Corporates

Pharmaceuticals

2013 Outlook: Indian Pharmaceutical

More Profitable Value-added Growth
Outlook Report
Rating Outlook

STABLE

Rating Outlook
Stable Outlook: Overall, India Ratings outlook on the Indian pharmaceutical sector for 2013 is
stable as large movements in credit profiles are not likely. The credit and liquidity profiles of
large pharma companies are likely to improve. However, mid to small-size players may face
challenges in managing competitive pressures.
Revenue Growth: India Ratings believes that the top players of the sector will continue to grow
strongly in 2013 (over 20% pa), primarily led by exports. Of the export markets, Indian pharma
will focus on the US market which presents significant opportunities for the next two years for
generics, due to patent cliffs and recent changes in healthcare policies.
Rise in Generic Spending: Patent expiry opportunities coupled with efforts to contain
healthcare spends are likely to drive the generic market in developed countries. Affordability
and availability will make a case for generics usage in the branded generic developing markets.
As per IMS Health, global generic spending is expected to increase to USD400bn-USD430bn
by 2016 from USD242bn in 2011.
Rising R&D Spends: R&D spends will likely continue to increase in 2013 as Indian players
have started targeting complex chemistry products. R&D spends have increased over the last
few years as pharma players have built robust portfolios of products approved by USFDA. Most
companies also have a strong pipeline of products awaiting approval.
Product Pipeline Monetisation: Robust product pipelines may bear fruit in 2013 on
commercialisation. Incremental capex requirements however are likely to remain modest in the
year as many companies benefit from existing infrastructure which would be sufficient for the
expected increase in operations.
NPPP Impact Minimal: Growth drivers for the domestic market remain intact. India Ratings
believes that the decision of National Pharmaceutical Pricing Policy (NPPP) 2011 to increase
the number of drugs under price control will not have a major impact on the sectors
profitability.
Better Asset Use: Revenue visibility (domestic and export market) and no significant capacity
expansions in 2013 will drive better use of existing capacities leading to a margin expansion.

Related Research
Other Outlooks
www.indiaratings.co.in/outlooks

Analysts
Ashwini Picardo
+91 22 4000 1787
ashwini.picardo@indiaratings.co.in

Pick Up in M&A Activity: Many large Indian pharma companies have made small, niche
acquisitions for product augmentation/geographical expansion. India Ratings believes that
large companies will continue to look for such opportunities.

What Could Change the Outlook

Avinash Lodha
+91 44 4340 1700
avinash.lodha@indiaratings.co.in

Regulatory Actions: The sectors earnings are susceptible to regulatory and policy actions.
Actions which would increase the use of generics in major markets or those which would
restrict the force of patents can open up further opportunities for Indian players. Adverse
regulations which can impact the outlook include restriction of exports from India or playerspecific actions such as suspension of plant approvals by the drug authorities of importing
countries.

Carrol D'Silva
+91 22 4000 1700
carrol.dsilva@indiaratings.co.in

Large Debt-Led Acquisitions: Acquisitions that are large and primarily debt funded could also
negatively impact the credit profile of such companies and lead to negative rating action.

Sreenivasa Prasanna
+91 44 4304 1711
s.prasanna@indiaratings.co.in

www.indiaratings.co.in

29 January 2013

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Export to Continue to Drive Growth

Figure 1

India Drugs Exports

(INRbn) Growth (%)
386
34
411
7
456
11
597
31
775
30

2008
2009
2010
2011
2012

Source: Centre for Monitoring Indian

Economy

A rise in demand for generics in developed markets will be led by patent expiries and an
expansion of generics usage due to efforts taken to control healthcare costs by governments.
Rising income levels and increasing access to healthcare facilities will continue to drive
demand for generics in pharmerging markets (China, Brazil, India, Russia, Mexico, Turkey,
Poland, Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine,
Pakistan and Vietnam Source IMS).
India Ratings believes that earnings for the export-oriented and generic-focussed Indian
Pharma sector will continue to rise with strong growth prospects for the global generics market.
On the back of increasing demand for generics, exports from the India comprising 60% of
pharma sector revenue, have grown at a CAGR of 19% over 2008-2012. In January to October
2012, exports were INR620.0bn, up about 28% yoy. We expect this trend to continue.

