A rising acceptance of generics, coupled with increased outsourcing of manufacturing by the global pharma companies to low-cost locations, will benefit the export-oriented Indian companies in a big way. An increase in contract manufacturing volumes and alliances with international companies could help Indian pharma industry to grow around 11-12%, according to Fitch Ratings.

The pharmaceutical industry globally is facing a period of significant drug patent expiries, which expands the addressable market for generics companies. Regulatory steps taken by developed countries towards curtailing growing healthcare budgets could also add to the demand for generics. These will augur well for the Indian companies, the agency said.

With a number of Indian companies entering into alliances, these companies will continue to benefit from steady domestic growth, with a consequent overall growth in volumes and capacity utilisation.

Although refinancing risks remain on account of foreign currency convertible bonds (FCCBs), outstanding on many Indian pharma companies? books, the improved liquidity scenario, coupled with the improved cash flows over the near term, should partly offset this risk. Some companies bought back a portion of their FCCBs in 2009 at a discount, which also partly mitigates refinancing risks. Many Indian companies suffered in 2009 due to large fluctuations in foreign currency due to a substantial portion of their sales, raw material purchases, and a material part of their debt, being in foreign currency (primarily the US dollar).

The liquidity scenario is comfortable in 2010. With an improvement in the global market, Indian pharma exporters should see shorter cash cycles with regard to their working capital, which had expanded during the tight liquidity situation in 2008 and the first half of 2009. Although higher utilisation levels and strong demand growth will continue to drive revenue growth, margin benefits could be offset in future by adverse currency movements, greater-than-expected competition and/or price erosion in key markets.

It is also noted that an additional margin benefits should accrue to Indian companies which are undergoing a transition from active pharmaceutical ingredients (API) to high-margin generic formulations, and from unregulated to regulated markets, as well as a move towards high-end therapeutic segments/delivery systems.

With the arrival of global companies into the generic market, the already-competitive market is likely to face further strain. Indian companies, by contrast, are much smaller and do not have the financial strength to absorb high price cuts or deep discounts. Indian companies? distribution networks in regulated markets is also far below that of their global peers. They will have to work harder to manage costs and maintain profitability in order to compete effectively.

The earnings and profitability growth would come from strong product portfolios and an established presence in regulated as well as unregulated markets. These companies will also receive enhanced revenues from the new partnerships. Earnings and profitability will also come from the burgeoning Contact Research and Manufacturing Services (CRAMS) opportunity-due to steady growth in generics-and from exports due to increased outsourcing from international markets. According to Fitch, rising purchasing power and the increasing penetration of health insurance will support strong growth in the domestic formulations business in the long term.

Fitch notes that the incentive to enter into alliances arises from the benefits the global companies derive from a readily-available generic product portfolio ? with necessary approvals in place. It enables these big firms to make up for the erosion in revenues and profitability from the dwindling product pipeline of innovative drugs.