India’s pharmaceutical market is set to experience continuing double-digit growth, faster than most other markets for the industry, says new research.

Even if the advance in India’s Gross Domestic Product (GDP) slows or is uneven, India would still represent a better growth opportunity than many other geographic pharmaceutical markets because of improving socioeconomic conditions and access to healthcare, against a backdrop of rising prevalence of diseases such as diabetes and cardiovascular problems, says the study, from Moody’s Investors Service.

However, as the sector grows, drugmakers in India could face higher debt levels, resulting in mergers and acquisitions (M&A), it warns. 

Indian firms do not have the same growth pressures as other industry players, but they could become involved in global M&A activities, thereby pressuring their leverage from currently low levels; some Indian firms are already increasing their pace of acquisitions, it says.  However, debt headroom is large for most Indian companies because their balance sheets are generally lowly leveraged.

Key Indian players have generally maintained low financial leverage and demonstrated aversion to risk due to their unique structures – when compared with global pharmaceutical firms – of high ownership levels by founding family members, known as promoters. Such structures are credit-positive, because the interests of creditors and promoters are frequently aligned and often lead to a more cautious risk appetite, says Moody’s.

No Indian player has more than 7% of the domestic market, and unless mergers are transformative, companies in the country will remain substantially smaller than the largest global generics firms such as Teva Pharmaceutical Industries, Actavis and Mylan. Their revenues would therefore be substantially smaller.

However, size alone does not drive credit quality; Indian drug firms are characterised by good geographical diversity, healthier growth outlooks and more conservative financial policies than those of large global players, says Moody’s.

They also exhibit favourable geographic mix because of their strong presence in emerging markets like India and Russia, which will see high growth. In contrast, leading players in the mature and highly competitive US and western European markets demonstrate much higher revenue concentration.

Moody’s sees the US as representing a substantial growth opportunity for Indian drugmakers, given the rich pipelines of generics awaiting US Food and Drug Administration (FDA) approval, although considerable event risk results from FDA manufacturing compliance standards, which have produced numerous warning letters for Indian-operated plants. Also, new rules making companies responsible for drug safety labelling will mean greater exposure to legal costs for generics players operating in the US, it says.