US Remains the Most Important Export Market

Figure 2

US Drugs Going Off-Patent

(USDbn)
75
50

India Ratings believes that the US market will remain the Indian pharma sectors main focus
area in the short to medium term. This is mainly driven by the sheer size of generic
opportunities in the US market. The US generic market size (about USD100bn) may grow at a
CAGR of 8%-9% in the medium term on account of patent expiries coupled with pro-generic
healthcare policies.

25
0
2012

2013

2014

2015

Source: India Ratings market

During 2013-2015, opportunities on account of patent expiries will amount to around

USD125bn. Indian players with robust product portfolio, filings and necessary manufacturing
infrastructure are well placed to capitalise on this upcoming opportunity. Also, the Patient
Protection and Affordable Care Act (PPACA, commonly called Obamacare), which is aimed at
reducing the number of uninsured Americans and reduce overall healthcare costs, will also
increase demand for generics in the US.
India Ratings believes that the Indian markets continued focus towards the US market will also
be led by the low investments required in setting up a distribution infrastructure, given the
market is pure generic market versus a branded generic market.
Figure 3

Drug Exports From India Countries-Wise (INRbn)

Countries
USA
UK
Germany
Russia
Brazil

2009 (%) Exports

84
21
15
4
15
4
12
3
9
2

2010 (%) Exports

110
24
17
4
16
3
14
3
10
2

2011 (%) Exports

141
24
23
4
20
3
26
4
13
2

2012 (%) Exports

204
26
25
4
25
3
25
3
17
2

Source: Centre for Monitoring Indian Economy

Strong Product Filing Pipeline, Faster Approvals

Figure 4

The R&D spends of Indian pharma companies have been increasing yoy. On the back of large
investments, the companies have built a strong pipeline of products to be sold in the US.

R&D Spends
FY08
FY09
FY10
FY11
FY12
0

10

20
(INRbn)

Source: Company Reports, Sample

size 47

2013 Outlook: Indian Pharmaceutical

January 2013

30

During 2011, Indian pharma companies filings were 51% of the total ANDA (abbreviated new
drug applications) filings compared with 49% in 2010 and 45% in 2009. Also, Indian
companies share of ANDA approvals increased in 2012 at 37% (FY11: 33%). Total ANDAs of
Indian companies approved by USFDA in 2012 was 178 (out of a total of 476) versus 144 (431)
in 2011.
Besides strong product pipelines, the sectors growth will also benefit from faster
commercialisation of product filings due to the Generic Drug User Fee Act (GDUFA).
Implemented from October 2012, the act is looking to bring down the approval time frame to 10

Corporates
months from 31 months currently.
Figure 5

Company Wise ANDA Filings

Cumulative fillings

(No)

Pending ANDA Approvals

400
300
200
100
0
Ranbaxy

DRL

Lupin

Sun Phrama

Torrent

Cadila
Healthcare

Aurobindo
Pharma

Strides
Arcolab

Wockhardt

Ipca
Laboratories

Source: Annual Reports/Market Sources

Domestic Formulations Growth Drivers Intact

The next main growth driver for the Indian pharma sector is the domestic market which
contributes 40% to the sectors revenue. The agency believes that growth drivers for the
domestic formulation market remain intact. Improving healthcare infrastructure, better
penetration of health insurance, increasing health awareness in both metro and rural towns will
continue to drive growth.
The recent decision of NPPP to increase the number of drugs under price control to 348 (from
74 earlier) will negatively impact domestic market focussed companies, especially MNCs while
the impact will be lower on companies with significant revenue from exports.

Growth from Alliance and Partnerships

India Ratings expects the trend of alliances between Indian pharma companies and innovator
companies to continue in 2013, given the win-win proposition for both parties. However, unlike
the past deals wherein the alliances entered into were focused on the regulated markets,
newer deals have been more focussed on growing emerging markets.
Many of the alliances have also been for joint drug development which acknowledges the
research capabilities of the Indian talent pool. This goes beyond the traditional alliances which
combine the research capabilities and world class manufacturing facilities of Indian companies
with the distribution capabilities of alliance partners to cater to the world generic markets.
Figure 6

2012: List of Alliances Entered Into by Indian Pharma Companies

Year
Aug 12
Jun 12
Aug 12
Feb 12
Feb 12
Oct 12
Jul 12
Nov 12
Aug 12
Jun 12

Indian pharma outfit

Strides Arcolab Ltd.
Dr Reddy's Laboratories Ltd
Ranbaxy Laboratories Ltd.
Jubilant
Jubilant Lifesciences Ltd
Piramal Healthcare Ltd
Cipla Ltd
Biocon Ltd
Orchid Chemicals
Biocon Ltd

