Mumbai: India's top 20 pharmaceutical companies would increase capital expenditure by 40 percent to more than Rs 50,000 crore by fiscal 2018, credit rating agency CRISIL said Wednesday.
Capex increase is because drug makers are expected to pay greater attention to regulated markets, especially the US market, to take advantage of substantial patent expiries expected in the medium term, as well as an ever increasing demand for generics. Regulated markets require higher investments to meet stringent standards, it added.
"CRISIL expects the capital expenditure (capex) of India's top 20 pharmaceutical companies, which contribute nearly two-thirds of the country's exports, to increase 40 percent to over Rs 50,000 crore till fiscal 2018, compared with about Rs 36,000 crore seen in the last four fiscals," a CRISIL statement said.
Out of the top 20 pharma companies, capex spending of eight companies, which currently generate a majority of revenues domestically, would almost double by fiscal 2018, growing at a much faster pace compared to the rest which are already focussed on regulated markets.
"Increasing domestic pressures will force Indian companies to seek greener pastures abroad. This will lead to higher expenditure related to compliance, research and manufacturing capacities. We see their capex rising around 200 basis points to nearly eight percent of operating income by fiscal 2018 from six percent now," CRISIL's President Ratings (Large Corporates) Ramraj Pai said.
Three factors would drive capex increase. The first is the need to adhere to compliance regulations of the US Food and Drugs Administration (FDA). FDA scrutiny of Indian manufacturing plants has been increasing of late, so companies would have to invest in upgrading facilities proactively to enjoy uninterrupted benefits from opportunities.
Secondly, research spending would rise since companies would need FDA approval to be able to sell their generic medicines in regulated markets. Consequently, annual filing of abbreviated new drug applications (or ANDA, which seeks approval to sell generic versions of patented medicines), by Indian companies is expected to increase to over 100.
As on March 31, 2014, the top 20 companies had around 1,000 ANDAs pending approval from the US FDA, compared to around 715 as on March 31, 2010.
Thirdly, investments to build FDA-approved manufacturing facilities and processes would rise. Revenue from regulated markets is poised to increase by about 1.7 times in the next four years through fiscal 2018. This would mean a significant ramp-up of existing capacities due to sharper focus on the regulated market.
Indian drug makers would continue to benefit from low debt and steady cash flows, which would mitigate or offset any potential impact of large capital spending on balance sheets.
"Aggregate gearing of the 20 companies has remained healthy at around 0.5 times over the last 3 fiscals. Liquidity is strong, too, with cumulative cash and liquid investments of nearly Rs 15,000 crore as on March 31, 2014. Both these strengths will support their credit profiles," CRISIL Ratings Director Anuj Sethi said.
