Growth in revenues of leading Indian pharmaceutical companies like Sun Pharma, Lupin, Aurobindo and Dr Reddy's Lab in the US - the most lucrative market for Indian companies - will witness a muted 1-3% growth in FY2023, says an analysis.

The revenue growth of about 16 leading Indian pharmaceutical companies is estimated to moderate to 6-7% in FY2023, says an ICRA industry analysis. Growth of these companies will be supported by 6-8% growth in the domestic market, 11-13% in emerging markets and 8-10% in European markets. Growth in the US business, however, is expected to be muted at 1-3%, owing to continued pricing pressures in the generics business. Headwinds related to pricing pressures in the US generics market and rising raw material costs will also result in contraction of profit margins in FY2023. This is after witnessing a year-on-year growth in revenues of 8.5% in Q4 FY2022 and 7.7% in FY2022, notes the rating agency.

The US market's year-on-year growth was a marginal 1.2% in revenues in Q4 FY2022, while revenues had contracted by 1.1% on a Q-o-Q basis. This was primarily due to continued high single digit to low teens price erosion in the US generics market. Citing continued pricing pressures and high competitive intensity in the US generics business, some major pharma companies reported sizable impairment losses in Q4 FY2022 and also announced discontinuation of some products and segments due to reduced earnings potential, notes ICRA.

ICRA expects the operating margins (OPM) of the sample set to moderate to 20.2% in FY2023 from 21.5% in FY2022 given the continued pricing pressures in the US generics market and high raw material and other input costs. The extent of the impact on margins will differ from company to company depending on the product portfolio, geographic mix of revenues and diversification of vendor base. The operating profit margin (OPM) for the sample set contracted to 18.3% in Q4 FY2022 from 22.3% in Q4 FY2021 and 21% in Q3 FY2022. This was majorly on account of rising costs of raw materials, other input costs such as freight, packaging among others, pricing pressures in the US generics market (which is generally the most profitable market), and inventory write-offs for Covid-19 products for a few companies.

Any further impact of the ongoing geo-political issues on input prices and supply chain remain key monitorable. Given that companies export their products and also import raw materials, forex fluctuations and impact of the same on margins will also affect performance, says ICRA.

"Going forward, WPI-linked price hike of 10.8% for national list of essential medicines (NLEM) products with effect from April 1, 2022 is expected to support growth of the domestic market in FY2023 even as high base effect is likely to impact volumes in H1 FY2023," says Mythri Macherla, assistant vice-president and sector head, ICRA.

While Indian pharma companies continue to focus on new product launches, complex generics, including first-to-file opportunities to improve margins for the US business, mid to high single-digits price erosion will exert pressure over the near term.

The emerging markets witnessed a healthy Y-o-Y growth of 14.3% in revenues in Q4 FY2022, although revenues were marginally lower by 2% on a Q-o-Q basis. Overall growth for FY2022 was healthy at 17% on a Y-o-Y basis and was broad-based, spread across all key regions. This was driven by new product launches, low base, strong demand and depreciation of the INR against certain currencies.

ICRA expects the research and development (R&D) expenses to stabilise at current levels of 7-7.5% of revenues for these companies, which continue to focus on complex generics, first-to-file opportunities and specialty products, which entail higher R&D expenses. Stable investments in R&D to develop such products will support growth and margin improvement over the medium term, says ICRA.

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