Data from pharmaceutical market research company AIOCD Pharmasofttech AWACS Pvt. Ltd shows that growth in the country’s pharmaceutical market slowed to a seven-quarter low between April and June this year.

“1Q FY20 market growth stood at 7.9%, the slowest in the past seven quarters and one of the lowest in past five years," Jefferies India Pvt. Ltd said in a note, citing the AIOCD data. The deepening slowdown in the domestic drug market will intensify profitability challenges for pharmaceutical companies.

The slowdown intensified from May, when the market decelerated to a growth of 7% from an average of 10% in the preceding five months. In June, the market grew 6.6%. Bulk of the drugs saw moderation and are currently growing in single digits.

Delay in the onset of the monsoon and low incidence of infections are set to have weighed on the offtake of acute therapy products. Besides, low inventory stocking post the implementation of the goods and services tax (GST) was another reason for the slowdown in pharma sales. While there may be fair reasons for the fall, the drop in growth rates is, nevertheless, disconcerting.

Volumes dropped for the second consecutive month in June and grew just 0.7% in the June quarter. “A majority of the companies saw a year-on-year decline in volumes, as did 12 of the 20 therapies," Piyush Nahar, an analyst at Jefferies India, wrote in a note.

A sanguine view is that product offtake figures will normalize as the industry adjusts to GST and normalizes inventory levels. The impact of the delayed monsoon is also expected to be transient. But as things stand, a prolonged slowdown can upset the calculations of drug companies.

(Graphic: Vipul Sharma/Mint)
(Graphic: Vipul Sharma/Mint)

Though less profitable than the US, the steady growth in the domestic market has been a source of strength for Indian drug companies. The steady growth in the local market has provided earnings stability and cushioned domestic companies from the bruising pricing pressure in the US.

Also, note that to climb the value chain, Indian companies are trying to build limited competition or better-value drug portfolio in the US. This is driving up costs towards research and development investments as well as market development. A prolonged slowdown in India can intensify cost pressures, at least till the time these new investments begin to pay off.

“Q1 FY20 is likely to be a weak one for the US business, with waning sales from exclusivities, competition in key products and discontinuation of products e.g. Losartan. On the other hand, weakness in domestic business have persisted in Q1FY20 as well, even as April’19 was a strong month. We thus expect most companies to report between 5-10% growth in India. Weak India/US should reflect in margins and we expect overall revenue/EBITDA/PAT sequential growth of 3%/9%/29% respectively for companies under coverage," Emkay Global Financial Services Ltd said in a note. Ebitda stands for earnings before interest, tax, depreciation and amortization and PAT is profit after tax.

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