Exploring synergies and de-risking strategies

A recent report that Spain may invest in India’s bulk drug parks is good news for both countries. The 12th Session of India-Spain Joint Commission for Economic Cooperation (JCEC) held on April 13 in New Delhi saw both governments agree to strengthen their collaboration in several key sectors, including pharma.

The two countries are natural allies in the pharma segment, as they seek to diversify their supply chains for APIs and bulk drugs. As Spain gets set to assume Spanish Presidency of the EU, from July to December 2023, one hopes that both governments can negotiate and finalise the terms of the collaboration, as bulk drug parks are critical to India’s hopes of retaining its reputation as the pharmacy of the world.

There is no doubt that retaining the pharmacy of the world title will only become tougher, as many countries hustle for the same claim to fame.

For instance, even as pharma companies continue the long-term process of reducing dependence on outside sources for key input materials, revenues from the US generics market remain subdued. This has forced Indian pharma companies to hedge their bets and focus on RoW markets. Luckily, the India domestic market has some sweet spots. A review of analyst reports on the Q4FY23 and FY23 results show some interesting trends.

For instance, an ICICI Securities report predicts that while there may be some near-term green shoots in the US generics market, the macro outlook remains the same. Not surprisingly, the report predicts that pharma companies with specialised R&D skillsets will likely be able to tide over the transformation better.

Giving some relief, India branded formulations segments seem better placed, with growth predicted to pick up from Q2FY24. The ICICI Securities report points out how strong brand recall, an asset-light business model and low R&D investments ensure best-in-class EBITDA margins. Companies operating in India are therefore well positioned to benefit by virtue of their lean balance sheet with steady cash flow.

Cutting down on R&D investments is not an ideal strategy for the long term, but it’s understandable that faced with tough choices, pharma companies are doing their best to balance short-term liquidity with long-term R&D investments.

The good news is that while the profitability of the India business was temporarily disrupted due to mandated price cuts on NLEM products and raw material inflation, from April 2023, pharma companies may start taking ~12 per cent price hike on products under price control and up to 10 per cent on the rest, thereby improving their margins. Better diagnosis and access to quality healthcare services are likely to boost volumes in India in the near term. The ICICI Securities report expects an 11 per cent CAGR over FY23E-FY25E in India formulations.

A second report from CRISIL Ratings offers more perspectives. Predicting some growth in the US generics market, Anuj Sethi, Senior Director, CRISIL Ratings reasons that increased inspections by USFDA after the pandemic and higher withdrawals of abbreviated new drug applications (ANDAs) due to intense competition are leading to moderation in the overall supply of existing drugs. Consequently, the double-digit price erosion witnessed in the US generics market during the past couple of years should stabilise at high single-digits this fiscal. To also increase exports, large pharma companies are developing higher-margin complex/specialty drugs and introducing new generics which have only recently gone off patent and where competition is moderate. Thus, he predicts US formulation exports may grow 6-8 per cent this fiscal after an extended period of underperformance.

Pharma companies are deploying various strategies to balance out the loss of revenues from the US generics market. Firstly, a focus on RoW markets. CRISIL Ratings expects domestic pharma companies should be able to register 8-10 per cent growth in revenues from RoW markets, this fiscal.

Secondly, pharma companies are increasingly venturing into tender-based, institutional sales and enhancing marketing channels across the globe.

Thirdly, domestic pharma companies are also expanding into new semi-regulated geographies, with a focus on increased market penetration and faster new product launches given less stringent regulatory requirements.

However, CRISIL Ratings analysts predict that domestic companies may not be aggressive in driving growth in select markets such as Latin America, due to high currency volatility and geopolitical risks.

Thus the de-risking of supply chains and revenue models will continue, as pharma companies look for breakthrough deals to explore synergies. For example, JB Pharma, now controlled by private equity firm KKR, is aggressive about brand acquisitions as a key pillar of its growth strategy. (Read more in the story, Betting big on India in the June edition of Express Pharma). Spain’s interest in collaborating with India’s bulk drug plan, should it fructify, is a huge vote of confidence in India’s pharma prowess and talent pool. Let’s hope the industry, and our policymakers, can capitalise on this opportunity.