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Minimal impact of Covid-19 on Indian pharma industry: ICRA

The domestic pharma industry is expected to grow at a 4-6 per cent in FY-2021 owing to Covid impact, though FY 2020-2023, CAGR is expected to be in the range of 8-11 per cent on the back of healthy demand from the domestic market given increasing spend on healthcare along with improving access, rating agency ICRA has said.

In its analysis of the pharma industry in India, the rating agency said that along with demand growth in India, moderation in pricing pressure for the US market, new launches and market share gains for existing products and consolidation benefits will drive growth for the industry over the medium term.

Several Indian pharma companies (Aurobindo, Dr. Reddy, Glenmark) have acquired US ANDA (abbreviated new drug application) portfolios which will aid growth going forward. The growth in FY-2021 is expected to be supported by a 1.88 per cent WPI linked price hike for the domestic NLEM (National List of Essential Medicines) portfolio.

The prospect for current year comes on the backdrop of the Indian pharmaceutical industry's stable growth of 8 per cent during FY-2020 led by rebound in domestic growth in Q2 FY-2020 to 14.2 per cent (Q1 FY-20 at 4.8 per cent) supported by seasonal factors and stable growth in chronic therapies.

Based on the trends, ICRA Vice President and Co-Head Gaurav Jain said, "The global demand scenario is largely expected to remain stable for Indian pharmaceutical industry owing to inelastic nature of prescription drugs though some impact on volume growth will be felt owing to lockdown (lesser OPDs/elective surgeries) and lower economic growth. The impact of lower demand will be felt more in less developed countries which are additionally negatively impacted owing to low crude oil prices."

As per ICRA research, post onset of Covid-19, manufacturing activity has gradually started in China with shipments/air cargo arriving in India for APIs, Intermediates and KSMs (Key Starting Materials). This has led to production continuation for Indian players though the capacity utilization across plants is yet to reach pre-Covid-19 levels.

The lower capacity utilization is largely contributed by restricted movement of personnel and availability of non-critical raw material (e.g. packaging material) during the lockdown period in India. Indian players hold 2-4 months of inventory (raw material & finished goods) and similar levels in the distribution channel (finished goods) which will largely suffice demand in the near term till the situation normalizes.

The outbreak of the Coronavirus in China and the consequent lockout in parts of China had earlier resulted in a shutdown of production units in China. The domestic pharmaceutical industry is highly dependent on imports, with more than 60 per cent of its active pharmaceutical ingredients (API) requirement being imported, and in some, specific APIs like cephalosporins, azithromycin and penicillin, the dependence is as high as 80-90 per cent. Of the total imports of APIs and intermediates into India, China accounts for 65-70 per cent.

The recent introduction of Rs 10,000 crore bulk drugs park and production linked incentives for API manufacturers by the Government of India will lead to reduced dependence for the domestic formulators on imports from China and augurs well in the long run to manage supply disruptions, the agency said.

The incentive scheme covers 53 APIs which are critical from import dependence on China with few API/KSM being entirely imported.

As for the growth and profitability, the same would however be constrained by regulatory interventions such as price controls, compulsory generalisation for the domestic market. For the US market, faster generic approvals and continued regulatory overhang with respect to manufacturing quality deficiencies highlighted during USFDA audits remains a key concern.

The pace of ANDA approvals has more than doubled over the FY 2014-2019 period leading to higher competitive intensity. The pace of official action post USFDA audit has also increased during the FY-2019 period with 16 warning letters compared to seven in FY-2018.

The margins have remained flat in FY-2020 at 20.3 per cent for ICRA samples of 14 leading companies led by cost cutting measures including R&D optimisation efforts by Indian Players. Though margins remain healthy, pricing pressures for the US base generics business (albeit moderating); lack of limited competition products and manufacturing quality issues will continue to put margin pressure. Higher share of domestic business and operational efficiencies will provide an overall cushion to margins.

Unlike in the past, when several Indian pharma companies ramped up their R&D spend, targeting pipeline of specialty drugs, niche molecules and complex therapies, this time around companies are optimising their R&D spend owing to above mentioned factors. Also, with competitive pressures expected to sustain in the near to medium term, companies are exiting product development of easy to manufacture, simple generics with multiple players and focusing on complex generics and specialty products.

According to ICRA, Indian companies are unlikely to significantly modify current spend on R&D development which will support their long-term growth prospects. With R&D optimization efforts underway to counter US pricing pressure, the aggregate R&D spend is expected to be maintained at current levels of 6.5-7.5 per cent compared to earlier 8-9 per cent for sample companies. This will be despite requirements arising from expanding presence in complex therapy segments such as injectables, inhalers, dermatology, controlled-release substances and even biosimilars..