Indian pharmaceutical industry— growth intact amid current headwinds faced by industry

Hitesh Sharma

Amidst the increasing patent cliffs, declining R&D productivity, and increasing regulatory and price containment pressures; the global pharmaceutical market continues its focus toward emerging markets. The contribution of emerging markets is expected to double by 2016, as compared to 2006. The growth in emerging markets is expected to be led by China and India in the near future (China with a CAGR of 15 per cent–18 per cent during 2012–2016 and India with a CAGR 14 per cent–17 per cent during 2012–2016).1 This augurs well for all the constituents of the Indian pharma industry – Indian companies and global pharma companies along with all ancillary supporting players like CRAMS, CROs.

The Indian pharma industry is expected to be among the top 10 global markets in value terms by 2020, bolstered by increasing domestic demand. The Indian pharma (formulations) industry stood at Rs 629.0 billion in FY12, registering a y-o-y growth of 16 per cent2 and expected to reach around Rs 55 billion by 2020.

Essentially the domestic market growth has been driven by increased affordability (middle class growing by 67 per cent from 160 million in 2011 to 267 million), access to healthcare (Increasing penetration of private health insurance—CAGR of more than 30 per cent) and change in the disease profile from acute to chronic.

The growth of the market was largely driven by sales of drugs for chronic diseases such as diabetes and cardiovascular ailments, which grew by nearly 21 per cent y-o-y in FY12.

Global pharma majors continue their strategy of inorganic growth, differential pricing strategy and rural initiatives to increase their market presence in India.

Also with the Indian Government’s focus on Indian healthcare growth with coverage of the masses through the National Rural Health Scheme, even with the economic conditions, the Indian pharma industry is expected to continue.

Global pharma companies – India to remain as a key market

India continues to remain a focus market for pharma MNCs. Currently, the Indian market is regarded by MNCs as one of the faster growing market globally, primarily driven by a large population, evolving patient demographics, increasing health care expenditure, growing urbanisation, rising life expectancy, and active private-sector participation.

They have increased investments in the domestic market over the past few years and are now comfortably placed to capture a substantial share of the domestic market. MNCs have outperformed the growth rate of domestic players in 1H FY13. Evidently, pharma MNCs are projected to capture a 35 per cent market share of the market by 2017, compared with 28 per cent in 20095. Over the years, pharma MNCs have adopted India-focused strategies to tap the growing potential of the country’s pharma market.

Graph 1: Indian pharmacetical market

Source: Domestic Pharma monthly review- April 2012, Edelweiss Securities and OPPI

Increased patented drug launched in India

The advent of the product patent regime in 2005 instilled confidence in the country’s IP regime. With renewed confidence, large pharma MNCs are now looking to launch their patented drugs in India and such product launches are expected to increase further in future.

Adopting inorganic route to enhance presence

Pharma MNCs have been considering acquisitions of domestic players to gain sizeable share in the domestic market. These acquisitions have also enabled pharma MNCs to access the infrastructure, distribution networks, and management capabilities of domestic players, thereby strengthening their business operations in the country. However, valuations and the current debate by the Indian Government on Foreign Direct Investment guidelines for the sector have put some bumps for the MNCs.

On the other hand, licensing agreements with Indian companies have helped pharma MNCs access a ready basket of generic products. Going forward, these deals are likely to accelerate the launch of products in various emerging markets while offering MNCs the advantage of cost-effective manufacturing. Furthermore, pharma MNCs consider India as a preferred strategic outsourcing partner with services ranging from Contract Research Manufacturing (CRO) and clinical research services to sales and marketing, information technology, finance and accounting, and customer-relationship management.

Differential pricing strategy to strengthen market reach

In a bid to compete with domestic generic players, pharma MNCs are launching patent-protected drugs in India at relatively low price points than those in developed markets. Simultaneously, a differential pricing strategy is helping these MNCs to enhance their market reach by addressing affordability issues. Drugs such as Diovan (Novartis), Januvia (Merck Sharp & Dohme), and Galvus (Novartis) are being sold at discounts of up to 80 per cent on global prices.

Graph 2: Growth trend of acute vs chronic segment (%)

Source: Domestic Pharma monthly review- April 2012, Edelweiss Securities

Rural-centric initiatives to enhance market access

Robust consumption in the rural economy is expected to be a key growth driver. Rural India accounts for more than 70 per cent of all Indian households and close to 40 per cent of the total consumption pie. Henceforth, a large number of companies are organising their efforts to derive a major portion of their overall sales from this untapped market.

Additionally, pharma MNCs are looking to implement new and effective business models in India and improve the health of patients. Delivering patient health outcomes implies getting involved in the cycle of care, rather than just delivering drugs to a health care system.

The Government’s regulatory and pricing policy is likely to have a larger impact on the MNCs. Also the IP litigation does create a few bumps for the MNCs. However, overall the India story still remains positive for MNCs.

Domestic pharma players

Indian pharma manufacturers are known globally for their low-cost approach, which is backwards-integrated and has the scale to challenge patents and be the first to launch on their expiry.

With $76 billion worth of patented drugs likely to go off patent in the US between 2012 and 2015, India is poised to capture its share of the global generics market – Plavix, Seroquel, Singulair and Lexapro went off patent in 2012. Consequently, the share of global generics (including biosimilars) is expected to increase from 25.3 per cent in 2011 to 35.2 per cent by 2016. This rise in the demand for generics is likely to drive the growth of bulk drug export of off-patent drugs.3

In addition, super generics, the incrementally modified generics drugs (IMDs), are currently at a nascent stage of their development in India, but offer a huge market opportunity for the future.

