Corporates
Pharmaceuticals
FY16 Outlook: Pharmaceuticals
Decelerating Export Growth on Low Patent Expiry, Large Issuers to Maintain
Credit Profiles
Outlook Report
Sector Outlook Positive: India Ratings & Research (Ind-Ra) has maintained a positive
outlook on the pharmaceuticals sector for FY16 as large issuers are likely to maintain their
credit profile. Exports are likely to grow at 10%-12% in FY16. However, this is lower than the
14% growth rate witnessed in FY14.
Sector Outlook
P OSITIVE
( 2 0 14 : PO S IT IV E)
Rating Outlooks
Positive
Stable
Negative
RWE
100%
Rating Outlook Stable: The Outlook for most Ind-Ra rated pharmaceutical companies is
Stable as the expectation of revenue growth along with stable margins has already been
factored into the ratings. We expect these companies to maintain their comfortable credit profile
in FY16. Regulatory actions or large, debt-funded acquisitions could affect individual
companies.
80%
60%
40%
20%
0%
Current
Source: Ind-Ra
Exports growth is likely to be driven by fully operational USFDA facilities, led by restored
regulatory approvals. Growth expectation continues to rest on the USD24.4bn (US sales) drugs
which are likely to go off patent by end-2016.
End-2013
 Exports driven growth
 Stable profitability
Improved Compliance to Boost Exports: Ind-Ra believes Indian manufacturers will face
fewer regulatory hurdles in FY16 on strengthened quality and control processes. In 2014,
import alerts reduced to eight from 21 in 2013 due to quality measures implemented by
companies.
 Product approvals remain high
Rating Outlook
S TABLE
( 2 0 14 : STA B L E )
 Credit profiles to remain comfortable
 Revival of capex
 Improved compliance score-card
Credit Metrics: Increasing top-line and steady margins will support capacity expansion leading
to credit metrics of large pharmaceutical manufacturers remaining comfortable in FY16. The
mean debt leverage and EBITDA interest cover of top-23, listed pharmaceutical manufacturers
remained almost unchanged in FY14 at 1.07x and 9.19x, respectively.
Consolidation to Continue: Regulated market focused Indian companies will continue to look
for in-organic growth opportunities in India and abroad. Such companies, which historically
focused on acquiring manufacturing facilities, have now also started acquiring product
portfolios with focus on accelerating market penetration.
Outlook Sensitivities
Related Research
2014 Outlook: Pharmaceuticals
Impact of 2013 US FDA Actions
Other Outlooks
FY16 Outlook Reports
Analysts
Avinash Lodha
+91 44 4340 1722
[email protected]
Regulatory Actions: Widespread regulatory actions by overseas regulators could affect
exports. Any further sweeping National Pharmaceutical Pricing Authority (NPPA) actions
including imposing substantial penalties will impact bottom-lines and credit profiles of domestic
market players. Highly leveraged acquisitions could also result in stress on credit profiles.
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 sector’s earnings and, if used to
reduce debt, could benefit individual companies.
Sreenivasa Prasanna
+91 44 4340 1711
[email protected]
Ankit Bhembre
+91 22 4000 1774
[email protected]
www.indiaratings.co.in
9 February 2015
Corporates
Exports Dependent Growth
Ind-Ra expects the sector’s exports to reach INR1.1trn by FYE16 (FY14: INR910bn). We
believe the pharmaceutical industry continues to have the advantage of low-cost research and
manufacturing. This, along with continued focus on strengthening the product pipeline will aid
the industry, though growth will be moderate (low double digit). Success in securing exclusive
sale opportunities could provide (one-time) impetus to export earnings and profits.
