India is gaining importance as a market for pharmaceutical products. Between 2002 and 2007, the domestic formulation industry grew at a compound annual growth rate (CAGR) of 14 per cent to USD 8.4 billion from around USD 4.3 billion. The Indian market expanded much faster than the global pharmaceutical market as a whole (+7 per cent per year).
Demand in India is growing markedly due to rising population, increasing per capita income, increasing access to medicine, especially in the rural areas and an increasing population of over sixty years of age.
Currently the largest segment in the domestic pharmaceutical market is anti-infectives - it accounts for one-fifth of total market turnover. Next in line and accounting for one-tenth each, are cardiovascular preparations, cold remedies, painkillers and respiratory solutions. By contrast, the market for treating diseases (such as diabetes and obesity) or so-called lifestyle drugs (anti-depressants, drugs to help smokers to quit and anti-wrinkle formulations) are of less significance at present, but are expected to grow in the future.
Drug pricing in the Indian market is difficult due to the fragmented nature of the market. The easy availability of multiple copies across molecules due to the absence of intellectual property protection till recently has exerted considerable pressure on pricing as well. Extraneous events like value added tax (VAT) implementation, maximum retail price (MRP) based pricing, etc keep compounding the problems.
The formulations market in India is quite fragmented. The top five companies in formulations account for around 22 per cent of the domestic formulations market. In all, the market is concentrated at the top with the first 10 players controlling about 36 per cent of the total formulations sales.
In the past seven years the industry has seen three years of negative price growth. Also, the price increase in the domestic formulation market is significantly lower than the general inflation level in the industry.
While the domestic industry is unlikely to see any dramatic changes over the next two to three years, we believe the patent regime and good manufacturing practice (GMP) norms will act as trigger points for consolidation in the sector. This consolidation is likely to improve the pricing power of pharma players. Experts foresee significant merger and acquisition (M&A) activity in the sector.
The consolidation will be driven by two broad factors. They are:
● Adoption of IPR: Over the medium term, it will limit the molecules available for copying and shrink new product-based growth.
● Strict implementation of current good manufacturing practices (cGMP) norms under Schedule M: Small pharma units that cannot afford investments required to comply with these norms will have to seek other alternatives.
The growth in population in terms of sheer numbers will translate into additional demand for medicine. India's population is expected to increase at a compound annual growth rate (CAGR) of 1.4 per cent to l.26 billion in 2015.
On account of an increase in the working age group population, lifestyle related ailments will be on an uptrend in the future. The most significant demographic change will be in the working class population (30-60 years), the share of which in the total population is expected to increase from 32 per cent in 2007 to 36 per cent in 2026. It is important to note that the working age group population is more prone to lifestyle-related diseases. Besides, the size of population (>60 years) is also likely to go up from 7.5 per cent in 2007 to 9 per cent in 2026.
Lifestyle diseases increase with increase in industrialisation. Urban population is more prone to lifestyle diseases due to unhealthy eating habits and lack of physical activity in their daily schedule. The proportion of urban population in the overall population is expected to increase from 28 per cent in 2001 to around 31 per cent in 2015.
The number of cardio vascular and diabetic patients in urban India is expected to increase at a CAGR of 7.3 per cent and 5 per cent (2005-2015), respectively, as compared with 3.5 per cent and 1.8 per cent, respectively in rural India, indicating that the urban population is more prone to these diseases.
Today, about 65 per cent of the population in the Indian subcontinent does not have access to western drugs. This segment of the population depends entirely or in part on traditional Indian medicine practices, which are cheaper and more easily available than their counterpart western medication. However, with higher education and awareness, rising income levels, urbanisation and a change in lifestyle, western medical treatment is gaining importance.
Although a large section of the population is still poor, there has been a rapid increase in the middle class and rich segments. The middle class segment accounts for a major part of the healthcare expenditures in India. Hence, with their numbers on the rise, coupled with a surge in income levels, the per capita expenditure on healthcare and medicines is expected to grow.