While exports continue to be a large driver of margins for the larger Indian companies, given the regulatory environments in the regulated markets, the margins will continue to be under focus going forward. Also the adherence to the regulated standards will be an area that most of the Indian companies tapping global markets would have to differentially focus on.

Graph 3: Rise of lifestyle-related chronic diseases in india

Source: Fortis Healthcare (India) Limited, December 2011

The Indian companies have also continued to focus on the Indian market. While launches of new products in the Indian markets has come down (as a result of the IP regime), the focus has turned towards reach and therefore growth in Tier-II and rural markets. Also the focus is more on more effective marketing and distribution strategies. Alliances with MNCs as part of co-marketing/ distribution arrangements are further strengthening this learning for the industry.

CRAMs players had at the start of the year felt a lot of pressure and in some case seen a de-growth.

But the industry seems to be stabilising and with many MNCs wanting to deleverage their over reliance on China, this industry seems to be back on growth path. But global economic conditions can have an impact both on growth and margins for this industry.

India was touted as fast emerging global hub in the clinical trials and research space (driven by cost-effectiveness, a huge patient pool, a genetically diverse population and trained clinical investigators are some of the factors driving the country’s clinical trials industry). The size of the market was around $400 million (` 23.1 billion) in 20114. India’s share of this market is expected to increase from 2.1 per cent in 2011 to 2.9 per cent in 2015 and reach almost $1 billion (` 43.9 billion)5. There are more than 120 clinical trial organisations in the country. The Government is also tightening its regulatory norms related to informed consent and provision of compensation to victims of clinical trial. However, India is facing stiff competition from countries such as China, due to which the number of new trials registered in the country declined from 365 in 2010 to 230 in 20116.

Graph 4: US patent expiries: 2006-15

Source: Indian Pharmaceuticals Outlook 2012: bracing for absolute performance year, January 2012, Morgan Stanley

Adequate government support to further boost the domestic market

In the last 10 years, the Government of India (GoI) has aggressively adopted prudent strategies to boost the country’s healthcare industry. From granting 100 per cent Foreign Direct Investment (FDI) in the drugs and pharma sector to establishing various pharma SEZs across the country, a range of initiatives have further strengthened the Indian pharma industry. Moreover, the GoI is providing incentives to encourage investment in the pharma sector.

In August 2010, the GoI announced its plans to set up a $639.56-million venture capital (VC) fund to give impetus to drug discovery and strengthen the country’s pharma infrastructure. Both domestic and MNC pharma players are expected to leverage these initiatives to expand their operations in the country.

The Department of Pharmaceuticals has prepared ‘Pharma Vision 2020,’ aimed at making India one of the leading destinations for end-to-end drug discovery and innovation. It envisages meeting this objective by building top-notch infrastructure for talent and research, encouraging public-private partnership (PPP) models, offering financial incentives to encourage and incubate innovation and shaping a favourable regulatory environment2. GoI also aims to position India among the top five pharma innovation hubs by 2020, with one out of every five to 10 drug discovered worldwide by 2020 originating from the country.

The GoI’s long-term vision is to provide quality and affordable health care services to all classes of Indian society. Consequently, the GoI plans to cover at least 50 per cent of the country’s population under health insurance by 2020, compared with the current average of 15 per cent.

Expanding health care infrastructure and changing demographics to supplement growth

The Indian healthcare sector is forecast to reach $280 billion by 2020, contributing expected GDP expenditure of eight per cent by 2012, compared with 4.2 per cent in 2009, according to a report by an industry body. Over the past two decades, India’s thriving economy has driven the need for urbanisation, thereby creating an expanding middle class with increased disposable income to spend on healthcare. Other key growth drivers for this sector include a growing population, the opening of new hospitals, growing lifestyle related health issues, less expensive treatment costs, the growth of medical tourism, improving health insurance penetration, government initiatives and enhanced focus on PPP models.

The overall growth of the Indian healthcare sector is likely to create a sizeable demand for quality and affordable medicines, thereby providing significant growth opportunities for both domestic and pharma MNCs.

In summary…

India’s pharma market has evolved and shifted gears to set foot on an accelerated growth path. In conclusion, as emerging markets become increasingly important and India’s role among these becomes progressively significant, both domestic and pharma MNCs will need to adapt their business models, organisations and processes and create customised strategies. Overall, active participation from domestic and international pharma companies, increased investments and strategic initiatives will likely underpin future growth and enable the Indian pharma market to break into the global top tier in the present decade.

References:

1. “The global use of medicines: outlook through 2016,” IMS Health website, http://www.imshealth.com/deployedfiles/ims/Global/Content/Insights/IMS%20Institute%20for%20Healthcare%20Informatics/Global%20Use%20of%20Meds%202011/Medicines_Outlook_Through_2016_Report.pdf, accessed 10 August 2012.
2. “Health check – Indian Pharmaceuticals market,” ICICI Securities Ltd., April 2012, via ThomsonONE.com
3. “Indian Pharmaceuticals Outlook 2012: bracing for absolute performance year,” Morgan Stanley, January 2012, via ThomsonONE.com
4. “India losing out on clinical trial biz pie,” Financial Express, 9 July 2012 via Factiva, ©2012 Indian Express Online Media Pvt. Ltd.
5. Clinical trials market -India,” Netscribe Pvt. Ltd., April 2012, via ISI Emerging Markets
6. “Clinical trials market -India,” Netscribe Pvt. Ltd., April 2012, via ISI Emerging Markets