The domestic pharmaceutical market has undoubtedly been a very strategic and a key growth driver for Indian companies because of higher profitability and a superior return profile. Though in terms of revenue, it would be contributing 25-30% of the top line, the contribution is much higher to the bottom line.

However, over the past 3 years (FY 2013 – FY 2016), the IPM has grown at a CAGR of ~ 11%, much lower than its historical average growth rate of 15%. During the Q3 of FY 2016 and Q1 of FY 2017 the growth had slipped to single digits. In September 2016 quarter growth had rebounded to 12.6% led primarily by volume growth and new product introductions. During this period therapeutic segments of Respiratory grew at 25.2%, diabetes at 16.5%, anti-infective at 13.4% and pain/analgesics at 13.2%. While the growth has rebounded, it has raised concerns on the long term sustainability of domestic growth within the investor community.

There have been primarily two concerns: a) government bringing down prices through NLEM and b) FDC ban which both together could shave off ~ $2 billion if the full impact is considered. This is quite significant given that it is ~ 13% of the total Indian pharma market.       

A) Bringing down prices of medicines:
As the government aims to reduce the out of pocket expenditure on healthcare, curbing patient spending on medicines will be a priority. As a result many more formulations are expected to come under the price net. This trend will squeeze margins throughout the distribution chain    

B) Regulatory environment:
• Number of new drug approvals being registered remains low  
• Decline in number of clinical trial studies in India
• Ongoing impact of the ban on FDC’s   
• Restrictive approach to grant of pharmaceutical patents
• Promotional strategies would be under greater scrutiny  

A tighter regulation, squeeze on margins and the quest for new avenues for growth will force domestic companies to adopt innovative strategies to stay ahead of market growth.

Demand resilient – Key factors driving growth
We believe a confluence of favourable macro environment factors would continue to drive growth over the foreseeable future for the pharmaceutical industry. Some of the key factors driving growth include:

Rapid growth of lifestyle diseases - While the incidence of most communicable diseases is falling, chronic, non-communicable diseases (NCDs) are being diagnosed with increasing frequency, and now account for an estimated 60% of all deaths. Cardiovascular disease, which is the nation’s biggest killer, accounts for 28%, neurological (18%), cancer (12%) and others (32%)

Ageing population – the proportion of ageing population is increasing and therefore will require greater amount of care.  By 2021, 11% of the population will over 60 years and by 2026, 13% of the population will be over 60 years.   

New product launches – launch of innovative molecules
Expansion of private hospital sector – Demand for quality private hospital services is on the rise. Leading corporate hospital groups are investing heavily in the expansion of existing networks, while new players are being attracted to the sector. With the high-end private hospital market already reaching saturation point in major metros, most corporate chains are pursuing a presence in smaller cities

Access to essential medicines - The government's draft National Health Policy 2015 outlines the universal access to free essential medicines, diagnostics and emergency care in public health facilities as one of six key policy objectives. The central government has shifted responsibility for the provision of free drugs to the states, under the National Health Mission, with the central government providing financial and technical support.

Expansion of pharmacy chains - Pharmacy chains have emerged as a growing force in the sector and are pursuing aggressive expansion initiatives which will drive rapid increase in market shares controlled by chains. MedPlus and Apollo are big players and also going online

Expansion healthcare infrastructure – Healthcare infrastructure is expanding multifold from metro / tier 1 to tier 2/3 areas. Is addition several innovative business models are being created which help to expand the healthcare infrastructure further  

Increase in health insurance coverage - The proportion of the population with access to of health insurance coverage has increased significantly over the past decade. Further increases will be driven by state-level initiatives, and by further expansion of the private health insurance market. The entry of new insurance providers is bringing down the cost of insurance.

Key strategies being adopted by Indian players
As a result companies would pursue some of the following strategies in pursuit of growth and profitability

Portfolio mix: Specialty vs Mass
Companies will increasingly focus on specialty segments over mass segments as specialty segments offer higher growth potential coupled with better realization. Further, in specialty segments, companies with higher market share and ability to build successful brands will grow ahead of peers. In addition onset of NCD’s are on the rise and companies are focussing on these segments.

Brand building
As new product launches dwindle, building big brands has assumed much greater importance and is somewhat necessary to improve profitability. To this effect companies are focussing on several aspects like - life cycle management, broaden coverage across doctors and geographies and creating credibility among KOLs.

Successful product launches
New product launches play a critical role for any company to grow base business and is therefore a key growth driver. While new product launches are critical for any pharma company, making them successful is more important as many of them failure

Field force stability and productivity  
Over the past few years many companies have ramped up their field force and will focus on the following to enhance revenues and productivity:
• field force stability  
• Concentration on specialty segments
• Increasing penetration outside of metros

In-licensing
Companies will also actively seek partnerships for In-licensing innovative products. Indian companies are best suited to distribute given their large field forces.  

Conclusion:
As per IMS Health, the Indian pharma market is forecasted to grow at a double digit CAGR of 12.7% between 2015 and 2019 to reach $25 billion by 2019. Despite the regulatory headwinds many industry participants believe India will continue to be a strategic market where the long term growth is pegged at 15%. Many new companies have entered trying to capture a niche in the market and backed by private equity investment. Companies are adopting aggressive strategies to grow their businesses and this could lead to a much needed consolidation in the market.

(The author is Partner at  Aurum Equity Partners LLP)