Alliance partner
Gilead Sciences Inc
Merck
Gilead Sciences Inc
Mnemosyne Pharmaceuticals Inc
Endo Health solutions Inc
Fujifilm Diosynth Biotechnologies
Drugs for Neglected Diseases Initiative
Bristol Myres Squibb
Hospira Inc
Abbott Laboratories

Type of alliance
Emerging markets
Drug development
Emerging markets
Drug development
Drug development
Drug development
Drug development
Exclusive marketing
Business Transfer
Contract research

Source: Company filings

Inorganic Growth- Increasing

Diversifying Product Portfolio

Geographical

Reach

and

To maintain growth momentum over a long term, pharma companies are looking at the
acquisition route which could result in product portfolio augmentation and/or geographic
expansion for the acquirer. The year 2012 already saw the beginning of the acquisition trend
with at least six sizeable deals announced in the Indian pharmaceutical industry. They included
three deals by Sun Pharmaceutical Industries Ltd, including acquisition of the generic assets of
2013 Outlook: Indian Pharmaceutical
January 2013

Corporates
Dusa Pharmaceuticals Inc. in the US, buying the remaining stake in Taro Pharmaceutical
Industries Ltd and a stake purchase in URL Pharma. Cipla bid to buy CiplaMedpro in South
Africa.
Indian companies have mostly used cash reserves for these acquisitions. Acquisitions if funded
through debt can negatively impact the credit profiles of acquiring companies; turning out
profitable operations from acquired assets could also be a challenge.
Also, companies are looking at building differentiated product portfolios which include complex
products that are difficult to manufacture. With not more than four to five players, there would
be limited price erosion and more stable margins.

Higher Asset Use to Benefit Margins

Asset use (gross fixed assets/ revenue) which had declined to 1.63x in FY11 from about 1.90x
in FY08 due to capacity additions, improved to 1.72x in FY12 and is likely to improve further
over the next two years as the capacities are increasingly used.

Figure 7

EBITDA Margins
India Ratings Pharma portfolio
(%)
45

Strides
Vasudha
Nectar

Aurobindo
Claris
Jubilant

35

Figure 8

Sector Efficiency Trends

Revenue growth (LHS)
(%)
30

FY09 FY10 FY11 FY12 FY13EFY14E

Source: India Ratings

23.3

24.3

10

8.5

23.9
8

18.3
13.9

10

9.0

7.8

20

Capex as % of revenue (RHS)

26.4

9.2

25
15

EBITDA margin (LHS)

Asset utilisation (x) (RHS)

17.3

13.6

4
1.75

1.78

1.63
1.72

2
0

FY09

FY10

FY11

FY12

Source: India Ratings - Sample size of 47

India Ratings believes that new product launches from a sizeable approved product basket will
increase asset utilisation in the sector, leading to an improvement in EBITDA margins.
Revenue grew 18% yoy in H1FY13 and EBITDA margins remained unchanged at 24%.
In addition to better asset use, operating margins for certain companies will also benefit from
high profits from the commercialisation of first-to-file opportunities and complex products.
However, competitive pressures will continue to have a negative impact on margins and will
offset part of the effect of beneficial factors. The negative impact of pricing pressures will be
lower for large backward integrated companies than for non-integrated smaller to mid-size
companies.

Large Players Credit Profile to Remain Comfortable

India Ratings believes that the credit metrics (debt/EBITDA) of large pharma companies will
remain at a comfortable level as growth prospects are on track; free cash flows are expected to
be positive due to an improvement in revenue and limited capex.
Among the India Ratings-rated pharma portfolio, large players like Aurobindo Pharma Limited
(IND AA-/Stable), Jubiliant Life Sciences Ltd (IND A+/Stable), Strides Arcolab Ltd (IND
BBB+/Stable) are likely to see an improvement in credit metrics in FY13 and FY14.
Figure 9

2013 Outlook: Indian Pharmaceutical

January 2013

Corporates
Sector Credit Metric Trend
Gearing

Adjusted debt to EBIDTA

Interest cover

(x)
8
6
4
2
0
FY09
FY10
Source: India Ratings sample size 47 comapnies

FY11

FY12

Figure 10

Figure 11

Interest Coverage

Adjusted Debt/EBITDA

India Ratings Pharma Portfolio

Strides
Vasudha
Nectar

(x)

