The domestic pharmaceutical market is going through a transformation, led by strong underlying growth drivers and has witnessed robust growth over the last couple of years. While this growth was driven mainly by an increasing spend on healthcare, on account of rising disposable income, increasing penetration of health insurance and changing disease profile, regulatory reforms also provided a significant boost. The industry has grown at a CAGR of 13 percent from 2002-2007 and is expected to grow at a CAGR of 16 percent over 2007-2011
Growth Drivers
Strong Economic Growth:The prospects of the Healthcare and Pharmaceuticals industry are strongly linked to economic growth. Over the last couple of years, the pharmaceuticals industry has grown at approximately 1.5-1.6 times the growth of economy. The rise in disposable income has a positive impact on healthcare spend. In 2005, 6.2 percent of disposable income was spent on healthcare as compared to 2.8 percent in 1995.
"There is a view that if the GDP of a country grows by 1 per cent the pharma industry grows by approximately 2 percent. So if you are going to have 8-10 percent growth in the GDP, the pharma industry will grow in double digits. This growth would primarily be led by expansion of healthcare services", says Dr. Brian Tempest.
This augurs well for the pharma industry, as the strong economic momentum is expected to continue and the Indian economy is expected to grow by 8-9 percent in the next few years.
Improving Healthcare Infrastructure:Both healthcare delivery and infrastructure segments are going through a structural change with the entry of corporates. Significant investments have been lined up in the domains of organized pharmacy chains and private hospitals. In addition to Metros even B and C category towns are witnessing sizeable investments. Many pharma companies have expanded their sales force in order to cater to these untapped markets.
At present, organized players account for a meager 2 percent share of the pharma retail market. It is expected that with the advent of modern retailing in India, increasing investments in this space will multiply the availability and accessibility of pharma products. The organized pharmacy chains will not only capture an increasing percentage of the total market but will also expand the market with value added services and enhanced offerings. The culmination of all these factors is expected to further drive the growth of the domestic pharma market.
Increasing penetration of health insurance: At present, only 4 percent of the healthcare costs are borne by the insurers in India as against 80 percent in developed economies. With increasing health insurance penetration in India, this is set to change and going forward, a larger proportion of expenses will be paid by insurers and consumption of sophisticated drugs is likely to become more affordable.
At present, the health insurance penetration is estimated at approximately 10 percent in India and is expected to double in the next five to seven years. This increasing penetration will help expand the pharmaceuticals market in two ways. One, it will increase the access to more sophisticated and expensive drugs; and two; it will also make basic drugs more accessible through wider coverage. This augurs well not only for domestic pharma companies but for MNC pharma companies as well; as increasing health insurance will also help expand the markets for patented products.
"The growth in the domestic market will be driven by volume. The small to medium size players are growing their presence in untapped tertiary markets while MNC's are expected to grow through introduction of high value products. As Insurance gets more liberalized as in the west and further growth in health infrastructure in this country will be key factors to drive growth", says Mr. Ranjit Shahani.
Changing therapeutic mix: The existing therapy mix is tilted towards acute diseases. However, in the medium to long run the domestic pharmaceutical market will be largely driven by the increasing prevalence of the chronic segment. Increasing urbanization, changing lifestyles and ageing population will drive the growth of this segment. In most cases, ailments in the chronic segment are recurring in nature, which ensures regular consumption of medicines for the lifetime of the patient. Going forward, therapies for treating cardiovascular diseases and diabetes are expected to have one of the highest growth rates.
In terms of the geographical distribution of the Pharma market, 23 Metro cities account for approximately a quarter of the market. Class I towns- comprising 300 towns altogether- account for about one-third of the market. Rural markets which account for 21 percent of the total market have been increasingly becoming an important market for big pharma companies. Though rural markets are dominated by acute segments, chronic segments have slowly started making inroads.
"The domestic Indian pharmaceutical market is expected to grow at 11-12 percent and will primarily be driven by the launch of new products and market expansion strategies. Domestic companies will also continue to grow through acquisitions, joint ventures, leveraging low operational costs and outsourcing. However, price control mechanisms and ambiguity in the policy environment may constrain market growth", says Mr. Kewal Handa.
Kewal Handa also feels that, "Though patented products will be introduced in India, the domestic market will predominantly remain a branded generics market. By 2015, it is estimated that the share of patented product will be about 10 percent."
