When times are tough ….

When times are tough ….

From the heady funding raising days of 2005, when most Indian pharmaceutical companies, along with other sectors, were tapping overseas markets to finance their expansion plans, we find the same companies now trying to settle those debts in the downturn. In 2005, companies took the foreign currency convertible bonds (FCCBs) route to take advantage of easier norms for raising cheap money, lower interest rates prevailing in overseas markets as well as due to the huge premium on the companies’ stock prices. FCCBs were considered cheaper than debt, with the advantage that promoters did not have to trade equity and dilute their stakes in the company.

Today however the scenario is quite different. Stock prices have taken a beating across the board, the rupee is weakening and most of these FCCBs are quoting at a 20-30 percent discount. The Reserve Bank of India has also encouraged these companies by relaxing its rules in December, allowing companies to use rupee reserves to redeem overseas debt. Companies like Jubilant Organosys, Aurobindo Pharma, Wockhardt, Strides Arcolab, Orchid Chemical, Ranbaxy Laboratories, Torrent, Sterling Biotech, Strides Arcolab, Panacea Biotec, Dishman and Glenmark with outstanding FCCBs are contemplating redeeming these. The first two have already gone public with their intentions to buy back their FCCBs.

These are clear indications that Indian pharma companies are re-structuring to cope with tough times. According to a CRAMS sector update from Enam Securities, even contract manufacturing will see a dip in the short term due to inventory rationalisation. But long term prospects for contract manufacturing remain strong as global leaders cut back on manufacturing to cut costs. AstraZeneca will outsource all drug manufacturing in the next 10 years to focus on innovation and brand building, as Merck aims to outsource 30 percent of its manufacturing to India and China. Innovator companies like Pfizer, GSK and BMS are closing down manufacturing sites.

However, the Enam report points out that the contract research opportunity has shrunk, with innovators shelving non-profitable therapy areas, like Pfizer’s shift from CVS to vaccines and biologics and Merck’s shift away from diabetes. Market analysts predict that milestone payments in drug discovery deals are set to become smaller and a market preference for late stage deals, as innovators want to see more data before they put down cash.

Similarly, a recent report from Fitch Ratings predicts that though Indian generic companies will be exporting more, thanks to an increase in demand for low-cost drugs, operating profitability margins will be squeezed as competition among generic players becomes fiercer, resulting in intense pricing pressure. However companies with a robust product pipeline in the approval stage, as well as companies that are focused on niche/low competition products, could be partially protected from pricing pressures.

As the interim budget reflected the largely expected deterioration in the fiscal balance of the nation, international rating agencies like Moody’s, Standard & Poor and Fitch Ratings reacted by downgrading India’s rating or putting it on alert, only underlining the need for fiscal discipline. Most pharma companies seem to be well on the way to taking care of their fiscal responsibilities, recognising that in tough times, the tough get going.

Viveka Roychowdhury