Indian Pharmaceutical Sector: A Prescription for sustained growth

Posted in Marketing & Strategy Articles, Total Reads: 5046 , Published on 15 October 2011
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India is one of the fastest growing Pharmaceutical markets in the world, and its market size has nearly doubled since 2005. The Indian pharmaceutical market is expected to reach US$ 20 billion by 2015, growing at a compound annual growth rate (CAGR) of 11.7 per cent during 2005–2015 and establish its presence among the world’s leading 10 markets. Presently, it is the third largest market in terms of volume and fourteenth largest in terms of value.

 


Plethora of Opportunities

Revenues of large cap Indian generic drug manufacturers look set to grow due to the following reasons:-

 

  • Domestic volume growth is benefitting due to expanding doctor coverage. Increase in doctor coverage results in increased distribution network which taps in the remote rural market increasing the target audience. Non urban markets are expected to continue growing with a double digit growth rate driving domestic growth. On the other hand, the urban market growth is forecasted to remain sustainable in single digit.
  • Regulated markets will be a major revenue driver in the export driven Indian pharmaceutical sector as large drug patents expire over the next five years. Significant opportunities open up in developed markets as branded drugs with sales of US $80 billion are about to lose patent protection over 2010 to 2015.
  • Sales in emerging markets are growing strongly thus offering growth opportunities, especially in countries like China, Russia, Brazil and Mexico.
  • Biosimilars, the generic equivalents of biologic drugs made from organic materials rather than chemicals, are expected to be long term growth drivers based on industry forecast. It is said to offer opportunities of USD 10bn by 2015 up from less than USD 1bn in 2010.
  • Opportunities also include building health infrastructure, developing tertiary care units and medical tourism. Also, India‘s changing demographics and the increasing incidence of non-communicable and lifestyle-related diseases is expected to trigger the need for more tertiary care hospitals to cater to this demand.

 

Risks

However it’s not plain and smooth sailing for the Indian pharmaceutical companies, especially those operating in the generic domain as ‘Big companies’ are becoming less innovative. This essentially means that the growth pipeline for generic drug makers is becoming narrow and their competition is increasing. Also, Europe and the US companies are increasingly turning their attention to ‘tough to copy’ products and even entering the generic market to supplement their growth.

Also, patent expiry will lead to intense competition amongst generic players and challenging pricing environment as companies all around the world will be pouncing on to grab this opportunity and make hay while the sun shines.

Sector Positives

The domestic growth story

The domestic Indian market is expected to grow rapidly over the next decade. The expansion is fuelled by the strong growth in the domestic market and the rising demand for exports. Sales force expansion has yielded positive results and industry growth has increased. The majority growth is coming from the non-urban markets, as metros are growing at single digit. Experts believe there is a first mover advantage in these markets which explains some companies increasing their doctor coverage ratios. The doctor coverage ratios for some companies have doubled to around 60-70 percent from the initial contribution of around 30 percent of the sales force.

 

High Absolute growth

India is expected to be amongst the top five countries in the world with respect to the absolute growth in terms of revenue. The Indian pharmaceutical markets show a huge growth of over 200 percent from being a USD 6bn market in 2005 to a USD 20bn market by 2015e.

Figure 1

India ranks fifth in terms of absolute growth over the period 2005-2015e.

Source: IMS World Review, Mckinsey Pharma Model.

Growth acceleration through exports

Following the expiry of numerous patents in the United States of America, a major market for Indian pharmaceutical companies is open for grabs. A plethora of opportunities await the generic players. Even though the challenging price environment will be hard to deal with, due to intense competition from generic markets, the Indian pharmaceutical companies are expected to do well due to experience in the generic field and comparatively low-cost of manufacturing in India.

Figure 2

A plethora of opportunities await generic players as numerous branded products lose patents during the next decade.


Source: IMS World Review.

India has a competitive advantage due to a variety of reasons. The following matrix describes in brief India pharmaceutical companies’ strong foundation to leverage the opportunities available.

