Pharma sector set for 8-10 per cent revenue growth this fiscal

The Indian pharmaceuticals sector will log a revenue growth of 8-10 per cent this fiscal, after ~10 per cent growth last year,  supported by healthy exports to regulated markets (1), recovery in exports to semi-regulated markets (1)  and steady domestic demand. 

The resultant improvement in operating leverage along with easing pricing pressure in the US generics market will improve operating margins by 70-80 basis points (bps) to ~22.5 per cent this fiscal. This will be on the back of an increase in margins by 100bps last fiscal. 

Continued strong annual cash generation and low financial leverage, will support ‘stable’ credit profiles of players even as companies continue to pursue acquisitions in targeted therapeutic areas. 

A CRISIL study of 190 drug makers, accounting for about half of the Rs 4.1 lakh crore market last fiscal, indicates as much. 

The pharmaceutical sector revenue pie is split almost equally between domestic sales and exports. Domestic formulation revenue comes equally from chronic and acute therapeutic segments. As for exports, formulations and bulk drugs contribute ~80 per cent and ~20 per cent, respectively. For formulations, 58 per cent of exports are to the regulated markets (2) and 42 per cent of exports is to the semi-regulated markets (3) 

Aniket Dani, Director, CRISIL Market Intelligence and Analytics says, “Formulation exports are expected to grow 12-14 per cent in rupee terms this fiscal. The regulated markets of the US and Europe will witness a growth of 13-15 per cent, driven by continued drug shortages, easing pricing pressures in the US generics market and the volume uptick expected from new product launches as well as players shifting focus towards niche molecules and speciality products. On the other hand, exports to semi-regulated markets will grow 8-10 per cent this fiscal, led by  improving forex reserves, strengthening of local currencies against the dollar, and easing the economic crisis in  select African and Latin American countries.” 

Domestic revenue is likely to see growth of 7-9 per cent this fiscal, primarily price-driven, with volume growth to be backed by new product launches. Price growth will be led by the non-NLEM (National List of Essential Medicines) portfolio (4), as price growth for the NLEM portfolio shall remain muted, due to minimal change in the Wholesale Price Index (WPI) last fiscal.  CRISIL expects the chronic segment to be the key revenue contributor amid increasing lifestyle-related diseases and continued emphasis on health awareness since the pandemic. 

Steady growth in revenues, healthy operating profits and a stable working capital cycle at ~50 days will keep cash flows strong. The financial risk profile of the CRISIL-rated players remains comfortable, with debt to earnings before interest,  tax, depreciation and amortisation ratio at 0.9 time and interest coverage at over 12 times in fiscal 2025. 

Aditya Jhaver, Director, CRISIL Ratings adds, “With strong cash flows and healthy balance sheets, players are increasingly focusing on inorganic growth opportunities in the API6 and the formulation space, to either diversify the product portfolios by acquiring the brands/businesses and/or to consolidate market share in the targeted therapeutic areas. While these acquisitions involve sizeable debt funding and a temporary  moderation in the financial risk profile, overall credit profile continues to drive comfort from the improvement  in the business risk profile, with immediate contribution accruing from acquired entities.”  

That said, looking ahead, sizeable debt-funded acquisitions and their integration will nevertheless remain monitorable. Other monitorables include any delays in resolving regulatory issues, pace of new product launches,  litigation costs arising from US anti-trust suits, unfavourable price movements of raw materials sourced and any potential domestic price caps. 

1. Regulated markets include the US, Europe, Canada, while semi-regulated markets include Asia, Africa, Latin America.
2. Mainly US; ~37 per cent and Europe; ~17 per cent 
3. Mainly Africa; ~18 per cent and Asia; ~16 per cent 
4. NLEM are price-regulated medicines wherein revision in prices in current fiscal is linked to the change in the WPI during the  preceding fiscal. These form 18-20 per cent of the domestic formulations market.