Corporates

Pharmaceuticals

2014 Outlook: Pharmaceuticals

Exports to Overtake Domestic Sales on Increased Product Approvals
Outlook Report
Sector Outlook

P OSITIV E
(2 01 3 : S T A B L E )

Sector Outlook Revised Upwards: India Ratings & Research (Ind-Ra) has revised its outlook
on the pharmaceuticals sector for FY15 to positive from stable on the back of increased exports
to the US and pharmerging markets. Also, the domestic pharmaceutical market is likely to see
high single-digit revenue growth. Profit margins are likely to improve on improved utilisation of
manufacturing facilities.
Rating Outlook Stable: The Outlook for most Ind-Ra rated pharmaceutical companies is
Stable as almost all of the positive factors have already been factored into the existing ratings.
Ind-Ra expects the credit profiles of these companies to continue to strengthen in FY15 on the
back of increasing revenue and improving margins on increased exports.

Rating Outlook

S TABLE

Export-led strong growth

Increased product registrations
Operating leverage-driven profitability

Exports to Overtake Domestic Demand: Ind-Ra believes the strong export growth recorded
over FY08-FY13 (CAGR of 22%) will continue in the medium term. This growth will be backed
by USD92bn of drugs going off patent in the next three years, increasing traction for generic
drugs globally and new generic drug approvals for Indian pharmaceutical companies in
different jurisdictions. However, the domestic market revenue growth (CAGR of 10.4% over
FY08-FY13) will continue to be moderate.
Strong Approval Numbers to Leverage Solid Manufacturing Base: Exports to the US will
continue to grow in the medium term backed by the largest number of United States Food &
Drug Administration (USFDA) approved facilities outside the US as well as the largest share of
drug approvals over the last few years. Approvals from the World Health Organisation and
European regulators are also strong providing added visibility for exports. Although 2013 saw
high regulatory actions against Indian pharmaceutical manufacturers, Ind-Ra believes they do
not weaken the industrys prospects.
Limited Capacity Expansion: The agency expects capacity expansion to be low in the
medium term with the focus being on improving utilisations of the existing capacities. 9MFY14
saw the lowest value of new capital expenditure project announcements (INR26bn) and
completions (INR12bn) in the last eight years. Ind-Ra expects this trend to continue in FY15.

Related Research
2013 Outlook: Indian Pharmaceutical
Other 2014 Outlook Reports

Analysts
Avinash Lodha
+91 44 4340 1722
avinash.lodha@indiaratings.co.in
Sreenivasa Prasanna
+91 44 4340 1711
s.prasanna@indiaratings.co.in

Operating Leverage Drives Profitability: Ind-Ra believes the pharmaceutical industrys

profitability will continue to improve in FY15 as capacity utilisation improves with more products
from the approved products basket being commercialised. Asset efficiency of pharmaceutical
companies has been increasing since FY09 and is likely to continue to improve in the medium
term.
Credit Metrics to Strengthen: Increased top-line, improving margins and limited capacity
expansion will strengthen credit metrics of pharmaceutical manufacturers. Median debt
leverage of top pharmaceutical manufacturers improved to 1.09x at FYE13 (FYE12: 1.44x).
Despite prevailing high interest rates, EBITDA interest cover also improved to 6.43x in FY13
(FY12: 5.35x). This trend is likely to continue in FY15.

Mukul Pathak
+91 11 4356 7241
mukul.pathak@indiaratings.co.in

www.indiaratings.co.in

8 February 2014

Corporates
Liquidity a Concern for Smaller Units: The agency expects the credit profiles of large
pharmaceutical manufacturers to remain strong in FY15 on the back of increased revenue and
margins. However, smaller drug manufacturing units, with a turnover of up to INR1bn, will
continue to face liquidity and competitive pressures. Such companies are usually active
pharmaceutical ingredients (API) and intermediates manufacturers and do not have much
bargaining power with their counterparties. Liquidity pressures on smaller units will facilitate
acquisitions in the industry. Indias top pharmaceutical manufacturers (Ind-Ras sample size of
43) command around 83% of the total market while the rest is shared by over 8,000 smaller
players.
Industry in Acquisition Mode: Indian as well as foreign pharmaceutical companies with
strong revenue growth continue to acquire manufacturing facilities with approvals from
regulated markets/institutional buyers. Such acquisitions enabling the acquirer to supply to the
strong growth markets of the US and the global antiretroviral market are likely to continue as
green-field facilities take two to three years to become operational. The sector saw foreign
direct investments (FDI) worth over USD12bn in various deals since 2006.

