The domestic pharmaceutical sector expects sales to grow 8–10 per cent in financial year 2023-24, indicated an analysis done by CRISIL, a global analytical research and rating agency.
This growth, the firm said, is expected to be similar to the previous fiscal and will be driven by consistent domestic expansion and increased exports to regulated markets. However, semi-regulated markets may face challenges, it said.
Additionally, the sector is anticipated to experience a 50-100 basis points improvement in operating profitability, reaching approximately 21 per cent during this fiscal year. This improvement is supported by the moderation of input and logistics costs and a reduction in pricing pressures in the US generics market. This, CRISIL said, comes after two consecutive years of margin contraction due to significant pricing pressures in the US and heightened input costs resulting from supply chain disruptions during the pandemic.
CRISIL’s study of 186 pharmaceutical companies, representing roughly half of the sector's annual revenue of Rs 3.7 lakh crore in the last fiscal year, corroborates these findings. The pharmaceutical industry demonstrates a well-balanced revenue distribution, with nearly equal contributions from domestic and export sales, the agency said. In the domestic market, both chronic and acute therapeutic segments make substantial contributions. In the export market, formulations and bulk drugs account for approximately 80 per cent and 20 per cent of total sales, respectively.
CRISIL’s analysis indicates that the chronic segment will be a significant revenue driver due to the consistent rise in lifestyle-related diseases and sustained emphasis on health awareness post-pandemic.
“Similar to the last fiscal year, domestic growth in fiscal year 2024 will be led by a 5-6 per cent increase in realisations, supported in part by high price hikes (linked to the Wholesale Price Index of the previous year) allowed by the National Pharmaceutical Pricing Authority (NPPA) for drugs under price regulation. In addition, the sale of existing pharmaceutical drugs and new launches will drive 3-4 per cent volume growth,” said Aniket Dani, Director, CRISIL Research.
Formulation exports are expected to increase by 7–9 per cent in terms of the Indian rupee during this fiscal year. This growth will be primarily driven by higher volumes resulting from new product launches and a reduction in pricing pressure in the US generics market. However, it’s worth noting that the imposition of claw-back taxes in specific European markets may dampen the growth of exports to Europe in the current fiscal year.
Also, the exports to Asian markets are anticipated to see improved growth this fiscal year, following a modest increase in the previous fiscal. In contrast, exports to African markets are likely to continue facing challenges due to low foreign exchange reserves, which impact purchasing power, and the persistent high currency volatility in the region.
Furthermore, the normalization of supply chains and reduced input prices should lead to a reduction in inventories, potentially bringing them back to pre-pandemic levels. This development is expected to result in a smaller incremental working capital debt for the fiscal year.
“Better profitability and lower working capital needs will further strengthen the balance sheets and liquidity of CRISIL Ratings-rated manufacturers, leading to healthy debt metrics. We expect the Debt/EBITDA ratio to improve to 1.1 times in fiscal 2024 from 1.3 times the last fiscal year. Also, despite higher interest rates, the interest coverage ratio of players is seen as robust at over 9 times,” Aditya Jhaver, Director, CRISIL Ratings said.
Manufacturers are increasingly shifting their focus towards inorganic growth strategies as they aim to diversify their product offerings and solidify their market presence. While their robust balance sheets provide substantial support for such endeavours, it’s important to closely monitor any significant debt-funded acquisitions.
CRISIL said that looking ahead, several factors warrant careful attention. This includes the potential for unforeseen increases in litigation expenses related to ongoing US anti-trust cases, alerts from the US Food and Drug Administration regarding imports, and potential delays in resolving pending regulatory matters. Additionally, the imposition of price caps on products within the domestic market, if implemented, will also require vigilant observation.
It is pertinent to note that regulated markets encompass regions like the US, Europe, and Canada, while semi-regulated markets include Asia, Africa, and Latin America. Furthermore, prices of Scheduled Drugs, as listed under the National List of Essential Medicines, are subject to annual increases determined by the NPPA in accordance with the previous year’s Wholesale Price Index (WPI).