A bigger problem for India lies in store

Tue, 9 Feb Pre-Open

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The global economy crumbled and slowed down India's growth in FY09. Monsoons failed to leave a mark and hampered agriculture. Food prices soared but so did the stockmarkets and liquidity. Amidst all this, the central bank (RBI) remained wary of raising interest rates fearing that it would thwart India's growth. However, it did resort to raising the reserve requirements of banks in its recent monetary policy.

Despite all this, as reported on Bloomberg, India's economy is expected to grow by 7.2% in FY10. This is after recording growth of 6.7% in FY09. This could probably leave the Finance Minister Pranab Mukherjee more headroom to consider withdrawing the fiscal stimulus.

Just a week ago, India's chief statistician Pronab Sen had stated that the Indian government may not exit the stimulus measures anytime soon. Sen acknowledged that the industrial recovery in India's US$ 1.2 trillion economy was 'on track.' But he opined that the government could wait for economic data until March before it starts to remove any stimulus.

Meanwhile, India's rising fiscal deficit remains a problem. The deficit soared to 6.2% of GDP in FY09. It is projected to account for 6.8% of GDP this fiscal year. The longer the government waits for clear signs of recovery, the harder it will be for it to bring the deficit under control. At present, keeping India's GDP growth intact may be the topmost priority for the government. But sooner or later the bloated fiscal deficit could turn out to be a much bigger problem.

A mixed quarter for Indian pharma
The recently concluded December 2009 quarter was a much better one for Indian pharma companies. For the generics players, the scenario in the US market improved a bit. In the previous quarters, many the domestic pharma companies faced the problem of delay in product approvals. Also, there were many companies then which had come under the scanner of the US FDA. In the December quarter, however, the number of product approvals increased. Not all companies were able to resolve their issues with the US FDA, barring Lupin. At the same time there were no fresh cases reported either. Further, sales in the domestic and the semi-regulated markets also picked up.

However, for companies whose exports strategy revolved around CRAMS, all was not hunky dory. This is because many smaller global innovators and biotech firms chose not to continue with some of their research projects. This reduced the amount of work that could be outsourced. Further, the inventory rationalization exercise of many of these companies was not over. All this had a significant impact on sales and profits of CRAMS players. On the profitability front, there were differences. At the operating profit level, performance was mixed. But most companies reported a significant growth in net profits due to reduction in interest costs and considerably lower forex losses.

The next few years are expected to be bumper years for generics players . This is because drugs having considerable value are scheduled to lose their patents. In 2010, branded drugs with US$ 24 bn in global sales face possible competition from generics. According to Bloomberg, that number in 2011 stands at US$ 42 bn. Readers would do well to recall that the last large wave of patent expirations came in 2006 and 2007.

During that time, branded drugs generating sales of US$ 43 bn faced generic competition. In the current wave, 2 big drugs to lose patents are cholesterol reducing 'Lipitor'. It is the world's largest selling drug (sales of around US$ 12 bn). The other is blood thinning drug 'Plavix' (sales of US$ 9 bn). Thus, according to IMS data, in total, drugs worth US$ 109 bn in sales face competition in the next four years. This signals huge opportunity for Indian generics players despite the increased competition in the US generics market.