What Could Change the Outlook

Regulatory Actions: Widespread regulatory actions can lead to erosion of confidence in the
pharmaceutical industry and affect exports.
Marketing Exclusivities: Success in acquiring marketing exclusivities (Para IV or first to file
(FTF) opportunities in the US) in the regulated markets and/or successfully commercialising
bio-generic molecules can provide an upward thrust to the sectors earnings and could benefit
individual companies. Highly leveraged acquisitions at very optimistic valuations could be
negative for ratings.

Exports to Drive Growth

Figure 1

Ind-Ra believes the sector is set to witness a 15%-16% yoy growth in FY15 to INR2.0trnINR2.1trn on the back of over 20% yoy growth in exports. The agency believes manufacturers
will end FY14 too with around 20% yoy growth in exports, on the back of increased exports to
the US, despite the subdued 1HFY14 growth of 9.6% yoy.
The Americas will continue to be the largest as well as the fastest growing geographical market
for Indian pharmaceutical exports in FY15. While Europe will continue to be the second largest
destination, the second fastest growth would come from Africa. An increase in the number of
product registrations, in developed as well as emerging markets, would be an important growth
driver. Ind-Ra expects pharmaceutical exports revenue to be 75% to 100% larger than that of
the domestic pharmaceutical market by FY20.
Figure 2

Exports to Overtake Domestic Market by 2015

Exports (LHS)

Exports (RHS)

Domestic market (LHS)

Domestic (RHS)

(INRbn)

(%)

1,200

50
40

900

30
600

20
300

10

0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Planning Commission, CMIE, Ind-Ra

2014 Outlook: Pharmaceuticals

February 2014

Corporates
US to Continue to be the Largest Target Market
Around 25.5% of Indian pharmaceutical exports were to the US in FY13 making it the single
largest destination, a position Ind-Ra expects will continue. Indian exports to the US have also
grown at the highest CAGR of 30% over FY09-FY13 (Source: Centre for Monitoring Indian
Economy (CMIE)). Exports to Africa have increased at a CAGR of 21% during the same period,
contributed mainly by export of anti-malarial and antiretroviral drugs. With a more secular
growth rate of 12%, European countries share in Indian pharmaceutical exports has constantly
declined. Ind-Ra expects these trends to continue in FY15.
Figure 4

Figure 3

Pharmaceutical Exports from India Region-wise (INRbn)

Year
FY09
FY10
FY11
FY12
FY13
4-yr CAGR

Exports
398.2
424.6
488.1
635.1
794.1
18.8%

America
28.8%
31.6%
32.5%
33.6%
34.3%
23.6%

Asia
21.5%
22.8%
20.9%
20.0%
19.8%
15.9%

Europe
31.6%
27.3%
27.0%
26.4%
25.5%
12.2%

Africa
16.9%
16.7%
18.0%
17.9%
18.4%
21.1%

Oceania
1.1%
1.5%
1.5%
1.7%
1.6%
30.0%

Others
0.1%
0.1%
0.1%
0.3%
0.4%
71.9%

Source: CMIE

The Patient Protection and Affordable Care Act (commonly called Obamacare) implemented in
January 2014, aims to reduce cost of healthcare delivery in the US and boost the usage of
generics. It also paves way for introduction of more bio-similars. The implementation of this act
is likely to benefit the Indian pharmaceutical sector as India is the largest supplier of generic
drugs to the US and has a 40% market share in terms of volume. India, with over 550 USFDAapproved drug manufacturing facilities, has among the highest of such facilities outside the US.
Indian companies accounted for 43% of the total abbreviated new drug application (ANDA)
approvals in 1H13 (2012: 37%) by the USFDA and over half of total ANDA filings during the
same period.
The US generics market (USD95bn), 29% of US total pharmaceutical market in 2012, grew
14.4% yoy in the same year. Indian pharmaceutical majors Ranbaxy Laboratories Limited
(3.3% of US generics market in 2012) and Sun Pharmaceutical Industries Limited (3.0%) were
the sixth and seventh largest generics players in the US in terms of revenue improving their
respective revenues by 188% and 35% yoy (Source: IMS Health). Ind-Ra believes Indian
manufacturers market share in the US will continue to grow in the medium term backed by the
largest number of USFDA approved facilities outside the US and the largest share of
approvals.

