Weakening Semi-Regulated Markets Weighing On Indian Pharma Exporters 

Weak economic and political conditions in Africa and currency volatility in Latin America (LATAM) are likely to weigh on the consumption of pharmaceutical formulations and therefore pressure medium-term growth prospects for India’s exporters, says India Ratings and Research.

In the financial year 2016-17 (FY17), India’s exports of pharmaceutical formulations or finished products to the semi-regulated markets grew at the weakest pace of 0.7 percent in the last seven years, after exhibiting robust growth till FY14.

The underperformance in FY17 was attributed to a 7.0 percent on a year-on-year (YoY) basis and 5.1 percent (YoY) decline in exports to Africa and LATAM, respectively, while exports to Commonwealth of Independent States (CIS) countries recovered slightly (up 2.9 percent YoY).

Exports to the African markets declined due to ongoing economic and political instability which weakened local currencies. This has also been the regional theme in CIS countries since mid-FY14 and LATAM countries since FY16. On the positive side, exports to other Asian peers were on a stable footing (up 13.9 percent YoY), driven by a stable demand.

Exports to the Middle East rebounded (33.4 percent YoY) in FY17 on the back of improving economic conditions, political stability in non-Gulf Cooperation Council (GCC) Middle Eastern countries and increasing mandatory insurance in GCC countries.

The agency expects weak macros to protract export slump in Africa and LATAM, a weak recovery in CIS countries and moderate growth in exports to Asia and the Middle East for the near to medium term.

Most Indian exporters are rationalising presence among semi-regulated markets, avoiding markets where risks outweigh opportunities. Exports to Venezuela have been restricted after the sharp devaluation of Venezuelan bolivar since March 2014 (32.2 percent). Exporters maintained a cautious approach towards Russia, following a sharp depreciation in the Russian rouble in FY15, with a weak recovery in exports despite currency gains in FY17.

Most exporters with a low pace of generic product approvals in the regulated markets had earlier explored product filings in most semi-regulated markets to recover investments through faster approvals and subsequent volume off-take. However, they are placing high importance on margins and cash flow security over volumes, given the present challenging currency environment.

Despite the export underperformance in FY17, the long-term underlying fundamentals of the semi-regulated markets remain intact. In the underdeveloped Africa, LATAM and Asia economies, the latent demand for the treatment of chronic diseases will boost generics uptake due to limited budgets and high out-of-pocket expenditure.

Increasing drive for universal healthcare insurance in developing Asian markets and GCC countries is also likely to boost generics uptake and benefit generics players over the medium to long-term.

Indian exporters are exploring new therapeutic opportunities in Asia, LATAM and the Middle East to deepen presence, build scale and maintain growth momentum. However, the nature and extent of commercial negotiations of respective governments for market access to Indian pharmaceutical companies will determine the commercial attractiveness and long-term sustainability of exports to these markets.

The African markets are likely to continue to be the key volume off-takers for the treatment of communicable diseases such as HIV/AIDS, malaria, tuberculosis and hepatitis with a large unmet demand for the globally funded initiatives. However, any adjustment, delay or cancellation of policies by the respective governments towards healthcare expansion or drying up of funding for these initiatives is likely to derail the fundamentals.