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Outlook 2019: Pharma looks medically fit for double-digit growth after years of suffering

By Sriraam Rathi

Indian pharma companies have been going through a tough phase for the past couple of years due to significant competitive intensity and pricing pressure in the US (the largest market) and regulatory hurdles in India in terms of demonetisation, GST implementation and lower prices. We believe the pricing environment in the US has stabilised, as average price erosion has now come down to single digit from double digits and Indian business should grow in double digits.

Among the key growth drivers to look at are:-

1. Complex generics and speciality portfolio to provide growth impetus
Next wave of patent expiry includes complex generics and speciality drugs, which are difficult to manufacture and have less competition. Companies have been ramping up capabilities as this shift of focus would be the key to future long-term sustainable growth. The specialty products involving innovation provides an exclusivity period for marketing and hence, offers very high profit margins.

The large Indian companies such as Sun Pharma, Lupin, Dr Reddys have already commercialised products in specialty segment which includes innovation.

2. Pricing pressure in US market is plateauing, USFDA issues reducing with increasing compliance.
US generics business witnessed double digit price erosion in the base business post buyer consolidation in last two years. However, pricing environment is stabilising and revenue would start growing from hereon. Portfolio pruning by big pharma companies has reduced competition in legacy products, thereby easing competitive pressure.

Clearance in 483 observations and limited instances of warning letters or import alerts in CY18 indicate increased regulatory compliance by the companies, hence potential for growth recovery. However, higher ANDA approvals by USFDA have reduced the opportunity size for generic products.

3. India formulations growth has started improving
The Indian pharma industry has adjusted to all disruptions (demon and GST) in the last two years and has reverted to a steady low double-digit growth

The Government of India push to generic-generic adoption has not gained traction, Jan Aushadi stores have increased significantly but it has not affected growth of branded formulations.

We expect industry to grow at 11-12 per cent in foreseeable future driven by mix of strong volume growth and 3-4 per cent price increase. This would be key positive as domestic formulations offer sustainable high profit margins without any requirement of large capex.

4. Healthcare would continue to grow in double digits
The hospitals business has been growing in double digit and is more consistent. We expect this growth trend to continue considering increasing lifestyle diseases, higher penetration and rising health insurance coverage.

The diagnostic industry growth rate has come down from earlier high double digit to mid-teens mainly due to severe price competition. The pace of competition has reduced, and we expect the industry to see 14-15 per cent growth going forward.

Challenges ahead
However, there are several risks the sector faces. Chief among them are unfavourable results of facility inspection by USFDA, delay in product approval by USFDA, more products added to NLEM list and FDC ban in India.

Our Top picks in the sector are Aurobindo Pharma, Torrent Pharma and Dr Lal Pathlabs.

(Sriraam Rathi is a pharma analyst with ICICI Securities. Views are his own)

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