INSUBCONTINENT EXCLUSIVE:
By Sriraam RathiIndian pharma companies have been going through a tough phase for the past couple of years due to significant competitive
intensity and pricing pressure in the US (the largest market) and regulatory hurdles in India in terms of demonetisation, GST implementation
We believe the pricing environment in the US has stabilised, as average price erosion has now come down to single digit from double digits
and Indian business should grow in double digits.
Among the key growth drivers to look at are:-
1.Complex generics and speciality portfolio
to provide growth impetusNext wave of patent expiry includes complex generics and speciality drugs, which are difficult to manufacture and
Companies have been ramping up capabilities as this shift of focus would be the key to future long-term sustainable growth
The specialty products involving innovation provides an exclusivity period for marketing and hence, offers very high profit margins.
The
innovation.
2.Pricing pressure in US market is plateauing, USFDA issues reducing with increasing compliance.US generics business witnessed
double digit price erosion in the base business post buyer consolidation in last two years
However, pricing environment is stabilising and revenue would start growing from hereon
Portfolio pruning by big pharma companies has reduced competition in legacy products, thereby easing competitive pressure.
Clearance in 483
observations and limited instances of warning letters or import alerts in CY18 indicate increased regulatory compliance by the companies,
hence potential for growth recovery
However, higher ANDA approvals by USFDA have reduced the opportunity size for generic products.
3.India formulations growth has started
improvingThe Indian pharma industry has adjusted to all disruptions (demon and GST) in the last two years and has reverted to a steady low
double-digit growth
The Government of India push to generic-generic adoption has not gained traction, Jan Aushadi stores have increased
significantly but it has not affected growth of branded formulations.
We expect industry to grow at 11-12 per cent in foreseeable future
driven by mix of strong volume growth and 3-4 per cent price increase
This would be key positive as domestic formulations offer sustainable high profit margins without any requirement of large
capex.
4.Healthcare would continue to grow in double digitsThe hospitals business has been growing in double digit and is more consistent
We expect this growth trend to continue considering increasing lifestyle diseases, higher penetration and rising health insurance
coverage.
The diagnostic industry growth rate has come down from earlier high double digit to mid-teens mainly due to severe price
The pace of competition has reduced, and we expect the industry to see 14-15 per cent growth going forward.
Challenges aheadHowever, there
are several risks the sector faces
Chief among them are unfavourable results of facility inspection by USFDA, delay in product approval by USFDA, more products added to NLEM
list and FDC ban in India.
Our Top picks in the sector are Aurobindo Pharma, Torrent Pharma and Dr Lal Pathlabs.
(Sriraam Rathi is a pharma
analyst with ICICI Securities