Exports to Pharmerging Markets to Grow Faster

Indias exports to pharmerging markets (China, Brazil, India, Russia, Mexico, Turkey, Poland,
Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan
and Vietnam Source IMS) will see higher growth on the back of increased affordability and
deepened penetration by not-for-profit organisations. In FY13, Indias exports to pharmerging
markets were around 20% of its total exports. The high growth rate of 29.1% yoy in FY13 of
exports to pharmerging markets is likely to continue. The share of pharmemerging markets is
likely to go up to 25% of total exports from India by FY17. Africa is another market with a
substantial share (18.4%) of Indian drug exports which Ind-Ra expects to continue to grow
primarily driven by antiretrovirals and anti-malaria formulations sales.

2014 Outlook: Pharmaceuticals

February 2014

Corporates
Figure 5

Exports to Pharmerging Countries as Percent of Total Indian

Pharmaceutical Exports (%)
2008-09
2009-10
2010-11
2011-12
2012-13
4-yr CAGR

Russia South Africa

3.78
2.79
3.07
2.75
4.26
3.19
3.10
2.89
3.89
3.02
19.24
20.76

Brazil Vietnam
2.89
1.33
2.34
1.67
2.15
1.42
2.10
1.40
2.23
1.38
10.98
19.38

Turkey Ukraine Thailand Mexico

1.55
1.70
1.14
1.29
1.56
1.34
1.35
1.22
1.56
1.15
1.00
1.12
1.37
1.06
1.13
1.04
1.35
1.07
0.97
0.94
14.31
5.32
13.75
9.39

China
1.40
1.52
1.31
1.19
0.93
6.81

Source: CMIE

Over April 2013-July 2013, exports witnessed single-digit yoy growth. However, post that,
recovery in shipments led by the US and Africa revived the sector. Exports growth in October
2013 (around 32%) was strong, led by exports to the US.

Large Pharmaceutical Companies to Corner Most of the Growth

Figure 6

Most of the export growth in FY15 is likely to be captured by the larger Indian pharmaceutical
companies as they account for most approvals and product registrations by regulators in the
developed markets. In FY13, the top 20 pharmaceutical companies in India accounted for 80%
of all ANDA approvals in the US.
Ind-Ra estimates that the recent Drug Price Control Order (DPCO, notified in May 2013) which
brings the 348 drugs notified in the national list of essential medicines (NLEM) and their
variants under price control will have a marginal impact as the domestic market is likely to
shrink by less than 5%.

Research & Development (R&D) Essential for Continued Growth

Ind-Ra believes R&D expenses of Indian companies will keep pace with the top-line growth and
much of this will continue to be towards generic products. To maintain the current levels of
growth, the pharmaceutical industry will have to constantly identify products with attractive
markets and obtain registration for these in the regulated markets. Indian companies accounted
for 43% of total ANDAs approved by the USFDA during 1H13, up from 33% in 2009 and 37% in
2012. Over FY09-FY13, R&D expenses for Ind-Ras sampled companies increased at a CAGR
of 87.5% to INR48bn. Revenue during the same period increased at a CAGR of 75%.

Capacity Utilization to Improve

Figure 7

Over the last decade, Indian pharmaceutical manufacturers have invested substantially in
building manufacturing capacities and obtaining facility approvals from regulators across the
globe. Projects worth INR331bn have been completed over this period and a further INR172bn
worth of projects were under implementation at FYE13 (Source: CMIE).
The industrys capacity expansion, measured in terms of the completed projects and those
under implementation, has been reducing over the last two years. Moreover, new capacity
expansion projects (capex) announced during 1HFY14 were the lowest in the last eight years.
Ind-Ra believes the industry will leverage its existing capacities to increase scale in the medium
term leading to higher profitability.