Government Initiatives: The Government has introduced several development programmes to improve the access to and quality of the healthcare services in the country. The National Rural Health Mission (NRHM), introduced by the government to provide basic healthcare amenities in the rural areas, is expected to increase the access to drugs in the rural areas. In Budget 2007-08, the budgetary allocation to health was increased by 22 percent to INR 1,52,910 million.
Launch of Patented Drugs: After the product patent regime was introduced in India in 2005, the domestic pharma industry has witnessed the launch of around 11 patented products by multinational companies.
This number is expected to grow, as MNC pharma companies are already planning significant patented launches over the next few years. Various industry estimates suggest that by 2015, patented drugs will account for 10-15 percent of the domestic pharma market.
However, ambiguities in the patent laws remain with respect to issues such as data protection, pre-grant and post-grant opposition and patenting of derivatives.
Key Considerations Need for Public-Private Partnership (PPP)
At present, a principal share (almost 75-80 percent) of the total healthcare expenditure by the country is incurred by the private sector, while the public sector finances the balance. On the other hand, affordability and accessibility of the latest and quality drugs continues to be one of the major issues for a large section of the population and for the country as a whole. Both the public as well as private sectors have recognized this as a serious concern and are looking at PPPs as a sustainable model to cater to the growing demand of medicines across all sections of society.
"70 percent people in this country do not have access to modern medicine. 700 million people in a population of 1 billion. That is a problem that the government needs to solve. There has to be a public private partnership to reach medicines to these 700 people," says Ranga Iyer.
Ranjit Shahani also has similar opinion, according to him, "Approximately 65 percent of the population does not have access to medicines. The government should focus on improving access to improve healthcare."
Spurious / Sub-standard drugs
At a time when India is moving towards becoming a preferred manufacturing base for global pharma companies, the menace of spurious and substandard drugs could give a negative image to the country. According to the Mashelkar committee report, the industry faces a loss of around INR 40 billion due to substandard drugs and a WHO report suggests that 35 percent of spurious drugs of the world are being produced in India. Spurious and counterfeit drugs are a major public health hazard. Government needs to accelerate the legislative reforms to curb the menace of counterfeit drugs.
"This is one of those issues that needs to be tackled as the industry comes of age. It is not just spurious drugs; it is pharmacovigilance per se." says Dr. Hasit Joshipura.
Price controls
Uncertainties regarding the Draft Pharmaceutical Policy 2006, which proposes to bring 354 essential drugs under the purview of Drug Price Control Order (DPCO) continues to be an area of acute concern for the industry. The pharma industry feels that regulation should try to simulate the "effects of competition" and price control should not be imposed on drugs where the "effects of competition" already exist. The proposed policy would significantly increase DPCO's span of control from the existing 25 percent to approximately 50-60 percent of all medicines produced.
High fragmentation
The domestic formulations market is predominantly a branded generics market and intensely competitive, with the presence of several players, including small scale companies. The top 10 companies account for only 37 percent of the market. This shows the level of fragmentation in the industry. Given this industry structure, brands franchise, field force strength and product innovation become critical success factors to operate in this market place.
"In a market that is only selling copied products, the importance of strong brands is very crucial and vital and the only way to grow in the future. Otherwise how do you differentiate between 18 different molecules? All you can look at is the brands," says Dr. Swati Piramal.
A report by the Institute for Studies in Industrial Development (ISID), a nationallevel policy research organization in the public domain, mentions that in 2000-01 there were approximately 2872 pharma units in India and out of these 91 percent were small manufacturing enterprises.
However, the amendments made by the government to the Schedule M which deals with standard manufacturing practices, will help in establishing quality standards and uniformity across manufacturing practices.
"I don't see consolidation happening in a massive way in the near future. Many of them are family run businesses and they are doing well. They have no reason to give up their business. It's a fragmented industry all over the world and why should it be different here," says Dr. Swati Piramal.
Mr. Ranjit Shahani feels that "consolidation will happen in the longer term - by 2010. However, current high valuation expectations and emotional attachments due to them being largely family run organizations, are the key reasons why you do not see consolidation in the short term".
India's domestic pharmaceutical market is at an inflection point. The strong underlying growth drivers offer enormous opportunities for domestic as well as MNC pharma companies. However, an inclusive and growth oriented public policy regime will ensure that this growth is sustainable.
(Extracted from 'India Pharma Inc - A continuing Success Story by KPMG&CII study.)