Sector Analysis- Indian Pharma Industry The Pharmaceutical sector in India is highly fragmented with more than 10,000 listed and unlisted companies. India is one of the fastest-growing pharmaceutical markets in the world, and its market size has nearly doubled since 2005. The total turnover of the Indian Pharma sector is estimated to be close to US$ 21 bn of which around US$ 9 bn comes from exports while the rest comes from domestic sales. US is the topmost destination for Indian Pharma exports followed by Russia, Germany and Austria. The growth of the sector has been fuelled by exporting life-saving drugs to developing countries and supplying quality drugs to the developed nations at affordable prices, which resulted in a 29.8% growth in FY12 in Indian drug exports in comparison to the prior year. The domestic pharma market is currently US $ 10 bn in size and is expected to reach ~US$ 20 billion by 2015 and establish its presence amongst the world’s leading 10 markets. The domestic pharma market is expected to grow at a CAGR CA GR of 15-20% annually to become a US$49 billion market by 2020. Currently, India is the 4th largest market in the world in terms of volume and 12th in terms of value. Indian pharma companies are increasingly filing Abbreviated New Drug Approvals (ANDAs) applications for the approval by the US Food & Drug Administration (FDA). Since the US is the largest market for generics, increasing number of approvals by the US FDA gives an opportunity to penetrate deeper into the global market.
Based on the different therapeutic areas, the Pharmaceutical market can be broadly divided into 2 categories – Acute and Chronic. 1. Acute Segment – It includes diseases that usually last for a short duration and includes therapies like anti-infectives, pain-killers or analgesics etc. 2. Chronic segment – It includes diseases that are recurring in nature and include lifestyle diseases. This includes therapies like anti-diabetics, cardiovascular (CVS), cancer etc.
In most cases, ailments in the chronic segment ensure regular consumption of medicines for the lifetime of the patient. Thus, chronic segment is expected to grow much faster than the acute segment going forward. Currently, the Indian Pharmaceutical Market is more than 60%
acute with the rest being chronic. The share of chronic is expected to increase going forward. Anti-infectives are the largest contributor (17%) to the domestic sales followed by Cardiovascular and Gastrointestinal. The highest growth has been shown by Anti-diabetics followed by Neurology (CNS) and Cardiovascular. The major inputs required for the Pharma sector are basic chemicals, labours and Research and Development (R&D). The sector is a research-driven industry with the focus being on discovering and launching new and innovative drugs. Companies spend millions of dollars/rupees on research and get the competitive advantage of patents if they are successful in launching drugs. In India, R&D costs as a % of revenues are around 5-8% on an average. This is very low compared to the companies in developed countries like US, UK etc. where the average R&D spend is close to 17-20% of the revenues.
Products/Services: The Pharmaceutical products/services can be broadly divided into 3 segments o
Active Pharmaceutical Ingredients (APIs ) – These are substances which are responsible for
medicinal activity. For e.g. Paracetamol is an API which is present in drugs like Crocin, Anacin etc. and is responsible for relieving the pain. APIs (also called as bulk drugs) are the raw material for the final drug that we consume. Well known API manufacturers include Orchid Chemicals, Elder Pharma etc.
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Formulations – While APIs are responsible for the medicinal effect of a drug, we cannot
directly consume an API due to different reasons like stability, taste, odour etc. Hence APIs are combined with certain substances called excipients to form the final drugs or formulations which are suitable for human consumption. Continuing the example given above, Crocin is a formulation. Companies like Sun Pharma, Cipla, Dr. Reddy’s etc. are examples of companies manufacturing formulations.
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Contract Research and Manufacturing Services (CRAMS) – Just like IT, major Pharma
companies outsource their manufacturing work to low-cost centres like India to reduce cost
while focusing on drug-discovery and marketing themselves. Further, they also outsource part of their research activities to some of the Indian pharma companies. Over the last few years CRAMS has emerged as a major focus area for many of the Indian Pharma companies. Examples include companies like Divi’s Labs, Jubilant Life Sciences etc.
Companies from developed countries spend a large amount on R&D and are responsible for discovering and launching a number of innovative drugs/formulations. Companies like Pfizer, Merck, Novartis, Roche etc are some of the biggest ‘innovator companies’ globally. Compared
to this, Indian companies have established their presence in the generics segment. Generics are low-cost versions of branded drugs and have the same medicinal effect as the branded or original drug. Once the patent period for a drug expires, companies can come in with generic versions of a drug which provides affordable medicines for consumers. Indian companies have developed an expertise in reverse-engineering and developing generics. Today, the Indian Pharma industry is the largest exporter of generics in the world. It caters to an ever-rising demand for generics from developed nations like the US, UK and Japan, as the governments of these countries are switching over to generic drugs from branded drugs in order to curb the rising healthcare costs.
