What is the outlook for Indian pharma in 2018? Analysts tend to think that it's a bit uncertain but many still feel the worst may be over. The last three fiscal years have been challenging for Indian pharma companies. The year 2015/16 saw price regulations being rung in by the pricing regulator. The next fiscal, 2016/17, was also tumultous with the demonetisation drive of the Modi government while 2017/18 has seen businesses coming to terms with the switchover to the Goods and Services Tax (GST) regime.
The expectation therefore is that 2018/19 could be the first normalised year for pharma after a while and the sector could show growth considering that the base is likely to be low by the end of FY18. And there may be more acquisitions. Plus, many of the leading companies will see their facilities come in for re-inspection by the US drug regulator - be it Sun Pharma's Halol, Dr Reddy's Duvvada and Srikakulam and Lupin's Goa and Indore facilities.
The year 2017 hurt Indian pharma in more ways than one. What hurt Indian companies the most in the US, their biggest market outside India, were three developments. Buyer consolidation and increased competition took a toll. It has been happening for the past two to three years but these developments became a severe problem in 2017. Most Indian pharma companies saw their base business (products launched earlier to the current financial year) in the US erode by 10 to 15 per cent this year as against 6 to 10 per cent last year.
The channel consolidation in the US has meant there are today just about three to four large wholesalers and chains that source generic drugs in the US as compared to about a dozen of them four years ago. Growing competition too has hurt margins. While the trend has been towards more players, including many from India, many of the relatively newer entrants into the US market began to cut prices severely to gain market share.
The third element was the unrelenting US drug regulator that chose to keep pressure on companies on crucial regulatory compliance issues. At the beginning of 2017 there were expectations that perhaps pharma giants like Sun Pharma and Dr Reddy's would be able to get the regulatory challenges sorted out by the year end. Not only did they, and others like Wockhardt and Ranbaxy plants (now Sun Pharma plants), continue to remain under the regulatory scanner but even others like Lupin faced the heat.
USFDA issues are not new and companies have been facing the music for the past couple of years but in 2017, analysts point out, the grounds for warning letters have become even more stringent. The end result: There was a double whammy. On the one hand the base business is getting eroded and on the other, because of the regulatory challenges, the companies are unable to get new product approvals and therefore unable to launch newer products in the market.
Then, domestically, the other big market for Indian pharma, policy uncertainties hurt the most. Some of the big concerns were around signals that the industry should be ready for a scenario where doctors would prescribe only generic drugs and not branded generics, especially for single molecule drugs, which would be -- as per some estimates by analysts -- about 40 to 50 per cent of the total domestic pharma market by volume and about 30 per cent in value terms. Then, there have been concerns that the price control applied to essential drugs may be extended to most other drugs too. These worries were also expressed by those who run and operate hospitals and diagnostic labs. Linked in some ways to these concerns were also some local M&A transactions.
Torrent, which had earlier bought Elder Pharma's brands, bought the India business of Unichem this year and Eris Lifesciences bought the India business of Strides Shasun. Analysts link part of the M&A activity to the fact that the exorbitant valuations have tempered down. Some deals are happening at 3 to 4 times sales as against 6 to 8 times sales demand earlier by pharma companies.