Evolving regulatory landscape across markets poses new set of challenges for generic players: ICRA
In ICRA’s view the near-term for the Indian pharmaceutical sector continues to be principally supported patent expiration wave in the US, strong product pipeline of Indian companies and favourable foreign exchange environment.
According to ICRA, the growth in the Indian market is likely to remain muted due to a) inventory cuts by trade channels, b) impact of new pricing policy (ICRA expects an average price cut of 17-20 per cent for drugs under NLEM), c) tighter new product approval norms.
Although the exposure of Indian pharma companies on European markets is not substantially high, the ongoing challenges and cautious approach being followed by companies could impact growth prospects.
As far as emerging markets are concerned, while the long-term growth prospects remain intact, certain regulatory developments in some of the markets have hindered the growth momentum for a few quarters. Notably, the delays in product approvals and pricing pressure in Brazil and efforts to encourage domestic companies in Russia are some of the key challenges that Indian pharma companies face at present.
Overall, the performance of individual companies would continue to vary depending on the quality of product pipeline in regulated markets, especially the US, geographic diversification, and in-organic investment driven strategies. Companies with growing portfolio comprising of niche or complex products in regulated markets and strong and established brands in branded generic markets are likely to be better positioned to manage industry challenges.
The Indian pharma industry has begun fiscal 2013-14 with a relatively stable operating performance even though headwinds have been building up in the domestic as well as emerging markets. Despite slowdown in India and evolving regulatory developments across many of the emerging markets, ICRA’s coverage group comprising of 22 leading pharma companies reported a steady growth of 11.6 per cent in revenues and stable Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margins in the 23.5-25 per cent range during the Q1 2013-14. Much of the growth was supported by strong US generic business where Indian pharma continues to leverage on limited competition launches, scale-up in product portfolio and market share gains. The growth trajectory has however started showings signs of sluggishness in emerging markets as frequently evolving regulatory developments is impacting the pace of new product approvals, drug pricing and competitive landscape.
Even as the growth momentum mellowed down to some extent, companies within the coverage group continued to exhibit stable EBITDA margins reflecting favourable impact of better product mix, rupee depreciation and operating leverage benefits. Margin pressures were limited to a few companies and were largely restricted to entities with either strong dependence on the domestic market (especially MNCs) or higher overheads (on account of rising R&D expenditure, manpower costs etc.). For some companies, delays in new product approvals, especially in the US or high-base effect of the previous year also led to lower EBITDA margins (18.5-20 per cent) on a Y-o-Y margins.
The currency movement has been favourable for Indian pharma companies since the beginning of 2012-13 with average $-INR rate being in the 54-55 range in each of the four quarters and higher levels during the current years. Apart from strong contribution from new product introductions, rupee depreication has contributed towards stronger growth from the US market for many of the players. However, a part of the upside from weak INR has been neutralised by MTM losses on restatement of foreign currency denominated borrowings and higher interest outgo on such borrowings, besides higher landed cost on input materials. Overall, we expect the foreign exchange environment is likely to be positive for companies that do not have significant dollar denominated liabilities in their balance sheets or limited revenue hedges. However, companies with significant forex borrowings or derivative contracts (not covered adequately by export receivables) could see sharp increase in MTM losses in the near-term. We analysed 45 pharma companies with aggregate debt of Rs 173 billion to judge the extent of their exposure to forex risk. Around 46 per cent of the debt of these entities was denominated in foreign currency and ~56 per cent was unhedged. As per our analysis, for every Re one depreciation, the PBT could decline by ~1.0 per cent excluding the impact natural hedge.
ICRA believes that the near-term for the Indian pharma continues to be principally supported patent expiration wave in the US, strong product pipeline of Indian companies and favourable foreign exchange environment. Growth in the Indian market is likely to remain muted due to a) inventory cuts by trade channels, b) impact of new pricing policy (ICRA expects an average price cut of 17-20 per cent for drugs under NLEM), and c) tighter new product approval norms. Although the exposure of Indian pharma companies on European markets is not substantially high, the ongoing challenges and cautious approach being followed by companies could impact growth prospects. As far as emerging markets are concerned, while the long-term growth prospects remain intact, certain regulatory developments in some of the markets have hindered the growth momentum for a few quarters. Notably, the delays in product approvals and pricing pressure in Brazil and efforts to encourage domestic companies in Russia are some of the key challenges that Indian pharma companies face at present. Overall, the performance of individual companies would continue to vary depending on the quality of product pipeline in regulated markets especially the US, geographic diversification, and in-organic investment driven strategies. Companies with growing portfolio comprising of niche or complex products in regulated markets and strong and established brands in branded generic markets are likely to be better positioned to manage industry challenges.
Over the years, Indian pharma companies have developed capabilties to target complex segments like injectables, inhalers, ophthalmics and even biosimilars. Given the increasing focus on these segments, pharma companies have been investing a higher proportion (I.e. 6.5-8 per cent) of their sales in R&D activities over the past few years and have guided to spend even higher amounts as they continue to broaden their product portfolio of complex compounds.
ICRA expects in-organic investments to also gain momentum in the medium-term as companies plan to create stronger presence in emerging markets and build expertise in select therapy areas. In particular, fast-growing branded generics markets in South-East Asia, Latin America and even some of the markets in East Europe will be of interest to Indian companies. Besides, market-entry driven acquisitions, it also expect investments to add technical capabilies in selected therapy areas or delivery systems to also continue going forward in view of increasing focus on complex generics.
The following report also focuses on certain recent regulatory developments that could potentially have important long-term implications on Indian pharma companies. Among the developments covered, the report begins with a discussion on the impact of recently implemented drug pricing policy on the profitability of distributors and retail pharmacy stores in India. It further goes on to illustrate the challenges being faced by MNC pharma companies in protecting IPR on their key drugs in India and what impact it may have on their investments plans. The second section of the report focuses on some of the key developments that have taken place in regulated markets of US and Europe and specifically discuss issues related to a) patent settlements between branded and generic companies, b) US FDA’s move to allow generic companies to change safety labels and c) new norms for APIs imports into the EU. That apart, the Indian pharma companies with presence in regulated markets are also facing an increased level of scrutiny by the regulatory agencies due to compliances issues in the past. Off late, some of the leading companies have faced stringent regulatory bans due to non-adherence to standard manufacturing practices. Such developments can have a significant impact on a company’s performance as it not only affects current business but also future product approvals.
Given the intensity of lapses, it can also result in potentially large penalties going forward. Companies with high dependence on few manufacturing facilities may be at a higher risk as scope for site changes could be restricted. In our view, companies are likely to follow a policy of dual registrations for some of their key product filings in order to minimise the potential risk of regulatory bans. While the cost involved in filings product dossiers/ANDAs from dual locations may not be significant but it will require duplication of resources such as R&D infrastructure, manpower etc. Overall ICRA believes, as pharma companies face greater regulatory scrutiny, they are likely give higher attention and invest in resources for adopting stringent manufacturing standards and compliance to good manufacturing practices.
Overall, these actions are likely to demand greater focus by generic companies in managing regulatory compliance, which would add pressures to the cost structures. In our view, some of the bigger companies with strong expertise in managing regulatory and legal issues and solid balance sheets will be better positioned to withstand these challenges. Alternatively, smaller companies may find it difficult to compete owing to limited resources for grappling with such developments. These trends along with higher spending by generic companies on R&D (given the increasing focus on complex generics) and regulatory compliances are likely to put pressure on margins of generic players.
EP News Bureau – Mumbai
