Improved cash generation to keep domestic pharma in good health

Domestic pharmaceutical sector's outlook will remain stable on the back of an expected recovery in margins, improved cash generation and growth in the domestic market, said rating firm India Ratings and Research.

While investment requirements are expected to increase substantially, strong balance sheet and adequate liquidity will lend additional support to the outlook, said Karthikeyan Thangarajan, associate director, India Ratings and Research.

According to the rating agency, improvements in the pricing condition might sustain into the next fiscal amid major global pharma companies' exit from the select product segment in the US generic drug market. Most large Indian pharma companies have robust product pipelines which can support margin recovery.

Thangarajan in his report also said that the US generic drug market is undergoing a rapid transformation and Indian pharma companies, over the next decade, will need to possess different product capabilities to remain profitable.

Complex generics, such as injectables, long-acting drugs and other alternate dosage forms, will have relatively better margin profiles compared to traditional oral solids, which remains a mainstay for most Indian companies.

On the other hand, biosimilars, as a product category, gained approval momentum in 2018 and are likely to grow multifold in the medium term. Most large Indian pharma companies have a sizeable pipeline of complex generics and are gradually shifting focus towards specialty drugs.

“However, absence in the biosimilar space will remain a glaring gap in the product strategies of most Indian companies,” he said, adding that most large issuers are likely to aggressively deploy capital in FY2020 towards necessary investments in new product platforms to strengthen their market-readiness for the medium term.

Meanwhile, the domestic market can also maintain its current growth momentum in the next fiscal with chronic therapies emerging as strong drivers of growth. Taking into account the government's growing focus on providing greater access to quality healthcare, the pharma sector will continue to see regulatory interventions, especially in terms of price controls.

Prices of active pharmaceutical ingredients produced by China have also started to soften. However, the prices are likely to settle at higher-than-the-previous-average levels, Karthikeyan said.

To implement strict environmental regulations, according to India Ratings, most Chinese producers had to upgrade facilities, and in some cases, tweak production processes.

“This has permanently increased the production cost and cycle times, which will act as a floor for a price correction,” Karthikeyan further said.

However, most large home-grown pharmaceutical companies are pursuing meaningful cost-saving initiatives, including portfolio optimisation, divesting non-core manufacturing facilities and optimising research and development expenditure. This along with currency depreciation could largely offset the increase in input costs.

Karthikeyan in his report also said that while the sector is accustomed to acquisition-driven growth, most of the current investments are medium-term plays, wherein deriving synergy benefits could take three to five years from the deployment of capital.

“This could result in a more gradual deleveraging,” he added.