2014 Outlook: Pharmaceuticals

February 2014

Corporates
Figure 8

Figure 9

Project Status - Capacity Addition Peaked in FY11

Announced

(INRbn)

Completed

Ongoing

250
200

150
100
50
0
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Source: CMIE, Ind-Ra

Profitability to Improve with Growth

Pharmaceutical companies have managed to continuously improve profitability with increased
revenue over the last decade. In 1HFY14, the profitability of India pharmaceutical companies
increased marginally to 22.9% (FY13: 22.5%). Commercialisation of new products and
forthcoming patent expiries are likely to support growth in the ensuing quarters. Ind-Ra expects
margin improvements to be small but continuous over the next three years.

Uncertain Future of Clinical Research

The genetic diversity of India provides a unique advantage for all human related research. Yet,
despite the potential on account of wide demographic diversity, clinical research in India has
not flourished due to an ambiguous policy structure and loose implementation of laws. After the
Supreme Courts order on 21 October 2013 stopping trials for 157 drugs, the clinical research
activity in India has come to a halt and many of the on-going clinical trials have been moved to
other locations. Ind-Ra believes in the absence of a clear and industry-friendly regulatory
structure capable of stopping unscrupulous elements from exploiting the poor and the destitute,
clinical research activity will continue to shift overseas to similar locations such as Malaysia in
the immediate future.

Acquisitions to Continue
The cumulative drugs and pharmaceuticals sector has attracted FDI worth over USD12 billion
since 2006.
While most of the acquisitions have been by foreign companies, Torrent Pharmaceuticals
Limiteds acquisition of Elder Pharmaceuticals Limiteds womens healthcare brands in
November 2013 (for INR20bn) involved two Indian companies. Ind-Ra expects more
acquisitions in the Indian pharmaceutical space in FY15 by medium-to-large global
pharmaceutical companies.
Figure 10

M&A Activity Led by Foreign Pharma Players

Number
1
2
3
4
5
6
7
8
9
10

Acquirer
Torrent Pharma
Mylan Inc
Hospira Inc
Otsuka Pharmaceuticals
Adcock Ingram Holdings
Watson Pharmaceuticals
Abbott Inc
Daiichi Sankyo
Fresenius Kabi
Mylan Inc
Total

Target
Deal Value (USDm)
Date
Elder Pharma
320 Nov 13
Agila Specialities
1,750 Sep 13
Orchid Chemicals & Pharmaceuticals
200 Jun 13
Claris Lifesciences Ltd
170 Dec 12
COSME Pharma Laboratories
96
Jul 12
Ascent Pharmahealth
393 Jan 12
Piramal Healthcare Solutions
3,720 May 10
Ranbaxy Laboratories Ltd
4,600 Jun 08
Dabur
200 Apr 08
Matrix Laboratories Ltd
700 Aug 06
12,149

Source: Ind-Ra, Company filings

2014 Outlook: Pharmaceuticals

February 2014

Corporates
The focus of both Indian and foreign pharmaceutical companies will continue to be on acquiring
manufacturing facilities carrying approvals from high-growth markets (such as the US,
Germany and the UK). The recent spate of regulatory actions against Indian pharma
companies is not likely to deter such acquisitions.
Mylan Inc.s acquisition of Agila Specialities Limited (from Strides Arcolab Limited) and Matrix
Laboratories Limited is a case in point. In 2013, Granules India Limited acquired Auctus
Pharma and Aurobindo Pharma Limited acquired Hyacinths Pharma and Celon Labs. In FY15,
larger Indian companies could look to acquire more manufacturing facilities of smaller players
with an eye on the global market. However, acquisitions with focus on the domestic market
(such as the Torrent-Elder deal) are likely to be rare due to the uncertainties around the DPCO
which is yet to be fully implemented.