Figure 3

Advantage India: Indian pharmaceutical companies possess a strong foundation for sustained growth.


Emerging markets gain importance

Emerging markets, which mainly consists Russia, Brazil, China and Mexico as well as countries like South Africa, Turkey and Indonesia, are growing at a faster rate as compared to developed markets. According to IMS, a well-known industry research firm, these emerging markets will increase their global share to 24 percent in 2014, from 16 percent in 2009. This 50 percent rise in market share makes it an attractive market for many pharmaceutical companies operating the global arena. Thus, emerging markets are the next big thing for the drug fraternity.

Figure 4

Global pharmaceutical market split-Increasing sales of pharma-emerging markets


Source:IMS.

The sales in emerging markets are expected to grow nearly at 100% from a base figure of US $100bn in 2010 to a mamoth US $ 200 bn in 2015E. Awhopping 8%  increase in the market share will have offer tremendous opportunities to  companies with strong fundamentals in these regions.

 

Sector Negatives

Patent expiry could cannibalise generics.

There is a risk that the patent expiry of branded generic drugs will lead to growth at the expense of lower sales of existing generic products. For example, Lipitor’s generic entry in November 2011 could impact growth in generic Simvastatin, an important product for many Indian generics. Also the influx of so many generic players to capitalise the market will lead to a challenging pricing environment.

Narrowing product pipeline

Innovation by pharmaceutical companies is on a decline with many companies reducing their R and D expenses over a period of time. Branded products, which in turn provide a life to generic products, are on a decrease and hence it might affect the generic players. Reduced R and D expenses and increased focus on niche products and biosimilars are forcing generic players to look into a new direction.

Regulatory and compliance issues

The US Food and Drug Administration (FDA) approval timelines have lengthened from an average of 16 months during 2006-07 to 26 months in 2009-2010. This increase in time has a negative effect on the revenue cycle. Also, compliance issues have been concerns for certain Indian companies like Cipla Ltd., Ranbaxy etc.

Currency Fluctuations

Exports form a major portion of revenues for Indian companies and most of the exports are dollar denominated. Hence, minor fluctuations in the foreign exchange market have a huge impact on the companies’ profitability. Thus, currency fluctuations can be a major issue, at times, for the pharmaceutical market.

Financial Outlook

The pharmaceutical and healthcare sector has historically outperformed the markets on a consistent basis. The following charts re-enforces the sector’s performance in the previous year i.e. 2010-2011 and the trend is expected to improve during the next five years.

Figure 5

Pharmaceutical companies have given better returns on the Bombay Stock Exchange over the past 1 year and the trend is likely to continue.


Source: BSE.

Investment Strategy:

An investor bullish on the Indian economy and the pharmaceutical sector has a lot to gain if he invests his money in this sector for the next five years. Potential outperformers in the industry will be the companies who thrive as generic players in the foreign market. Companies active in the emerging economy as well as companies with a good product portfolio consisting of generic drugs are likely to outperform the market in the next five years. A sound investment strategy will be to invest in such companies and be a part of their growth story

Conclusion:

Considering the latent and untapped domestic market, growing population, increase in the number of individuals affected by chronic diseases as well as the expiry of patents of branded drugs in the US markets and the rising share of the emerging markets, the pharmaceutical sector in general is expected to grow significantly. A wide portfolio of generic drugs and low cost manufacturing facility gives India, per se, a distinct advantage in the growth story.

However, it is not going to be a smooth sailing for the generic players due to highly competitive environment and lack of innovation and adequate research and development.

Considering all the factors, I am bullish on the pharmaceutical sector and have positive expectations from the sector, at least for the next five years.

References:
Indian Pharmaceuticals 2015, A Mckinsey & Company Report
IMS Health Information and Consulting Services India Pvt. Ltd
Global Pharmaceutical report 2011
The Indian Pharmaceutical Industry Report-KPMG

This article has been authored by Kaushal S.Sheth from K.J.Somaiya Institute of Management Studies and Research (SIMSR)



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