Level of investment by Indian generic formulation manufacturers falling: Candle Partners

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Capital spending by Indian generic pharmaceutical companies has been steadily declining, according to data from investment bank and consultancy Candle Partners.

Talk to Trade standard, Candle Partners founder Navroz Madhudawala said the level of investment over the past three to four years has been declining for generics systems houses. “It peaked for large caps at around 30% of the gross block in fiscal 2016, which was the peak of investments in the market regulated by the Indian pharmaceutical industry. Since then, it has seen a steady decline and is now stabilized at 9-10% of the raw block over the past 2 years (fiscal 2021, fiscal 2022). »

On the contrary, the investment cycle for active pharmaceutical ingredients (APIs) continues to be robust, with the industry consistently spending 18-19% of its gross block on investments, Madhudawala added.

So what is the reason for this drop in capex by formulators? Madhudawala believes this is directly related to the underperformance of regulated markets. “Most of the big companies in India are sitting on spare capacity when it comes to solid dosages for regulated markets. India invested heavily in regulated market capabilities during the FY15-FY17 phase and the effect of this will likely take some time to normalize,”

The CEO of a major pharmaceutical company said: “In absolute numbers, capital expenditure has not decreased. But, yes, the priority areas keep changing. Once we build capacity for US markets, we can’t keep adding capacity every year. Then we focus on investing in processes.

Candle Partners says that over the past five years, the industry has seen revenue growth of 7%. Flat or negative growth in the US operations of several companies is the main contributor to these low growth rates. For most companies, business in India and the rest of the world (RoW) grew by 10-12%, which helped mitigate the weak performance in the United States.

In contrast, API makers have seen growth: 5-year revenue CAGR of 15%, EBITDA margins are around 24-28%.

US sales as a percentage of total formulations peaked at 42% in fiscal year 2017 and have been steadily declining since. Meanwhile, Indian incomes have risen from 27% to 32%.

Indian pharmaceutical majors like Torrent, Cipla, Dr. Reddy’s Laboratories, etc. therefore focus on their business in India.

“For most companies, these two business plans grew around 10-12%, which helped dampen US performance,” Candle Partners noted.

R&D spending has been reduced sharply, from historic levels of 9% in fiscal 2016 and fiscal 2017 to current levels of 5-6%. “While this is good for short-term return on capital employed (ROCE), the long-term implications are questionable,” the consultant said.

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