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Persisting cost inflation and pricing pressures impact pharma industry: ICRA

Mumbai: ICRA’s sample set of 16 Indian pharmaceutical companies registered revenue growth of 4.9 per cent YoY in Q1 FY 2023. This was supported by 4.2 per cent growth in the US market and 10.2 per cent in the emerging markets, even as revenues from the domestic and European markets contracted, given the high base of the previous year. The revenue growth rate in Q2 FY2023 is estimated to be largely in line with that of the previous quarter.

ICRA took a sample set of revenue growth of 16 Indian pharma companies — Wockhardt Pharma, Torrent Pharma, Pfizer, Abbott, Cipla, Indoco Remedies, Natco Pharma, Unitech Laboratories, Zydus Lifesciences, Lupin, sun Pharma, Dr Reddy’s, Glenmark Pharma, Aurobindo Pharma, Jubilant Pharmanova and Biocon.

The rating agency has maintained its growth estimates for its sample set at 6-7 per cent to Rs 2 lakh crore in FY 2023, marginally lower than the growth of 7.7 per cent in FY 2022. The sample set revenue growth will be supported by 6-8 per cent YoY growth in the domestic market, 4-6 per cent in the European business, and 11-13 per cent in the emerging markets, even as growth in the US business is expected to be muted at 1-3 per cent.

The operating profit margin (OPM) for the sample set stood at 19.9 per cent in Q1 FY 2023, against 23.5 per cent in Q1 FY 2022 and 18.3 per cent in Q4 FY 2022. The OPM improved on a QoQ basis, supported by favourable currency movement (USD-INR) and the easing of raw material prices to a certain extent. However, the OPM is expected to contract by 120-150 bps in FY 2023 as the industry continues to grapple with cost inflation and pricing pressures.

In Q1 FY 2023, revenues from the European business for the ICRA sample set witnessed a YoY contraction of 1.2 per cent due to pricing pressures, base effect, and higher channel inventory, in addition to unfavourable foreign exchange movement.

Highlighting on the headwinds in the European market, Deepak Jotwani, Assistant Vice President and Sector Head, ICRA, said, “While no material demand contraction has been witnessed thus far, the industry remains cautious, given the inflationary pressures and an uncertain macro-economic environment in the European market. The ongoing inflationary pressures in Europe are expected to impact the cost of imports of key starting materials (KSMs)/ active pharmaceutical ingredients (APIs), including excipients, especially for acute therapies. Further, the rising energy cost is likely to have an adverse impact on Indian pharmaceutical companies with manufacturing operations in Europe. Going forward, market conditions in Europe are expected to remain challenging even as the same are expected to be mitigated selectively to a certain extent by expansion in product offerings, market share gains in existing products, and entry into new geographies in Europe.”

As for the US market, the sample set reported a 4.2 per cent YoY growth in revenues in Q1 FY 2023 against 1.2 per cent YoY growth in Q4 FY 2022. The revenue growth was supported by the depreciation of the INR against the USD and new product introductions. ICRA expects mid to high single-digit price erosion to continue to exert pressure over the near term, resulting in muted revenue growth for the Indian pharmaceutical companies from the US generics market in FY 2023.

For the domestic market, ICRA’s sample set witnessed a YoY decline of 4.2 per cent in revenues in Q1 FY 2023 on a YoY basis, against 2.8 per cent YoY growth for the IPM. The divergent trend stems from the large base of Q1 FY 2022, wherein ICRA’s sample set witnessed a YoY growth of 46.9 per cent, while the YoY growth for IPM stood at 37.8 per cent during the same period. The WPI-linked price hike for NLEM products sustained healthy volumes across both chronic and acute segments. New product introductions and annual price hikes for non-NLEM products are expected to support the revenue growth for ICRA’s sample set in FY 2023.

Commenting on the recent pick-up in inspections by the United States Food & Drug Administration (USFDA), Mythri Macherla, Assistant Vice President & Sector Head, ICRA, said, “With the USFDA re-commencing physical inspections of manufacturing facilities and some companies receiving form 483s and warning letters, regulatory risks remain a key monitorable. Any adverse outcome in the form of warning letters or import alerts for key facilities could impact the companies’ business prospects.”

The emerging markets continued to witness steady YoY growth of 10.2 per cent in Q1 FY 2023, although revenues for the sample set were flat on a QoQ basis. The growth was driven by new product launches, low base, strong demand, and depreciation of the INR against certain currencies. Most major Indian pharmaceutical companies continue to focus on emerging markets to fuel their growth, given that they continue to face pricing pressure in the US and the European markets.

The outlook for the Indian pharmaceutical industry remains stable, led by expectations of continued steady revenue growth and comfortable margins. ICRA expects the sample set’s capital structure and coverage indicators to remain comfortable despite higher CAPEX and R&D expenses, which are likely to be partly funded through strong internal accrual generation and available surplus liquidity.

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