Figure 1
Export Dominated Top-23 Indian Pharma Companies' Revenues
(INRbn)
900
Domestic (LHS)
Exports (LHS)
Overall median growth (RHS)
Median export growth (RHS)
(%)
30
600
20
300
10
0
0
FY10
FY11
FY12
FY13
FY14
Source: Company filings, Ind-Ra
US Continues to be the Largest Target Market
Around 27% of India’s pharmaceutical exports were to the US in FY14 (FY13: 25.5%), making
it the single largest destination. Ind-Ra expects this position to be maintained in FY16. Indian
exports to the US grew at the highest CAGR of 26.8% over FY04-FY14 (Source: Centre for
Monitoring Indian Economy (CMIE)). Indian manufacturers accounted for 24% of the total
abbreviated new drug application (ANDA) approvals in 2014 (2013: 33%) by the USFDA
behind US companies which dominated with 42% (43%). India, with 582 (550 in January 2014)
USFDA-registered drug manufacturing facilities, has among the highest of such facilities for
any country outside the US.
Figure 2
USD44bn Patent Expiry Over
Next 2 Years
US
Developed markets
(USDbn)
50
40
30
20
10
Figure 3
Top Pharmaceutical Exports Destination (INRbn)
Year
FY09
FY10
FY11
FY12
FY13
FY14
6-yr CAGR (%)
Exports
404
425
488
635
798
910
14.5
USA
72
93
113
156
202
244
22.6
Russia
15
13
21
20
31
33
13.7
UK South Africa
12
11
16
12
18
15
23
18
28
24
32
30
17.0
17.9
Germany
15
15
16
22
25
28
10.4
Nigeria
10
9
10
15
19
23
14.3
Source: CMIE, Ind-Ra
0
2012
2013
2014
2015
Source: IMS Health
2016
Large Pharmaceutical Companies to Corner Most of the Growth
Most of the export growth in FY16 is likely to be captured by the larger companies which
account for maximum product registrations and approvals by regulators in the developed
markets. In 2014, the top 23 Indian pharmaceutical companies accounted for 17 of the total 22
ANDA approvals received by Indian manufacturers in the US.
India’s top pharmaceutical manufacturers (revenue > INR12bn; Ind-Ra’s sample size of 23)
command around 71% of the total market while the rest is shared by over 8,000 smaller
players. Ind-Ra believes top pharmaceutical manufacturers will return similar profitability in
FY16 while the smaller companies (revenue up to INR1bn - Ind-Ra sample of 70) are likely to
struggle.
FY16 Outlook: Pharmaceuticals
February 2015
2
Corporates
Figure 4
Large Companies Growing Faster Despite Large Base
Top-23
(%)
Small-70
350
300
250
200
150
100
50
0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company reports, Ind-Ra
Focus on Research & Development (R&D) to Aid Growth
Ind-Ra believes R&D expenses of pharmaceutical manufacturers will keep pace with their topline growth and much of this will continue to be towards generic products. Over FY10-FY14,
R&D expenses for the top-13 export-focused manufacturing companies grew at a CAGR of
21.3% to INR49.2bn. Revenue, during the same period, increased at a CAGR of 19.8%.
Large Companies Revive Capex
Overall industry capacity expansion slowed down during FY14 as forecasted by Ind-Ra while
the top issuers continued to invest in creating new assets. Ind-Ra expects these companies to
expand capacities in FY16 through organic as well as in-organic routes. These companies
have invested over INR361bn in capex between FY12 and FY14 while the increase in EBITDA
during this period was around INR156bn.
Figure 5
Capex Index: Top Companies Spending More
(%)
Industry capex
Large companies
Small companies
200
160
120
80
40
0
2006-07
Figure 6
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
Source: Company filings, CMIE, Ind-Ra
Asset Efficiency to Improve
Revenue (LHS)
Asset turnover (RHS)
(INRbn)
1,500
(x)
2.0
FY14
FY15E
1.0
FY13
1.2
250
FY12
500
FY11
1.4
FY10
750
FY09
1.6
FY08
1.8
1,000
FY07
1,250
Source: Company filings, Ind-Ra sample
of top-23
FY16 Outlook: Pharmaceuticals
February 2015
Ind-Ra believes the revival of the capex cycle notwithstanding the asset turnover is likely to
improve further for top companies in FY16, albeit at a slower rate. This will be driven by their
entry into new markets and product expansion.
Profitability to Stabilise
Ind-Ra expects top pharmaceutical manufacturers to return around 20% EBITDA margins in
FY16 backed by product introductions. In 1HFY15, the profitability of Ind-Ra’s sample of 23
large companies decreased marginally to 20.1% (1HFY14: 20.6%). Commercialisation of more
products and forthcoming patent expiries are likely to support growth at similar profitability
levels. Getting sales exclusivities can also boost profitability temporarily.