Large Players Credit Profile to Strengthen

The credit metrics of large pharmaceutical companies will continue to strengthen as growth
prospects are on track. Free cash flows are likely to be positive due to an improvement in
revenue and capital expenditure is likely to be limited. Smaller companies with revenues below
INR1bn will continue to face liquidity issues due to long working capital cycles.
In FY13, the profitability (median) of top Indian drug manufacturers remained unchanged yoy
(20.7%) while credit metrics improved on completion of capex cycle and increased capacity
utilisation.
Figure 11

Strengthening Credit Metrics

(x)

Leverage (LHS)

Int coverage (LHS)

EBITDA margin (RHS)

15

(%)
25

10
20
5

0
FY07

FY08

FY09

FY10

FY11

FY12

15
FY13

Source: Company reports, Prowess, Ind-Ra

2013 Sector Update

Pharmaceutical exports increased 25% yoy in 2013 (2012: 30% yoy) to INR794bn. Domestic
growth rate revived to 10% yoy in FY13 (6.3% yoy) despite the enhanced NLEM (348 drugs
from 147 earlier) and the consequential increased purview of price control. The industry saw
increased regulatory action as the Supreme Court took cognisance of the deaths of subjects
and ordered closure of 157 on-going clinical trials. USFDA issued several import alerts to
Indian manufacturers including Wockhardt and Ranbaxy during 2013 along with 10 warning
letters to other Indian companies including Agila Specialties (acquired by Mylan Inc. in
February 2013). The year also saw considerable action on the M&A front with Mylan Inc.,
Otsuka Pharmaceutical Co., Ltd, Torrent Pharmaceuticals Ltd. and Aurobindo Pharma Ltd.
making acquisitions.

2014 Outlook: Pharmaceuticals

February 2014

Corporates
Figure 12

Major Rating Actions During 2013

Company
Aurobindo Pharma Ltd.
Cipla Limited
Claris Lifesciences Ltd.
Ecologic Chemicals Ltd.
Fresenius Kabi India P Ltd.
Gland Pharma Ltd.
Inventia Healthcare P Ltd.
Jubilant Life Sciences Ltd.
Modi-Mundipharma P Ltd.
Shree Baidyanath Ayurved Bhawan
Siddhayu Ayurvedic Research
Strides Arcolab Limited
The Himalaya Drug Company
Vasudha Pharma Chem Limited
Win Medicare Private Limited
Windlas Biotech Ltd.

2013 Rating/Outlook
IND AA-/Stable
IND AAA/Stable
IND A/Stable
IND BBB-/Stable
IND BBB-/Positive
IND A/Stable
IND BBB+/Stable
IND A+/Stable
IND BBB+/Stable
IND A-/Stable
IND BBB-/Stable
IND A+/Stable
IND A-/Stable
IND A-/Positive
IND BBB/Stable
IND BBB+/Stable

Rating action
in 2013
Affirmed
Affirmed
Upgrade
Affirmed
Outlook revised
Upgrade
New rating
Affirmed
Affirmed
New rating
New rating
Upgrade
Affirmed
Upgrade
Affirmed
New rating

End-2012
Rating/Outlook
IND AA-/Stable
n.a
IND A-/Stable
IND BBB-/Stable
IND BBB-/Stable
IND A-/Stable
n.a.
IND A+/Stable
IND BBB+/Stable
n.a.
n.a.
IND BBB+/Stable
IND A-/Stable
IND BBB+/Positive
IND BBB/Stable
n.a.

Source: Ind-Ra

Figure 13

India Select Pharma Issuers Ratings Headroom and FY15

Expectations
Long-Term Issuer
Rating/Outlook
Cipla Ltd.
IND AAA/Stable
Aurobindo Pharma Ltd.
IND AA-/Stable
Claris Lifesciences Ltd.
IND A/Stable
Gland Pharma Ltd.
IND A/Stable
Strides Arcolab Ltd.
IND A+/Stable
Jubilant Life Sciences Ltd. IND A+/Stable
Shree Baidyanath
IND A-/Stable
Ayurved Bhawan
Vasudha Phramachem
IND A-/Positive
Ltd.

Credit
metricsb
Similar
Improve
Improve
Similar
Improve
Similar
Improve

Profitabilitya
Decline
Improve
Decline
Improve
Decline
Decline
Decline

Capex
Lower
Increase
Lower
Lower
Lower
Increase
Lower

FCF
Improve
Improve
Improve
Improve
Improve
Improve
Improve

Improve

Lower

Improve Improve

Ratings
Headroom
High
High
High
High
High
High
High
High

EBITDA margin
Total adjusted net debt/EBITDA
Source: Ind-Ra
b

2014 Outlook: Pharmaceuticals

February 2014

Corporates

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2014 Outlook: Pharmaceuticals

February 2014