The Indian pharmaceutical sector is projected to log a revenue growth of 8-10per cent this fiscal year, following a 10per cent growth last year, according to a CRISIL study. The growth will be driven by strong exports to regulated markets, recovery in semi-regulated markets, and steady domestic demand.
Operating leverage will improve due to easing pricing pressure in the U.S. generics market, boosting operating margins by 70-80 basis points (bps) to approximately 22.5 per cent this fiscal. This follows a 100 bps increase in margins last year.
The sector's continued strong cash generation and low financial leverage will sustain 'stable' credit profiles for companies, even as many pursue acquisitions in key therapeutic areas. A CRISIL study of 190 drug manufacturers, representing nearly half of last year’s Rs 4.1 lakh crore market, supports these forecasts.
The Report went on to say that the revenue split for the pharmaceutical sector is almost even between domestic sales and exports. Domestic formulation revenue is balanced between chronic and acute therapeutic segments, while exports are primarily made up of formulations (80 per cent) and bulk drugs (20 per cent). Of the formulations exported, 58per cent are sent to regulated markets, including the U.S. and Europe, and 42 per cent to semi-regulated markets in regions like Africa and Asia.
Aniket Dani, Director at CRISIL Market Intelligence & Analytics, stated, “Formulation exports are expected to grow 12-14 per cent in rupee terms this fiscal. Regulated markets such as the U.S. and Europe are set for 13-15 per cent growth, driven by ongoing drug shortages, reduced pricing pressure in the U.S. generics market, and increased volumes from new product launches." He added that companies are increasingly focusing on niche molecules and specialty products. In semi-regulated markets, exports will grow by 8-10per cent, aided by improving forex reserves and economic recovery in African and Latin American nations.
Domestic revenue is expected to grow by 7-9 per cent, primarily price-driven, with volume growth supported by new product launches. Growth will be led by the non-NLEM (National List of Essential Medicines) portfolio, as the NLEM portfolio's pricing will remain stable due to limited changes in the Wholesale Price Index (WPI) last fiscal. The chronic disease segment will likely be the largest revenue contributor, driven by rising cases of lifestyle-related illnesses and heightened health awareness since the pandemic.
The sector’s financial risk profile remains solid, with a stable working capital cycle of around 50 days and robust cash flows. CRISIL-rated companies are expected to maintain a debt-to-EBITDA ratio of 0.9 times and interest coverage exceeding 12 times in fiscal 2025.
Aditya Jhaver, Director at CRISIL Ratings, emphasized that companies are increasingly eyeing inorganic growth opportunities, particularly in the API (Active Pharmaceutical Ingredient) and formulation spaces, to diversify product portfolios or consolidate market share. While these acquisitions may involve significant debt funding and a temporary dip in the financial risk profile, the overall credit profile is expected to remain strong due to improvements in the business risk profile.
However, the report also cautions that sizeable debt-funded acquisitions and their integration will need to be closely monitored. Other potential risks include regulatory delays, slower-than-expected product launches, litigation costs from U.S. anti-trust suits, price volatility in raw materials, and the potential for new domestic price caps.
Overall, the Indian pharmaceutical sector is expected to continue its robust performance, driven by strong export and domestic growth, while navigating potential challenges in the coming fiscal year.
