India remains an important supplier to the US, but structural triggers are missing in generics. We continue to be selective with US generics and do not expect the profitability of this business to materially improve. We prefer companies with clear FDA status, a commercial specialty portfolio and a pipeline of complex generics. Price erosion in generics would keep growth in check, with new launches remaining critical. India is among the top five suppliers of pharma products in the US market, with pharmaceuticals becoming the largest imported commodity in the US. Value of import of pharma products from India has increased at an 8% CAGR over CY12-21.
Focus reverts to India: Given the increasing competition and price erosion in US generics, the focus of companies has reverted to India, both for organic as well as inorganic growth. We expect domestic branded formulations market to grow at 10-11% y-o-y over the medium-term with high profitability. We see branded formulations as a sticky business that is less sensitive to competition or pricing. This business also commands superior margins and consistent FCF generation, and therefore enjoys better valuations.
With the softening of crude oil price and normalisation of supply chain issues, we expect raw material and freight costs to gradually moderate from elevated levels. This, along with the appreciation of USD should help gross and Ebitda margins improve. We continue to prefer India focused businesses over US generics. SUNP remains our top pick, followed by JBCP.
The Indian pharma market (IPM) grew at a 10.8% CAGR over FY12-22. While FY21 growth was impacted by Covid, IPM is expected to grow at 10-11% CAGR over FY22-27, as cited in Mankind Pharma’s DRHP. The growth projection is in-line with our expectations, which we believe would be driven by a 5% volume increase, a 3-4% price hike and a 2-3% growth from new products. We expect US generics to remain volatile due to high competition, price erosion and regulatory headwinds and estimate flat to single-digit growth for companies over FY22-25E. We recommend SUNP and J B Chemicals & Pharmaceuticals (JBCP) as our top picks in the pharma space.
Since CY20, pharmaceutical products have become the largest imported commodity in the US market and the total import of pharmaceutical products in the US stood at $171 bn as of CY21. India has been among the top five suppliers of these imports since CY13 and was the fourth largest supplier in CY21.
