, established players (Dr. Reddy’s and Ranbaxy) continued to alter their business plans to focus on profitable
segments.
 To some extent the impact of political instability and weakening macro-economic environment in East Europe also
contributed to the slowdown. Given the challenging environment in Europe, companies have been altering their
business plans with focus shifting in favor of segments or markets that offer higher profitability, making their
operations leaner and even exiting certain segments.
 Some of the companies have also been looking at expanding their branded generic business and entering into
relatively niche/complex segments. Overall, Indian companies have a relatively small scale of operations in Europe
with the continent’s contribution ranging between 5-27% in FY 2014.
Increasing focus on complex generics & biosimilars to necessitate higher investments in R&D
 Over the past few years, pharma companies have increased their R&D budgets significantly in view of their growing
focus both on regulated markets and complex molecules/therapy segments. In FY 2014, most of the leading pharma
players spent anywhere between Rs. 5-12 billion on R&D, which represented an increase both in absolute term as well
as in proportion to net revenues (8-11% of sales).
 We expect this trend to continue as most of the leading companies are in the midst of expanding presence in complex
therapy segment such as injectables, inhalers, dermatology, controlled-release substances and even biosimilars. Many
of these segments entail higher R&D costs during the development stage owing to product complexities and need for
clinical trials.
 While R&D spending would continue to vary across companies, we expect significant rise in R&D budgets, especially
for companies that are developing biosimilars (for regulated markets) or have portfolio of NCEs under development.
As these entities get closer to conducting clinical trials, they are likely to pursue JVs/Alliances with the objective to
share investments and securing technological capabilities.
ICRA Limited
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