3
Corporates
Figure 7
Profitability Steady at ~20% for Ind-Ra Sample of Large Companies
Combined revenue (LHS)
(INRbn)
1,500
Median EBITDA (RHS)
(%)
25
20
1,000
15
10
500
5
0
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
Source: Company filings, Ind-Ra sample of top-23
Smaller companies have historically struggled on growth as well as profitability front. The
situation is likely to persist in FY16 with increasing incentive for them to sell out. This will drive
further consolidation in the market. Smaller manufacturing outfits will continue to face
profitability stress as large manufacturers push them (primarily pharmaceutical intermediates
manufacturers) for cost reduction and longer credit periods. 31 of Ind-Ra’s sample of 70 small
companies reported EBITDA losses in FY14 (FY13: 26).
Figure 8
Survival Issues for Smaller Pharma Manufacturing Outfits
(Ind-Ra Sample of 70)
Combined revenue (LHS)
(INRbn)
25
Median EBITDA (RHS)
(%)
8
20
7
15
6
10
5
5
0
4
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company filings, Ind-Ra
Large Players’ Credit Profile to Strengthen
The credit metrics of large pharmaceutical companies will continue to strengthen in FY16 as
growth prospects are on track. Free cash flow is likely to be positive, despite capital
expenditure cycle revival, due to an improvement in revenue. Smaller companies (revenue
below INR1bn) will continue to face liquidity issues due to long working capital cycles and
profitability pressures.
In FY14, the profitability (median) of top Indian drug manufacturers remained unchanged at
19.2% yoy while credit metrics improved on increased top-line from improved capacity
utilisation.
FY16 Outlook: Pharmaceuticals
February 2015
4
Corporates
Figure 9
Strengthening Credit Metrics for Ind-Ra Sample of Large Manufacturers
EBITDA Int coverage (LHS)
Net leverage (RHS)
(x)
12
(x)
2.2
10
1.9
8
1.6
6
1.3
4
FY07
FY08
FY09
FY10
FY11
FY12
FY13
1.0
FY14
Source: Company reports, Ind-Ra
NPPA Penalty a Threat to Credit Profiles
The NPPA estimates a total of over INR38bn of amount overcharged by pharmaceutical
companies up to August 2014 of which only INR3bn has been recovered. If this amount is
required to be paid by the manufacturers/marketers, it will dent their credit profiles severely.
Industry Consolidation to Continue
Ind-Ra believes FY16 will also see foreign pharmaceutical manufacturers and marketers
acquiring Indian companies should the government relax foreign direct investment (FDI) norms
for brownfield investments. 2014 saw FDI in the sector coming from financial investors. During
FY14, KKR Floorline Investments Pte bought a substantial minority stake in Gland Pharma
Limited (‘IND A+’/Stable) for around INR14bn and Khazanah Nasional Berhad picked up
around 1.37% in Dr. Reddys Laboratories Limited.
Strides Arcolab Limited’s (‘IND A+’/Stable) acquisitions of Bafna Pharma Limited’s branded
generics business and Shasun Pharmaceuticals Limited during 2014 indicate an emerging
trend of Indian companies making small, focused acquisitions to gain access to manufacturing
facilities and product portfolios. Ind-Ra expects more acquisitions in the Indian pharmaceutical
space in FY16 by medium-to-large global pharmaceutical companies. However, acquisitions
with focus on the domestic market (such as the Strides-Bafna deal) are likely to be rare due to
the uncertainties around the Drug (Prices Control) Order, 2013.
Figure 10
Product Focused Acquisitions by Indian Companies During 2014
Acquirer
Aurobindo Pharma Ltd
Aurobindo Pharma Ltd
Target
Actavis Plc
Natrol Plc
Dr Reddy's Laboratories
Ltd.
Sun Pharmaceutical
Industries Ltd.
Strides Arcolab Limited
Novartis Consumer
Health Inc.