According to McKinsey Global Institute, the number of households with income above US $5,000 per year (middle class and above) are expected to increase at a CAGR of 18.0 per cent from 14.4 million to 63.8 million by 2015. The population of households having income between US $2,250 and US$5,000 per year are also expected to marginally increase to 106 million households by the year 2015. An increase in population above middle class will result in increase of population with access to medicine.
The total population served by western medicine is expected to increase from around 400 million in 2007 to around 600 million individuals in 2015, an annualized increase of around 6.2 per cent.
Healthcare insurance
Access to quality healthcare in the private sector has so far been limited by the high cost for the vast majority of India's population. However, this is changing dramatically with the advent of health insurance as a preferred tool to finance most healthcare expenditures. Health insurance industry is slated to grow exponentially in the coming years with large and diverse players having entered the fray and enticing consumers with an ever growing array of schemes.
There is still a lot of ground to be covered - even today over 75 per cent of the expenditure on healthcare is still being met by consumers "out of pocket."
Less than 10 per cent of India's population today has some sort of health insurance cover: either voluntary or as part of the Employees State Insurance, Central Government Health Scheme or Community Insurance. Private players in the voluntary health insurance sector saw spectacular growth in their collections last year. Healthcare insurance premium collected in 2005-06 registered a growth of 35 per cent over 2004-05. The private players registered a growth of 77 per cent, while public players recorded a growth of 25 per cent over 2004-05. In addition, community health insurance (CHI) schemes are also slowly penetrating the rural market. There are more than 25 schemes covering over 8 million lives all over India.
With the Insurance Regulatory and Development Authority (IRDA) stipulating that 5 per cent of the business for insurance companies be from the rural sector, a slew of innovative schemes and better coverage is being seen.
Product patent regime
Until 2004, the regulatory system in India focused only on process patents, during which the Indian pharmaceutical companies thrived. However, in January 2005 India complied with the World Trade Organisation (WTO) to follow the product patent regime [the sale of re-engineered products for drugs patented after 1995 is restricted].
However, enterprises that had significant investments and were producing and marketing the concerned products prior to January 01,2005, and which continued to manufacture the product covered by the patent on the date of grant of the patent, are protected and the patentee cannot institute infringement suits against them, but would be entitled to receive reasonable royalty from them.
Even though branded generics products are expected to dominate the market, patented products are expected to capture around 8 per cent of the total market by 2015.
Formulations market
The domestic formulations market is expected to grow at a CAGR of l2.5 per cent to reach US $21.5 billion.
Over the last five years, the Indian domestic formulations market (volumes) grew 1.2 times (on an average) the growth in the Indian gross domestic product (GDP). This makes experts believe that with Indian GDP expected to grow by more than 7-8 per cent over the next ten years, the Indian pharmaceuticals industry's volume growth is poised at 8-9 per cent.
This, coupled with better pricing power on account of consolidation, higher growth in chronic segments and launch of patents products will lead domestic formulation market to grow at a CAGR of 12-13 per cent over the next eight years.
The growth will be driven by:
● Increasing per capita income
● Better pricing power on account of consolidation
● Growth in population
● Change in demographics of Indian population
● Health insurance and change in patent laws
Branded generics
The drug control authority of India specifies the drugs which have to be sold only under prescription. Also, drugs can be sold in retail only by licensed outlets. Prescription drugs cannot be advertised in the general media. Hence, doctors are extremely important decision makers and it is he/she who recommends treatment, and their prescriptions drive sales for pharmaceutical companies.
The situation in India is quite unique as doctors remain the key influencing factor unlike the generics market in US and UK where trade is the key influencing factor.
Hence, pharmaceutical companies use medical representatives to provide doctors with samples, literature and brief on their products. The brands that are properly marketed through doctors enjoy a high premium and growth compared to other drugs in the same segment.
Despite the advent of health insurance and pharmacy retails, doctors would continue to be key decision makers for the Indian market and hence companies investing in sales force and building brands to continue to grow at higher rate.
Generic- Generic
The market for Generic - Generic (Gx-Gx) is estimated to be around US $500 million or around 6 per cent of total market.