Growth Drivers of Pharma Sector 1)
Increasing incomes & healthcare spends to spur domestic growth
With increasing affordability, shifting disease patterns and healthcare reforms, the total consumer spending on healthcare products and services in India has grown at a CAGR of more than 14% since 2000. According to a research report by the Mckinsey Global Institute, spending on healthcare in India will witness the highest growth rate among all spending categories over the next two decades. Healthcare spend is expected to grow to 13% of average household
income by 2025 from 7% in 2005. This will be driven largely by increase in per capita disposable income which is expected to increase to US$765 in 2015 from US$463 in 2005. The domestic pharma market will thus continue to grow rapidly (~15% sales CAGR over 200913) buoyed further by stronger penetration of semi-urban/rural areas and rising share of chronic therapies. McKinsey estimates the domestic pharmaceutical market will more than double to achieve sales worth US$ 20bn by 2015. 2) Significant patent expiries in developed markets present good growth opportunities for Indian generic companies:
A slew of patents will expire in the US and EU over 2011-15, including top-selling brands Lipitor, Nexium, Zyprexa and Plavix. Over this period, products with estimated annual sales of ~US$ 80 bn in the US alone will lose patent exclusivity, and this will translate into an estimated incremental generic sales opportunity of US$ 18 billion (~60% of current US generic drug market); a similar incremental opportunity in developed European markets exists as well. A big share of this revenue will go to companies that secure high-margin first-to-file (FTF) sales which offer marketing exclusivity for 180 days. It is estimated that Indian companies can take about 20% of this S18 bn new market.
3) Emerging markets to become the next destinations for pharma companies “Pharmerging” markets, including the BRIC countries, South Africa, Mexico, Turkey, Poland,
Indonesia and Romania, are growing faster than developed markets. According to IMS, a wellknown industry research firm, “Pharmerging” markets will increase their share in global pharma
from 16% in 2009 to around 25% in 2014-15. Indian generics are replicating their domestic success in markets like Russia, Brazil and Mexico which like India are branded in nature. 4) M&A a potential catalyst
With higher growth prospects in emerging markets, many multinational branded drug companies are trying to expand their presence in generic pharmaceuticals. This has increased their interest in generic companies with an established product portfolio and sales/distribution
network in emerging countries including India. The acquisitions of Ranbaxy (by Daiichi Sankyo) and Piramal (by Abbott) are a case in point. This is expected to continue.
5) Biosimilars – potentially a big long-term driver
Biosimilars are reproductions of biotechnologically manufactured biopharmaceuticals that partially mimic proteins naturally present in the body. Biosimilars could potentially become an important long-term growth driver for the generic pharmaceuticals industry, with the global annual sales opportunity rising to as much as US$ 10bn by 2015 (once patents for several biologics expire). Indian generic companies still trail overseas rivals in biosimilars. Success will depend on building manufacturing capacity and the emergence of favourable regulatory reforms in the US and EU.
Porter’s Five Forces Analysis
Availability of Substitutes: High
Supplier Power: Medium
Competitive Rivalary: High
Buyer Power: Low
Threat of New Entrants: Low/Medium
Bargaining Power of Suppliers: The bargaining power is high for API companies with difficult to
manufacture products. These companies command premium prices. However, a majority of API suppliers have low bargaining power since they produce products which are simple to manufacture or commoditised. Thus, bargaining power of suppliers as a whole is MEDIUM. Power of Buyers: Consumers have no choice but to buy what the doctor says. Buyers are
scattered and they as such do not wield much power in the pricing of the products. Thus, bargaining power of buyers in LOW. Competitive Rivalry: The growth opportunities for pharma companies are expected to grow
manifold in the next few years with many drugs going off patent in the US and emerging countries coming into the focus. To make the most of the generic opportunities many innovator
companies are trying to establish themselves by acquiring or striking joint venture deals with generic companies. Thus, apart from other generic players, Indian companies may also face competition from these big pharma companies who are backed by significant financial muscle. With lack of visible opportunities in the US post the patent cliff (2012-13) competition is expected to heat up. Thus, competitive rivalry is HIGH. Availability of Substitutes: The threat of substitution is higher in unbranded markets where
one generic can be substituted by another by the pharmacists. In branded market and for biosimilars, it is the doctor or physician who can substitute one drug for another. Thus, threat of substitution is HIGH. Entry Barriers: Entry barriers in the emerging markets are high due to its branded nature.
Generic manufactures can challenge patented products and get an opportunity to sell their products. Biosimilars which is emerging as the next growth driver requires clinical trials, extensive regulatory know-how, logistics network and branded presence, thus making it difficult for everyone to enter this segment. On the other hand many companies are focusing on markets like US and UK which are unbranded in nature. These markets work on tender system wherein companies require little infrastructure and are relatively east to enter. Thus, threat of new entrants is Low to Medium.
