How the Russian-Ukraine conflict could impact India's pharmaceutical industry?

The ongoing conflict between Russia and Ukraine looms large in the minds of almost everyone individual considering the impact it would have on the global economy. While India already witnessed a massive wipe-off of investor wealth in the past few days, another sector flagging concerns over the crisis are the pharma industry.

Pharma industry executives opined that the geopolitical crisis and sanctions against Russia by a number of western countries including the US may cause damage to Indian pharmaceutical exports. They also expressed worry that sanctions against Russian banks may also affect the remittances of outstanding trade receivables from that country.

India’s Drug Exports to Russia and Ukraine

Pharmaceutical products constitute one of the main exports from India to Ukraine. India is in fact the third-largest exporter of pharmaceuticals to Ukraine, followed by Germany and France.

India exported more than $181 million of pharmaceutical goods to Ukraine and about $591 million to Russia in 2021, nearly 44 per cent growth over the previous year. 

Russia’s Sputnik V vaccine for COVID-19 is also being manufactured in India, backed by the Russian Direct Investment Fund. 

Sun Pharma also has a strong presence in Russia. The Mumbai-based firm along with pharma major Ranbaxy had entered the Russian market way back in 1993, almost simultaneously. Today, Sun Pharma is represented in more than 50 cities of Russia.

India’s drug exports to Russia amount to 2.4 per cent of the total pharmaceutical exports, while exports to Ukraine have a share of 0.74 per cent. It is worth adding that India exported pharmaceuticals worth $24.5 billion in FY21.

Revenues from Russia for Dr Reddy’s was about ₹1,580 crore, which is 8.5 per cent of its total revenues, in FY21.

According to the Dr Reddy’s Laboratories' consolidated financial results for the quarter and the nine months ended December 31, 2021, revenues from Russia were at ₹4.7 billion. Year-on-year growth of 5 per cent was driven by revenues from new products launched a favourable forex rate and increase in prices of some of its products, offset partially by a reduction in sales volumes in its base business.

However, Dinesh Dua, former chairman of Pharmexcil and CEO of Nectar Lifesciences, shared a different view saying the impact on pharma exports may not be huge. But he added if the sanctions against Russia by the West escalate, the pharma industry may find it hard to do any business there.

Indian Pharma firms in Russia

Pharma companies Dr Reddy’s and Sun Pharma have a noticeable presence in both Russia and Ukraine. Taking note of the present crisis, the firms said they are closely monitoring the situation, adding that their primary focus at the moment is to ensure the safety of employees.

India’s largest drugmaker Sun Pharma also stated that it is “hoping for the best outcome”. “We are in constant touch with our employees in both countries and they are safe,” a company spokesperson said.

Indian Pharma Outlook

Ind-Ra maintained a Stable Outlook for its most of the rated pharma issuers for FY23, expecting limited rating movements in the sector. 

The agency has upgraded ratings on 12 companies in its pharma portfolio since April 2021, on account of a continued improvement in the business and financial profile, strong EBITDA to operating cash flow conversion, a healthy uptrend in return on capital employed and a strong performance in the India business. 

Like in FY22, the agency expects the rating actions in FY23 to be driven by company-specific factors United States Food and Drug Administration (USFDA action, operating profitability and business visibility).

Ind-Ra observed fewer facility inspections from the USFDA in lieu of the pandemic, and hence expect a significant increase in USFDA inspections in FY23.

 Ind-Ra continues to monitor its rated portfolio and any material deviation in the credit metrics from its expectations could result in a rating downgrade. 

Ind-Ra expects the mid-single-digit pricing pressure in the US generic market and healthy growth in the domestic pharmaceutical market to continue well into FY23. 

Cost-cutting measures remain a priority for Indian companies. However, interim disruptions such as high raw material costs and logistic expenses will put pressure on the level of free cash flow generated. With the significant improvement in the free cash flow generated in the near term, M&A activities will continue to provide an inorganic push in FY23.

The stock Price has bottomed 

Dr Reddy’s stock has underperformed the sector so far this year. The stock is down around 21% vs 10% fall in Nifty pharma.

Dr Reddy’s share price has corrected around 23 per cent so far this year. The stock has been under pressure amid the ongoing Russia-Ukraine conflict as among the India Pharma companies, Dr Reddy’s is most exposed to Russia and Ukraine.

Shares of Dr Reddy's Laboratories hit a 52-week low of ₹4,055.85 after Russia ordered military operations in Ukraine and reports emerged of blasts in some major Ukrainian cities.

The stock of the pharmaceutical company, which has a significant presence in the Russian market, has fallen below its previous low of ₹4,135.90 touched on March 19, 2021. In the past one month, it has underperformed the market by falling 10 per cent as compared to a 5 per cent decline in the S&P BSE Sensex.

In September 2020, Dr. Reddy's had signed up with the Russian Direct Investment Fund (RDIF) — Russia's sovereign wealth fund — to cooperate on clinical trials and distribution of Sputnik V vaccine in India. Upon regulatory approval in India, RDIF had committed to supply 100 million doses of the vaccine to Dr. Reddy's

In Russia, the company's key products — such as Nise, Omez, Nasivin, Cetrine and Ibuclin — were ranked among the top 200 best-selling formulation brands, as per IQVIA in its report for the 12-month period ended March 31, 2021, it said.

Revenue from CIS countries (including Romania) was ₹740 crore, representing 15 per cent growth over the previous year. The growth was led by Ukraine, Kazak, Uzbek and Romania including certain tender sales, the company said in the annual report.

According to analysts at Edelweiss Securities, the high US contribution, which is exposed to price pressure and regulatory risks, make the road ahead difficult for Dr Reddy.