The report states that operating profitability for about 350 pharmaceutical companies classified by CRISIL, accounting for 70 per cent of the sector's revenue, will reduce by 100-150 bps but remain healthy at 19 per cent despite higher input prices for drug production. Strong balance sheets will continue to sustain the credit profiles of pharmaceutical companies. Interestingly, export pie is divided into controlled markets such as the US and Europe (45%), the rest of the world (35%) and bulk drugs (20%). Export growth is expected to remain high at 10 and above in each of the current fiscal segments. 

 

Growth in controlled markets will be driven by a steady rise in new product launches from compliant plants, which will minimise price pressure on existing generics, and noticeable easing under review by the United States Food and Drug Administration (US FDA) in recent months.

 

“India accounted for almost half of the abbreviated new drug application approvals issued by the US FDA since fiscal 2019. This strong pipeline, coupled with lower import warnings and warning letters in recent months, should ensure a steady pace of new launches that will help maintain export momentum to controlled markets, "said Isha Chaudhary, Director, CRISIL Research.

 

At the same time, exports to ROW markets are also projected to recover to 10 % compared to 7% of this fiscal year, which will be driven by opportunities in underperforming generic markets such as Africa and Latin America. Also, bulk drug exports are expected to benefit from moves worldwide to reduce dependence on China.

 

Experts at CRISIL on a query from THE WEEK on the increase in raw material prices by China and that impacting Indian pharma players said that although there has been an increase in raw material prices from China, pharma players are able to pass on the rise in prices. Likewise, diversification of China's supply chain and dual sourcing strategy (China plus India) have opened up new opportunities for players, boosting revenue and margin growth. Some major drug players have also diverted their capacities and capital to more lucrative goods. The export demand for both formulation and bulk drugs is high as a result of COVID-19. The PLI (Performance-linked Incentive) scheme, recently announced by the government to improve domestic bulk drug production, aims to reduce import dependence. This will, however, only come to fruition in the medium to long term. 

 

"Higher exports should compensate for some of the reduction in domestic formulation sales due to pandemic disruptions, especially in the acute therapy segment. At the same time , lower hospital footprints and less field visits by doctors have impacted prescription-based sales of acute treatments, as can be seen from steep moderation in the first quarter of sales of anti-infective and gastro-intestinal medicines. On the other hand, a steady demand for chronic therapies pertaining to lifestyle diseases should help keep domestic formulation sales growth at around 5 to 6 per cent,” said Tanvi Shah, Associate Director, CRISIL Ratings. 

 

Despite the slight moderation in market efficiency, credit profiles of domestic companies are expected to remain relatively stable, benefiting from sound balance sheets and liquidity. Equity infusions from private equity firms have also tended to boost credit metrics in recent years. Experts at CRISIL expect an increase in capital and investment on research and development, as well as an efficient management of working capital, to allow Indian pharmaceutical companies to manage the transition through today's challenging times.