Organised retail chains currently account for around 1.5 per cent of total pharmacy sales or around US $125 million. Huge investments are expected to be made by players like Apollo and Fortis over the next eight years. Further, large retail chains like Subhiksha, Big Bazaar, Hypercity and Spencers have already entered pharma retailing. Corporate groups like Reliance have indicated interest in entering this space. With huge investments lined up we expect share of organised retail to increase from around 1.5 per cent to around 10 per cent of total market by 20l5.
With the advent of retail chains and growth in health insurance, we expect the share of generic - generic to moderately increase over the next eight years. We expect the market of Gx-Gx to grow to around US $2 billion, i.e., around 10 per cent of the total pharma market by 2015.
Patented products
Based on discussions with industry the potential market size for new patented drugs could be as high as US $1.5-2 bn by 2015. However, we believe future prospects of patented products in India are closely linked to the innovator's view of the Indian market potential and the support it provides to the Indian subsidiary/licensee.
If innovators lower their emphasis on the India market the share of patented products could be significantly lower than the industry estimates of around US $1.5-2 billion.
It is still early days for MNCs to formulate their India strategy for their globally patented drugs in terms of introduction timelines, pricing strategy etc. These strategies will significantly impact overall penetration of products under patent in India.
Focus on lifestyle diseases
Over the last few years, the domestic formulation market has witnessed rising prominence of lifestyle segments such as anti-diabetic, cardiac and gastro-intestinal.
The overall domestic formulation market has grown moderately in the last few years. However, segments such as anti-diabetic and cardiac have registered a sturdy growth of more than 20 per cent during the same period partly due to the smaller base as compared to the other segments and rising prevalence of diabetes and cardiovascular diseases.
The pattern of living in India is undergoing a massive change, leading to lifestyle-related issues like obesity and stress, which in turn lead to cardiovascular diseases and diabetes. The prevalence of both these diseases in India is growing at an alarming rate due to increasing sedentary lifestyle and unhealthy eating habits.
Going forward, anti-diabetic, CNS and cardiac markets in India are expected to grow strongly on the back of increasing number of patients and rising affordability of the consumer.
Players such as Sun pharma, Sanofi Aventis and Zydus Cadila have a significantly high proportion of the lifestyle segment in their overall domestic portfolio. Torrent, Zydus Cadila and Sun Pharma are the market leaders in the cardiac segment, each holding around 8 per cent of the Indian cardiac market. On the other hand, the anti-diabetic market in India is highly concentrated with the two top players (Abbott and USV), having almost 50 per cent market share.
MNC share in India
While multinational companies (MNCs) still have some concerns on the patent bill, most of them have aggressive plans for the Indian market. MNCs will increase their market presence on the back of new product launches, in-bound acquisitions and continued trust on brand building. GSK and Aventis have restructured their operations and others like Pfizer are aggressively pursuing operational efficiency improvements. Also, BMS and Merck - companies that had exited the Indian market - have staged a re-entry. Daiichi-Sankyo, one of the largest Japanese companies, has also entered the Indian market by acquiring controlling stake in India's largest pharmaceutical company Ranbaxy.
The factors that make India an important market for MNCs are:
● Growth Prospects: We expect the domestic formulation market to increase at a CAGR of 12.5% to reach to US $21.5 billion, an increase of US $13 billion. The growth in the Indian market is expected to be much higher compared to developed markets of US, Europe and Japan
● Indian domestic formulation industry is expected to be amongst the top 10 global markets by 2015
● Product patent regime
● Compared to developed markets higher profitability even In the generics business
The reasons to improve MNCs market share, compared to domestic players, include:
● Access to products: With access to global pipelines, MNCs are better off than their Indian counterparts who will lose the flexibility of launching copies of newer global molecules
● Consolidation: Slowdown in new product based growth will impede growth in India for most domestic companies. While the domestic industry is unlikely to see any dramatic change over the next 2-3 years, the patent regime and GMP norms will act as trigger points for consolidation in the sector. Also on account of an increased interest in India, MNCs would be at the forefront to acquire good domestic assets
According to estimates the market share of MNCs is expected to increase from current 25 per cent to around 35 per cent by 2015.
(Courtesy: Yes Bank Report)