Fitch Ratings says its outlook on India's pharmaceutical sector for 2012 remains stable, with earnings prospects remaining positive because of the growing global demand for generics and opportunities provided by patent expiries in developed markets.

In a new report, Fitch points to forecasts from IMS Health which expect that the shift in global drug spending towards generics will rise to 39% of total pharmaceutical expenditures in 2015, compared to 20% in 2005 and 27% in 2010. This growing demand, a subsequent increase in capacity utilisation and better cost rationalisation will ensure stability for Indian pharmaceutical companies' operating margins, and they could also benefit from additional licensing income from strategic alliances and the depreciating rupee, says the ratings agency.

India's Pharmaceuticals Exports Promotion Council (Pharmexcil) estimates that the industry's exports rose 17%-20% last year, to reach a value touching US$12 billion. In 2012, with the rising global demand for generics - and $52 billion-worth of branded drugs set to go off-patent this year, compared with $21 billion-worth in 2011 - further growth in the sector will likely be driven largely by Indian firms' readily-available product portfolios, ability to ramp up production and lower manufacturing costs, plus the trend toward strategic alliances, according to Fitch. 

The US market is a major focus for Indian generic drugmakers - they accounted for more than a third of the 431 Abbreviated New Drug Applications (ANDAs) approved by the Food and Drug Administration (FDA) last year - and will remain so in the short to medium term. But longer-term, growth and profitability for Indian firms will be driven by newer markets such as Japan and those which are emerging, including Brazil, China, Indonesia, Mexico, Russia, South Africa and Turkey, whose rapid growth will be driven by spending on generics, says the report.

However, Fitch also warns that negative implications arising from non-compliance with international regulatory standards could hamper the earnings potential and outlook for Indian drugmakers. For example, it says, a warning letter and/or import alert placed on major revenue-generating manufacturing facilities could impede a company's ability to export to high-margin, developed markets.

Strong competition leading to significant reduction in margins could also have a negative impact on individual company outlooks, while sustained depreciation of the rupee, leading to higher debt because of foreign currency borrowing, could also harm the sector's credit profile, the ratings agency adds.