Fitch expects sales of drugs used to treat acute medical conditions and elective procedures to continue to recover in FY22. Sales in these categories fell in FY21 as travel restrictions reduced doctor visits and hospitals prioritised Covid-19 treatment over elective procedures. Sales of some of these products are still 10% below pre-pandemic levels, although they started to recover with the easing of curbs.
The risk of further waves of infection remains significant in markets with slow roll-outs of vaccination, including India, but healthcare systems are better prepared after the second wave, which should limit the impact.
We believe revenue in key markets, including the US and Europe, will also benefit from a healthy pipeline of generic drugs and further progress in launches of specialty drugs by larger companies. This should help to offset the effects of continued price erosion, particularly in the US. Several companies have taken steps to remediate shortcomings pointed out by the US Food and Drug Administration (USFDA) previously in their plants, but travel restrictions delayed re-inspections last year. Progress in resolving the USFDA issues after resumption of inspections could accelerate new launches.
We also expect sales in the near term to be boosted by demand for Covid-19 related drugs, particularly in India. Some companies say they will expand production capacities in active pharma ingredients (API) and injectable products to take advantage of government incentives and increased demand.
Healthy growth in domestic market and API sales helped Glenmark Pharmaceuticals Ltd (BB/Stable) and Sun Pharmaceutical Industries Limited to offset declines in the US, and supported low single-digit growth in revenue in FY21. Glenmark’s domestic sales benefitted from the limited pandemic impact on its key therapies, including those for cardiovascular diseases and diabetes, and launch of a drug for use in Covid-19. Similarly, growth in India and API helped Lupin Limited to limit the overall decline in sales to 1% in rupee terms for FY21, despite a 5% drop in North America, its largest market.
Growth in the US helped Aurobindo Pharma Limited and Dr. Reddy's Laboratories Ltd’s report high single-digit revenue growth in FY21. The pharma revenue of Jubilant Pharma Limited’s (BB/Stable) parent Jubilant Pharmova Limited increased modestly in FY21, despite significant decline in speciality segments, which are dependent on doctor visits and elective procedures. This is because of the strong growth in contract manufacturing of injectables and sales of API, and a boost from sales of Covid-19 products in India.
Many of the leading companies reported stable or better operating margins in FY21 despite lower sales in the US, where margins are typically wider. This was due to their focus on cost savings, and lower travel and marketing expenses during the pandemic. Companies like Glenmark and Lupin also benefitted from lower R&D expenses. Sun reported higher margins due to increased contribution from more profitable specialty drugs.
Fitch expects costs to rise to normal levels in FY22 as companies step up marketing and R&D activities. Nonetheless, higher sales will cushion the impact on margins. Resilient operating performance enabled Glenmark and Jubilant Pharma to proactively refinance their US dollar notes maturing in 2021. Most companies were prudent about growth investments in FY21, which enabled debt repayments. We expect capex to rise in FY22, but this should not affect the strong financial flexibility at most companies.