India Ratings Pharma Portfolio

Aurobindo
Claris
Jubilant

20

20

15

15

10

10

0
FY09
FY10
FY11
Source: India Ratings

FY12

FY13E

FY14E

Strides
Vasudha
Nectar

(x)

0
FY09
FY10
FY11
Source: India Ratings

Aurobindo
Claris
Jubilant

FY12

FY13E

FY14E

2012 Review
Figure 12

Sector Financial Performance

Revenue (LHS)

(INRbn)

EBITDA (LHS)

EBITDA margin (RHS)

250

(%)
40

200

30

150
20
100
10

50
0

0
Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Source: India Ratings - Sample size of 47 listed entities

Major Rating Actions in 2012

Strides Arcolab Limited (Strides; IND BBB+/Stable): India Ratings upgraded Strides LongTerm Issuer Rating by two notches following its repayment of USD116m of foreign currency
debt (following the sale of its Australian subsidiary) and based on the likelihood of a strong
improvement in cash-flow generation coupled with limited capex spends. Strides credit profile
is likely to improve in the medium-term driven by commercialisation of more USFDA approved
products in its steriles segment - the major revenue and profitability driver.
Gland Pharma Limited (GPL, IND A-/Stable): India Ratings upgraded GPLs Long-Term
Issuer Rating by one notch to reflect its higher-than-expected revenue growth of over 120% yoy
on the back of penetration in a therapeutic segment which has only two other manufacturers
worldwide. The companys high customer advances against its order book have resulted in a
2013 Outlook: Indian Pharmaceutical
January 2013

Corporates
very strong credit profile with close to zero net financial leverage.
Aurobindo Pharma Limited (APL, IND AA-/Stable): India Ratings affirmed APL to reflect
the improvement in its credit profile as per expectations along with increased capacity
utilisations, robust growth and profitability. The agency expects APL's revenue growth to
continue to come from the sales of formulations to the regulated markets. Profitability is also
expected to grow on account of higher capacity utilisation levels and absence of losses from
the China operations. An increase in revenue and profitability coupled with limited capex is
expected to translate into positive free cash flows over the medium to long term.
Vasudha Pharma Chem Limited (Vasudha, IND BBB+/Positive): India Ratings revised
Vasudhas Outlook to Positive from Stable as a result of its top-line growth in line with the
agencys expectations along with an margin expansion on the back of its continued market
leadership position in its top-five products. Further growth will come from continued high
utilisation of its existing facilities and introduction of new products and advanced stage variants
of the existing products.

Figure 13

Financial Snapshot of India Ratings-Rated Pharma Companies

Company

Aurobindo
Pharma

Ratings
Year-end
Revenue
EBIDTA
Net profit
Shareholders funds
Debt
EBIDTA margins (%)
EBIDTA /interest
Debt/EBIDTA
Debt/equity
Cash flow from operations
Inventory days
Receivables days
Creditors days

Jubilant
LifeSciences

IND AA/Stable IND A+/Stable

FY12
FY12
44,879
43,031
6,055
8,734
-1,235
145
23,397
23,297
30,959
38,380
13.5
20.3
2.2
3.9
5.1
4.4
1.3
1.6
2,456
5,148
157
121
101
55
62
89

Gland
Pharma

Vasudha
Pharma
Chem

IND A-/Stable IND A-/Stable IND A-/Stable

Dec 11
FY12
FY12
7,388
13,033
5,267
2,435
2,374
1,331
1,515
732
1,334
10,509
7,844
4,517
4,108
10,431
844
33.0
18.2
25.3
5.0
2.3
48.0
1.7
4.4
0.6
0.4
1.3
0.2
-420
749
1,241
186
208
220
129
85
64
126
69
50

IND
BBB+/Stable
FY12
3,824
661
330
1,357
803
17.3
7.3
1.2
0.6
158
61
98
43

Claris
Lifesciences

Nectar
Lifesciences

Strides
Win
Arcolabs
Medicare
IND BBB+
IND
/Stable BBB/Stable
Dec 11
Dec 11
25,245
4,526
4,587
177
1,593
169
14,180
1,501
25,664
722
18.2
3.9
2.1
8.7
5.6
4.1
1.8
0.5
5,014
102
83
79
67
45
115
64

Source: India Ratings

2013 Outlook: Indian Pharmaceutical

January 2013

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2013 Outlook: Indian Pharmaceutical

January 2013