The credit rating agency ICRA (Investment Information and Credit Rating Agency) on Thursday said that it expects the revenues for its sample set of 16 Indian pharmaceutical companies to grow by 4 to 6 per cent in FY2023, marginally lower than the growth of 7.7 per cent in FY2022. 

While the same will be supported by 5-7 per cent year-on-year (YoY) growth in the domestic market and 4 to 5 per cent in the US business, revenues from the European market are expected to contract marginally, given the ongoing macroeconomic challenges and the large base of the previous fiscal which was supported by vaccine sales, 

For FY2024, the investment information agency expects the sample set revenues to grow by 6-8 per cent, primarily driven by the domestic and emerging markets. As for operating margins, after contracting by 110 bps to 21.5 per cent in FY2022, they are expected to contract further by 50- 100 bps in FY2023 due to high input costs during H1 FY2023 and continued pricing pressures in key markets of the US and Europe.

"That said, moderation in raw material prices and improved earnings due to first-to-file (FTF) launches in the US market will continue to support margins for the sample set players in FY2023," ICRA's statement read.

ICRA maintained that the outlook for the pharma companies looks stable led by expectations of continued steady revenue growth and comfortable profit margins. The credit rating agency expects the sample set’s return indicators, capital structure, and coverage indicators to remain comfortable, despite higher Capex and R&D expenses, which are likely to be partly funded through strong internal accrual generation and available surplus liquidity. 

Speaking on the headwinds in the European market, Mythri Macherla, Assistant Vice President and Sector Head, ICRA said, “Revenues of ICRA’s sample set from Europe continue to witness headwinds such as muted demand, the depreciation of the EUR against the INR, and pricing pressures due to increasing competition. Some companies are thus exiting non-profitable markets and/or products to protect their margins as the ongoing inflationary pressures are also impacting the cost of imports from Europe. 

She further said that the market conditions in Europe are expected to remain challenging, given the ongoing macroeconomic issues, even as the same is expected to be mitigated for some companies to a certain extent by expansion in product offerings and market share gains in existing products. "Overall, revenues for the sample set from the Europe market are expected to contract marginally in FY2023,” she added.

During Q2 FY2023, the sample set registered a YoY growth of 7.0 per cent in revenues in Q2 FY2023, supported by 11.4 per cent growth from the US market and 6.2 per cent in the domestic market. The same was offset by a 7.6 per cent contraction in revenues from the European markets, ICRA noted.

For the domestic market, the sample set is expected to witness a growth of 5 to 7 per cent in FY2023. This will largely be supported by the WPI-linked price hike for NLEM products, sustained healthy volumes across both chronic and acute segments, new product introductions, and annual price hikes for non-NLEM products, the investment information agency stated.

As for the US market, in line with the trends in the recent past, mid-to-high single digit pricing pressure is expected to continue over the near term for generics, with some normalisation expected only after a few quarters.

Commenting on the recent pick-up in inspections by the United States Food and Drug Administration (USFDA), Deepak Jotwani, Assistant Vice President and Sector Head, ICRA, said, “With the USFDA re-commencing physical inspections of manufacturing facilities and some companies receiving form 483s and warning letters, regulatory risks remain a key monitorable. Any adverse outcome in the form of warning letters or import alerts for key facilities could impact the companies’ business prospects.” 

Most major Indian pharmaceutical companies continue to focus on emerging markets to fuel their growth, given that they continue to face pricing pressure in the US and the European markets. The growth in emerging markets also continues to be driven by new product launches, strong demand, and depreciation of the INR against certain currencies, the credit rating agency said.