Tough Gets Tougher For Global Firms And Indian Giants

An industry update by Indian credit rating agency ICRA finds global drug makers saw their profitability drop in the country mainly due to a drying up of launch plans, while their Indian counterparts are contending for scale with bigger global generic rivals.

MUMBAI – Subsidiaries of leading multinational drug makers in India have maintained a strong credit profile but sluggish product introductions have dented profitability. As part of a broader study, ICRA, a local corporate credit rating agency, sampled seven subsidiaries of MNCs in the country over a five-year term to gauge the impact of scale on performance.

One of the key findings was that those firms showed almost negligible debt levels and sizeable cash balances, but their profitability reflected a declining trend. The study did not name specific companies.

It noted, “While they [multinationals] continue to maintain superior return indicators, their EBITDA margins have been on a declining trend over the past five years. In our view, their limited ability to launch patented products owing to Intellectual Property (IPR) related challenges in India and increasing competition from domestic players are the key factors behind shrinking margins.

“More recently, the price cuts initiated by the government on a wide range of essential drugs have also had an impact on their earnings given the premium-pricing strategy vis-à-vis domestic companies and limited geographic diversity.”

The rating agency highlighted preferences for outsourcing manufacturing operations and limited investments in R&D as key reasons for their cash balances as compared to Indian peers. The MNCs also demonstrated comparatively higher financial discipline.

From three distinct pools that formed part of the study - 13 large pharmaceutical companies with spreads across mature and emerging markets, 11 mid-sized companies with high dependence on India but aiming for a global focus, and seven MNC units in India - MNCs were found to have the best RoCE (return on capital employed).

Locals Big But Facing Rivals

On the other side, the report said local generic companies faced their own set of challenges from international counterparts in terms of scale although the larger firms came out stronger on a few financial parameters.

It suggests global generic firms have used their stronger balance sheets to follow the inorganic route, in contrast to the position taken by Indian companies that are largely focused on gaining front-end presence in certain unexplored markets or plugging technological gaps in complex therapy segments.

“Barring Sun Pharmaceutical Industries Ltd.’s acquisition of Ranbaxy Laboratories Ltd. for $4 billion, most of the acquisitions by Indian companies have been in the vicinity of $100-500 million,” the report said.

ICRA mentioned that the international outlook of “larger Indian companies” helped achieve “reasonable scale” as compared to their smaller rivals, aided mainly by opportunities to launch blockbuster drugs in the U.S. and creating a branded generics business in emerging markets. Acquisitions have also helped expansion into newer geographies and to access technical capabilities, according to the report.

“This coupled with their improving quality of product filings has enabled [Indian] companies to improve margins over the years. Accordingly, Return on Capital Employed of larger pool has expanded by approximately 900 bps between financial year 2010-14 supported by improving gross margins and scale benefits, partly offset by rising R&D investments and costs associated with setting-up business in new markets or accommodating in-organic investments.”

The report went on: “The strong improvement in operating margins and cash accruals also supports the credit profile of leading pharma companies, which has also strengthened considerably over the years. Most of the leading companies maintain low leverage levels and strong liquidity at present.”

It forecast the business mix of global generic companies will increasingly move towards specialty pharmaceuticals, and that the larger domestic peers are expected to follow this through use of their own resources or buyouts.

From 2013 to present, the top three global generic companies alone have seen acquisitions worth more than $125 billion.

“Given the diminishing pipeline of patent expiries and continued pricing pressure, the inorganic route has been the favored route, earlier to gain scale economies and now to access niche therapies and complex products. Global generic majors have focused on increasing share of specialty pharma over the years and have been able to consistently reduce their dependence on pure play generic products supporting the growth and margins,” the report said.

Larger domestic peers are expected to follow in these footsteps to counter competitive pressures and expand their product and geographic routes.

[Editor's note: This story was contributed by PharmAsia News, which provides in-depth coverage of Asia business and regulatory developments.]