India Ratings and Research (Ind-Ra) believes the Indian pharmaceuticals market is likely to grow 3%-5% yoy in size during FY21, despite the COVID-19 related lockdown. Ind-Ra expects monthly revenue improvements from June 2020. Additionally, the seasonality in the Indian domestic business will support the recovery. Also, the continuous rise in the number of COVID-19 cases in India will result in further volume growth in related therapies. Furthermore, pharma companies’ large cash balances and sufficient headroom under debt covenants along with diversified funding sources will mitigate any impact of the ongoing lockdown.
The COVID-19 impact on the sector has been less pronounced than observed in the other sectors, as pharmaceuticals fall under the essential service category and sector companies are exempt from the restrictions under the nationwide lockdown. Additionally, to avoid drug shortages, the government of India has removed the roadblocks in the movement of pharma products/ ancillary supplies as well as employees engaged, thus aiding overall supplies. Companies with exposure to chronic therapies will witness a lower impact than the companies with exposure acute therapies as patients are curtailing their visits to doctors.
Manufacturing Capacities Reach Healthy Capacity Utilizations Again: The manufacturing volumes after declining to 50%-60% in April 2020, given the strict lockdown, has improved significantly to 60%-80% of the original capacities during May-June 2020, as per our industry interactions. The overall manufacturing activities had reduced, given the lack of manpower availability and lower availability of transportation for the staff in the initial days.
Logistics – A Big Challenge: Indian pharma companies initially faced challenges in the transportation of active pharmaceutical ingredients (APIs) and formulations which created short-term unavailability of some medicines. Ind-Ra’s interaction with pharmaceutical distributors also suggests that the frequency of supplies from companies reduced considerably during the initial period of lockdown and remains so due to lower production and logistics issues. Companies apart from the lower availability of transportation have witnessed an increase in freight rates for land, air and sea cargo transport, thus impacting costs. However, most issuers expect manufacturing operations as well as logistics to normalize after June 2020 with improvement in COVID-19 situation and additional support from the GoI through reducing the bottlenecks in transportation.
New Launches to Fall: Most issuers rated by Ind-Ra indicated that there would a lesser number of new launches during the lockdown while expecting lower volume growth in 1Q-2QFY21. Companies have refrained from new launches as effective marketing to the prescriber community could not be undertaken. There has been adverse impact on new prescription generation because of patient’s inability to meet doctors. Additionally, medical representatives’ limited ability to meet doctors during the lockdown has resulted in lesser chances of prescription swapping. The representatives have now been engaging with prescribers through video conferencing to discuss new launches, given the limited clarity on future physical interaction timeline as doctors/hospitals are still focusing on absolute emergencies.
Price Hike Likely by Players: Companies may take price hikes on non-DPCO (drug price control order) products up to 8%, unlike the earlier average price hike of 5% (max limit 10%) due to an increase in raw material cost and the additional cost incurred towards raw materials, logistics and manpower. The annual price hikes by companies are generally taken during 1Q. The same is likely to result in improved profitability and cash flows. It was difficult to take a significant price hike on drugs in the domestic market in the past due to intense competition and stable raw material and other costs.
Acute Therapies Impact Sales in April and May: Ind-Ra analysed the India formulations sales of 10 listed companies, and notes the overall sales fell 6% qoq in 4QFY20 and increased 9% yoy. The quarterly decline has been primarily on account of the weak acute segment sales and unavailability of doctors impacting prescription generation. During April-May 2020, the industry witnessed a month-on-month fall in sales due to the high base in March 2020 (inventory stock-up by chronic disease patients) and relatively low incidence of other diseases in the acute segment due to the lower infection rates led by the lockdown. The Indian Pharma Market declined around 11% in April 2020 and 8.6% yoy in May 2020, led by a sharp 16.7% yoy and 14.4% yoy, respectively, decline in volume growth; while prices and new drugs launches witnessed an increase of around 4% and 1% yoy. In line with the overall industry level decline, during April-May 2020, most of the companies reported a double-digit decline in sales growth due to the weak acute sales and high base last year. Except cardiac and anti-diabetic, all other therapies reported a decline in sales growth. Ind-Ra expects flattish growth in June 2020. Overall, the chronic therapies will continue to do well, due to the fresh buying of medicines while the upcoming monsoon season and commencement of elective surgeries in hospitals will lead to a recovery in overall sales in acute therapies.
|Therapy-wise Performance Therapy|
|(Growth, %)||%IPM||FY17||FY18||FY19||FY20||4QFY20||April 2020 (monthly)||May 2020 (monthly)|
|Source: Ind-Ra’s industry interactions|
Growth Trends in Indian Pharma Market
|Parameters (%)||FY17||FY18||FY19||FY20||4QFY20||April 2020 (monthly)||May 2020 (monthly)|
|New product growth||3||3||2||3||3||1||1|
|Source: Ind-Ra’s industry interactions|
Pharma Distributors Take a Cautious Approach: Ind-Ra’s interactions with few pharmaceutical distributors suggest that they have resorted to inventory clearing and there has been a reduction in inventory days in the value chain. Also, most manufacturers have extended the credit period to support distributors during the lockdown. However, the fresh restocking by distributors will depend on their assessment of the demand scenario.
Raw Material Supply Returning to Normalcy: Sector companies were facing difficulties in receiving clearance of product containers from ports, as suggested by Ind-Ra rated players. This had disrupted the supply chains for almost all pharma companies. However, API supplies from China are gradually resuming with the GoI reaching out to companies to extend logistics support to airlift critical APIs. Also, Ind-Ra’s interaction with API distributors suggests that the price escalations in key starting materials and APIs have been normalizing beginning June 2020. While manufacturing facilities continue to operate with lower workforce and at lower capacity utilization, continued supply chain disruptions could favour larger incumbents in IPM.
Comfortable Balance Sheet: Ind-Ra does not expect the sector’s liquidity to face a major risk, despite the maturities swelling in FY20 and FY21 – almost 48% of the Ind-Ra rated pharma majors’ net debt is to be repaid with repayments on the debt availed earlier for acquisitions kicking-in, the sector’s refinancing requirements is likely to increase. However, large pharma companies generally have large cash balances, which typically account for 12%-13% of their revenues; overall cash balances have been around 35% of their total debt. Furthermore, most issuers have sufficient headroom under the negative rating triggers and maintain diversified funding sources. Interest coverage, which has been in the range of 14x-16x, is likely to increase with scale and margin expansion to 19%-20%. Net leverage is expected to remain around 2x for these players. Overall, Ind-Ra believes the balance sheet of Indian pharma players is fairly comfortable. Ind-Ra’s analysis indicates that the liquidity headroom available to players rated ‘IND AA-’ and above is significantly higher than those with lower ratings. Majority of the companies rated ‘IND AA’ and ‘IND AAA’ have the liquidity buffers necessary to absorb the effect of lower capacity utilization and pressures on margins, if any – even up to the next 12 months. – MB Bureau