For Lupin, for example, it has come down to 9.5 per cent from 38.2 per cent, whereas Sun Pharma’s RoCE has fallen to 10.2 per cent from from 33.3 per cent over the past five years. Torrent Pharma, which acquired the domestic formulations business of Unichem Pharma in 2017, saw its RoCE dip from 31.9 per cent in FY14 to 12.7 per cent in FY19.
IIFL analysts attributed the decline to increasing challenges in the US market — a key export market for Indian pharma firms. India’s largest drug maker Sun Pharma draws 31 per cent of its consolidated revenue from the US. “Majority of Indian firms now report low double-digit RoCE because of high investments. In the past, Pharma firms attracted investors due to their superior RoCE metric. Conversely, lack of investor-interest in main-line Indian pharma names is driven by falling RoCE,” IIFL said.
Earlier, Indian drug makers
used to focus on the plain vanilla generic drugs that were going off-patent in the US market. Those drugs required less expenditure on R&D, however, intense competition led to pricing pressure. Consequently, in the past few years, Indian drug majors turned to complex generics for higher profit margins.
India Ratings and Research said the demand-supply situation in the US generic drug market favours complex generics. The rating agency recently said it expected most large firms to aggressively invest in new product platforms to strengthen their market-readiness for the medium term. “This could constrain the cash flows and hamper the sector’s deleveraging progress,” it added.
Filings for complex generic drugs have risen to about 25 per cent of the overall product pipeline from nearly zero three years ago, CRISIL said.
On top of this, there is additional overhang of regulatory compliance
related issues, which necessitates investments in ensuring quality compliance.
In 2019, the US Food and Drug Administration (USFDA) issued 19 warning letters to Indian companies
as against 11 issued in 2018.
Sameer Charania, director, CRISIL Ratings said: “With intensifying regulatory scrutiny, sales growth from the US market will drop to 10-11 per cent during FY20-22, compared with growth of 16 per cent in FY19.” A substantial delay in resolution of regulatory issues and/or heightened scrutiny could derail the US growth story, he said. That said remediation costs to resolve the regulatory observations are also likely to increase for big pharma. This is expected to shave off operating profitability by 100-150 basis points over the next two financial years from the current 19 per cent, CRISIL added.
have thus started focusing on cost optimisation and are also reviewing their R&D pipeline. Ratings agency ICRA said the aggregate R&D spends of the top pharma companies
have moderated from 9 per cent (of operating income) in FY17 to 8.8 per cent in FY18 and 7.8 per cent in FY19. For the first half of the current financial year, this has further moderated to 7.1 per cent.
Crisil noted that a similar trend was noticed in calendar year 2015, when FDA scrutiny had intensified over data integrity issues. Consequently, US revenue growth had dropped to 6 per cent in FY17 as new product launches got delayed amid inherent price erosion.