Dipping rupee to boost FY19 pharma revenues but …

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Smart companies will focus on discovering avenues which lead to long-term sustainable growth

It’s been more than three years since the  Directorate General of Foreign Trade (DGFT), Department of Commerce, Ministry of Commerce and Industry laid down procedures for implementation of the track and trace system for export of pharma and drug consignments. On November 1, the DGFT decided to extend the date for maintaining the parent-child relationship in packaging levels and uploading the data on the central DAVA portal to July 1, 2019, for both SSI and non-SSI units supplying to the export markets. The Pharmexcil site notes that November 15 remains the deadline for barcoding on secondary and tertiary packaging.

Given that the India’s pharma sector is a net exporter, this recent DGFT notice should give exporters some leeway as they cope with the increasing price of imported active pharma ingredients (APIs) and increased competition in the ANDA space. Both these trends will be partially offset by the depreciating rupee versus the US dollar.

India Ratings and Research (Ind-Ra)’s latest report also points out that the higher margins for 2QFY19 on a year-on-year basis, largely supported by the nine per cent y-o-y depreciation of the Indian rupee against the US dollar, will be partially off set by the increasing debts of these companies as they have foreign currency-denominated debts.

The impact of imported API prices can be gauged by the 100bp-350bp fall in the gross profit margins of some large players over QFY18-1QFY19. Thus prices of imported APIs are going to be very crucial, especially for players focused on regulated and fixed -tender markets, as it is fairly certain that prices are never going to reduce to previous levels.

Similarly, a CRISIL report predicts that after two years of single-digit growth, revenues of big pharma companies in India, i.e. those with a turnover of `1,000 crores or more, will be up 10-12 per cent in fiscal 2019; with operating margins seen stable at 18-20 per cent. Besides the depreciation of the rupee against the dollar, a recovery in sales in the US and improving domestic demand will contribute to this return to double digit growth. The recovery of sales in the US could be linked to improved compliance status of US generic market-focused pharma companies, with the CRISIL report pointing to establishment inspection reports for facilities of two big players which were under warning letters (Sun Pharma and Dr Reddy’s Laboratories).

But the news on abbreviated new drug approvals (ANDA) front is bitter sweet. The IndRa report points out that while Indian companies received more ANDA approvals, the overall increase in these approvals meant more competition. A slight silver lining could be the fairly significant 30 per cent increase in India’s share of first-time generic drug approvals, including gSensipar by Aurobindo Pharma and Cipla, gSuboxone, by Dr Reddy’s Laboratories, and gWelchol by Glenmark Pharma. First-time generic approvals, which do not offer marketing exclusivity in all cases, allow manufacturers to operate in a less competitive environment and are especially positive from the margin expansion perspective.

While the exports market has traditionally offered more margins, the domestic market cannot be ignored any longer. The CRISIL report posits that better access to healthcare, deeper penetration of health insurance are expected to grow domestic revenues of big pharma companies by 12-13 per cent in FY19. The IndRa report says that the domestic market offers a relatively high scope to large-sized players to pass on increased input costs than highly competitive regulated markets such as the US.

Thus, while revenues will increase in FY19 (with nearly half of revenue growth likely to be driven by a weaker Indian rupee), smart companies will focus on discovering avenues which lead to long term sustainable growth. Beside ongoing cost optimisation measures, this could be complex generics, as well as balancing focus on key ANDAs and first-time generic drug approvals. The roll-out of India’s health assurance scheme, Ayushman Bharat, could see increased demand for medicines, expanding the domestic market but this segment will be under severe price control. All in all, FY19 promises to be no cakewalk.