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India Ratings and Research (Ind-Ra) said that it expects the US drug regulator’s inspection in 2023 and 2024 to be less disruptive for the sector and will only have an impact on some facilities and entities compared to the situation in 2015 and 2016.
The rating agency said that Indian drugmakers have steadily increased their sales to non-US markets, and has focused on high margin and high RoE branded generics, and increased their share of API manufacturing. This has helped the pharma companies to de-risk their operations to mitigate cash flow impact of the disruption caused by United States Federal Drug Administration (USFDA) inspections,
In addition, Indian pharmaceutical companies have worked towards strengthening their processes with the help of global regulatory consultants and improved training and automation to comply with the USFDA requirements, according to Ind-Ra report. Further, these firms have diversified, in terms of production facilities across geographies and using third-party filings. However, companies with higher exposure to the US markets and a low level of diversification could be affected due to unsuccessful USFDA inspections.
As the USFDA inspection picks up, Ind-Ra expects some possibility of lowering competitive pressures in the existing abbreviated new drug applications (ANDAs). As there was absence of inspections in the past two years, the competition had increased in the existing ANDAs and the proportion of new ANDA approvals to existing approvals had fallen. This has resulted in pricing pressure becoming much more noticeable. Ind-Ra anticipates that the increase in the proportion of Official Action Indicated (OAI) in 2021 and 2022 largely reflects the low base of inspections (17), and this is likely to revert to its historical rate of 10%-15% as the inspections pick up.
Weak growth in the US
The top 15 Indian pharmaceutical companies continued to experience tepid growth in the US market during FY17-FY22 period at an average CAGR of 0.5% compared to an average CAGR of 19.3% between FY12-FY17, on the back of consolidation of distributors and growing pricing pressures.
Moreover, the pharma companies have seen their EBITDA margins and returns from the US remain muted and they have diversified into other markets which has resulted in their US business declining to 32% in the first half of FY23 from 39% in FY17. Ind-Ra expects this diversification to provide some cushion to the drugmakers and the trend to continue as the attractiveness of the US business wanes in relation to the domestic market as well as exports to some of the non-regulated markets. The rating agency has also seen drugmakers scale down or close the US operations.
Outlook
The pharmaceutical companies will continue to benefit from higher sales in the domestic markets, while growth in the export markets is likely to remain flat in FY23, the Ind-Ra report said. Companies exposed to export markets is likely to witness pressure in their gross margins and API manufacturers will see significant capital expenditure on account of the Production-linked Incentive schemes.
The headwinds in regulated export markets and cost inflation could impact the sector in FY23 compared to its performance in FY22. However, the momentum in domestic market, traction in China+1 opportunities and rise in new growth markets such as biosimilars would largely offset the pressure from price erosion in developed markets. According to Ind-ra, the rating outlook for the sector remains stable for FY23, driven low leverage and adequate liquidity.