Moody's Investors Service says that India's pharmaceutical market will continue to grow in the double digits; a rate which is more favourable than most other markets for the industry. However, drug companies in the country could face higher debt levels, as the pharmaceutical sector in India grows, resulting in mergers and acquisitions.
''As consolidation in the industry continues globally, particularly among generic drug companies, Indian firms will increasingly look to become involved in global mergers and acquisitions. We have already seen some Indian companies increasing their pace of acquisitions,'' says Michael Levesque, a Moody's senior vice president.
''Even if India's GDP growth slows or is uneven, the Indian pharmaceutical market would still represent a better growth opportunity than many other geographic markets, because of improving socioeconomic conditions and access to health care, against the backdrop of a rising prevalence of diseases such as diabetes and cardiovascular problems,'' says Kailash Chhaya, a Moody's vice president and senior analyst.
Moody's report says that while Indian firms do not face the same growth pressures as other players across the industry, they could become involved in global merger and acquisition activities; thereby pressuring their leverage from currently low levels. However, for most Indian companies, debt headroom is large as balance sheets are generally lowly leveraged.
Moody's report acknowledges that as a general rule, key Indian players have maintained low financial leverage and demonstrated their aversion to risk, due to their unique structures - when compared with global pharmaceutical firms - of high ownership levels by founding family members, known as promoters.
Moody's sees such structures as credit positive for Indian drug companies, because the interests of creditors and promoters are frequently aligned and often lead to a more cautious risk appetite.
Moody's report notes that no Indian player exhibits more than a 7% share of the domestic market, and unless mergers are transformative, companies in the country will remain substantially smaller than the largest global generic pharmaceutical firms such as Teva Pharmaceutical Industries (A3 negative), Actavis, Inc. (Baa3 stable) and Mylan Inc (Baa3 stable). Their revenues would therefore be substantially smaller.
Nonetheless, the report acknowledges that size alone does not drive credit quality. Indian drug companies, for instance, are characterized by good geographic diversity, healthier growth outlooks and more conservative financial policies than compared with large global players.
Indian firms also exhibit favorable geographic mix, because of their strong presence in emerging markets like India and Russia, which will see high growth. By contrast, leading players in the mature, highly competitive US and western European markets, demonstrate much higher revenue concentration.
According to Moody's, the US market represents a substantial growth opportunity for Indian drug companies, due to the rich pipelines of generic drugs awaiting approval by the US Food and Drug Administration. However, considerable event risk results from FDA manufacturing compliance standards, which have resulted in numerous warning letters for plants operated by Indian companies.
In addition, generic players operating in the US market will see greater exposure to legal costs, owing to new rules that will make companies responsible for drug safety labeling.