Ranbaxy Laboratories Branded generics
Shasun Pharmaceuticals
Ltd
Strides Arcolab Limited
Products
1,200 branded generics
Branded nutritional
supplements
Habitrol
Focus
EU
US
US
Domestic and
exports
Bafna Pharma Limited Raricap and other branded India
generics
ScolrPharma
Nuprin - NSAID
US
Fagris Medica Pvt. Ltd na
CIS countries
Revenue
INR30bn
INR30bn
n.a.
INR133bn
INR246m
n.a.
n.a.
Source: Company filings
Both Indian and foreign pharmaceutical companies will continue to acquire manufacturing
facilities carrying approvals from high-growth markets (such as the US, Germany and the UK).
FY16 Outlook: Pharmaceuticals
February 2015
5
Corporates
Figure 11
Manufacturing Asset Focused Acquisitions in 2014
Acquirer
Aurobindo Pharma Ltd
Sun Pharmaceutical
Industries Ltd.
Strides Arcolab Limited
Alembic Pharmaceuticals
Ltd
Target
Natrol Plc
Ranbaxy Laboratories
Facilities
1
47
Shasun Pharma Limited
Adwiya Mami
3
1
Focus
US
Domestic and exports
API manufacturing
Oral formulations
Location
US
US, EU,
India
India
Algeria
Source: Company filings
FY14 Sector Update
Pharmaceutical exports increased 14.1% yoy in FY14 (FY13: 25.6% yoy) to INR910bn.
Domestic growth rate was a subdued 6% in FY14 (FY13: 10%) on more drugs coming under
price control. During 2014, the industry saw increased regulatory control as the NPPA issued
11 notifications capping prices of a total of 791 formulation packs.
Figure 12
Major Rating Actions During 2014/15
Company
Aurobindo Pharma Ltd.
Cipla Limited
Gland Pharma Ltd.
Inventia Healthcare P Ltd.
Jubilant Life Sciences Ltd.
Strides Arcolab Limited
Current Rating/
Outlook
IND AA/Stable
IND AAA/Stable
IND A+/Stable
IND BBB+/Stable
IND A+/Stable
IND A+/RWE
The Himalaya Drug Company
Marksans Pharma Ltd
Vasudha Pharma Chem Limited
IND A-/Stable
IND A-/Stable
IND A-/Stable
Rating action in
2014/15
Upgrade
Affirmed
Upgrade
Affirmed
Affirmed
Ratings Watch with
Evolving Implications
Affirmed
Upgrade
Affirmed
End-2013
Rating/Outlook
IND AA-/Stable
IND AAA/Stable
IND A/Stable
IND BBB+/Stable
IND A+/Stable
IND A+/Stable
IND A-/Stable
IND BBB-/Stable
IND A-/Positive
Source: Ind-Ra
Figure 13
Select Pharma Issuers’ Ratings Headroom and FY16 Expectations
Long-Term Issuer
Rating/Outlook
Cipla Ltd.
IND AAA/Stable
Aurobindo Pharma Ltd.
IND AA/Stable
Gland Pharma Ltd.
IND A+/Stable
Strides Arcolab Ltd.
IND A+/Stable
Jubilant Life Sciences Ltd. IND A+/Stable
The Himalaya Drug
IND A-/Stable
Company
Inventia Healthcare P Ltd. IND BBB+/Stable
Marksans Pharma Ltd
IND A-/Stable
Vasudha Phramachem
IND A-/Stable
Ltd.
FCF
Improve
Improve
Decline
Decline
Improve
Similar
Credit
metricsa
Similar
Improve
Improve
Decline
Similar
Improve
EBITDA (%)
Decline
Improve
Similar
Decline
Decline
Improve
Capex
Decline
Similar
Increase
Increase
Increase
Increase
Improve
Improve
Improve
Increase Similar Improve
Increase Increase Improve
Increase Lower
Decline
Ratings
headroom
High
Low
High
Low
High
High
High
Low
High
a
Total adjusted net debt/EBITDA
Source: Ind-Ra
FY16 Outlook: Pharmaceuticals
February 2015
6
Corporates
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FY16 Outlook: Pharmaceuticals
February 2015
7