Pharma sector outlook for FY23

With the ongoing challenges by the increase in raw material prices and supply-chain disruptions which are leading to the higher cost of production, there are possibilities for the pharma companies to increase the prices in the domestic market, with higher WPI (Wholesale Price Index) in CY21 the companies will be able to take at least 10% price hike on NLEM (National List of Essential Drugs) portfolio and approx. 10% hike on Non-NLEM portfolio. The overall domestic market growth is expected to be around 13-15% largely led by the increase in price.

On the exports front, The Net ANDA (Abbreviated New Drug Application) filings data (Difference between ANDA Filed and withdrawn) has seen around 50% drop in the last 2 years. These factors may tend to lower deflation in overall US Generics.

US Generics:

The competition in dosage forms like OSDs (oral solid dosage) and Topicals (typically ointments) which make the bulk of the ANDA filings have seen a reduction in filings, the withdrawal, and discontinuation of products is due to the plant-related issues and non-viability of products to drive profitability, and larger players like Teva, Sandoz and Mylan are monetizing their portfolios by creating less competition in older simple / slightly complex generics. All the above factors can lead to a lower price erosion to mid-single digits as compared to the high double digits of CY21. Although competition is here to stay, the incremental investments in R&D have moved towards Complex Generics viz. Inhalation pipeline, depot Injectables, Biosimilars, etc. Large-cap companies are heavily investing in these areas for sustainable growth.
The higher price erosion in OSDs and other dosage forms is not sustainable and is likely to revert to a mean of mid-single to a high single range. The price deflation is increasing for Complex dosage forms like Injectable and Inhalers as against Simple/ Less Complex dosage forms like ODS & Topicals.

The rise in Raw material prices will likely remain in FY23:

At the beginning of CY21, a historical spike in prices of key solvents to the tune of 2x-4x in various solvents viz. Ethyl Acetate, Tetrahydrofuran, Acetone, etc. was observed resulting in gross margin decline for many companies across the API segment. Although the prices of solvents had come off from their highs, with the rise in crude oil prices of around 50% in 3 months the solvent prices are likely to go from back at their historic highs. As solvents are the building blocks of KSM (key starting materials) or raw materials, the immediate impact of higher solvent prices will lead to increased raw material costs for API manufacturers. However, deeper backward integrated API companies may be less impacted than those which buy from the third party. Apart from Solvent price increases, the higher raw material prices due to the ad hoc shut down of plants and factories in China in 2HCY21 on account of the winter Olympics and the blue sky policy of the Chinese government. Although the raw material prices have come off from their peaks still remain elevated. With higher input cost there is a possibility of API companies to face gross margin compression as full passthrough of raw material related cost to formulations companies is difficult. Although, on a lower base in FY22, the API companies are expected to see some improvement in EBITDA margins aided by revenue growth.

Increase in price led by Domestic formulation growth:

During CY21 the average wholesale price index was close to 14%, and for large domestic pharma companies, NLEM comprises close to 14-20% of their domestic portfolio. In the midst of the higher raw material costs, the domestic pharma companies are expected to take maximum price increases in the (NLEM + Non-NLEM) portfolio. On the volume front, better volume growth in Chronic therapies and higher Acute sales are expected on account of lower COVID product sales and improved in-clinic activity by Medical Representatives. Overall domestic formulations growth is expected to be around 13-15% largely led by price increases.