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Weakening Regulated Markets Weighing On Indian Pharmaceutical Exporters

Rising competitive intensity in the U.S. will lead to a contraction of Indian pharma exports.

A scientist works in a lab owned by Sun Pharmaceuticals Industries Ltd in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)
A scientist works in a lab owned by Sun Pharmaceuticals Industries Ltd in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)

Rising competitive intensity in the U.S. markets is poised to create a challenging operating landscape for large exporters leading to contraction in overall exports of pharmaceutical formulations to the regulated markets in the near term and weak-to-moderate pace growth over the medium-to-long term, says India Rating and Research.

Exports to regulated markets maintained a volatile growth since financial year 2014-15 after recording a notable compounded annual growth rate of 26.3 percent over FY11-FY14. The volatility is attributed to the U.S. which is the largest regulated market (71.6 percent of regulated market exports) and witnessed weak growth in FY15, recovered in FY16 and observed a sharp moderation in FY17.

While regulatory overhang continues to be an event risk since FY14, price erosion on account of ongoing structural shifts such as channel consolidation and heightened competition following lumpy approvals has initiated a paradigm shift in growth expectations. Weakening of currencies in Europe (since FY15) and the U.K. (since FY17) on account of political issues have also kept Indian exports under pressure.



A technician inspects vaccine vials for defects during a screening process. (Photographer: Sanjit Das/Bloomberg)
A technician inspects vaccine vials for defects during a screening process. (Photographer: Sanjit Das/Bloomberg)

In FY17, Indian exports of pharmaceutical formulations to the U.S. peaked to a seven year high of 39.4 percent of the overall exports. The agency expects base businesses for large players to contract 5 percent-10 percent per annum, amid pricing pressures from consolidating buyer groups and waning exclusivity leading to pressures on operating margins. India Ratings expects competitive intensity to be high for high value chronic opportunities (market size above 200 million) targeted by Indian exporters consisting speciality and complex products aggregating to an estimated market size of $42.6 billion in patent expiry between FY18 and FY31.

This is on account of a high average number of filers and approvals or tentative approvals per Abbreviated New Drug Applications. Regulatory amendments by the United States Food & Drug Administration in the first half of FY18 are poised to accelerate drug access and increase competition by streamlining and further expediting generic product approvals while compliance cost rise unabated. The heightened competition is likely to accelerate price erosion and weigh on growth expectations from future U.S. patent expires.

Indian exporters have targeted niche opportunities to build speciality franchise across Europe. Portfolio restructuring for margin security and inorganic portfolio expansion are the key strategies adopted to maintain growth momentum. While favourable demographics reinforce market fundamentals, restrained budgets are likely to impact market growth for patented and generic drugs due to pricing pressures. Despite the euro making a modest recovery in Q1FY18, any currency shock due to political or monetary policy stance is likely to hurt exports.



Amlodipine tablets fall into a collection bin inside the Lupin Ltd. pharmaceutical plant in Salcette, Goa (Photographer: Dhiraj Singh/Bloomberg)
Amlodipine tablets fall into a collection bin inside the Lupin Ltd. pharmaceutical plant in Salcette, Goa (Photographer: Dhiraj Singh/Bloomberg)

A 16.6 percent decline in pound post Brexit, hit exports to the U.K. during FY17. The weakness in the pound is likely to sustain over the next one to two years, keeping Indian exports under pressure. As a result, India Ratings expects negative-to-low positive growth in exports in the near to medium term.

India Ratings believes contribution from other regulated markets is unlikely to grow significantly in the near to medium term, given limited significance to Indian exporters. Exports to North America are likely to be modest, while exports to Australia and New Zealand will have limited growth headroom owing to price controls. Exports to Japan are likely to be in a recovery mode driven by a large geriatric care opportunity, but participation is likely to be limited owing to stringent regulatory standards.

India Ratings and Research, a wholly owned subsidiary of Fitch Group, is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.