The structure of the Indian pharmaceutical industry is characterized by fragmentation, with over 20,000 players-a large number of which are in the small-scale sector-competing for market share.

Currently, the top five players in the Indian pharmaceutical industry account for 22 per cent of the retail formulations market even as the top five players in the Indian pharmaceutical industry account for 22 per cent of the retail formulations market even as the top 10 account for around 36 per cent and the top 25 for around 61 per cent (2001).

In part, the trend of consolidation is being expedited by M&As among the Indian affiliates of global pharmaceutical majors following parental restructuring overseas. As for Indian companies, it is not so much corporate-level M&As but the need to acquire units and brands that is driving consolidation.

Therapeutic Segments

The anti-infectives segment remains the largest in the Indian retail formulations market. However, most anti-infective products are currently witnessing a low or even negative growth. Some of the other therapeutic segments, on the other hand, have been notching up high growth rates.

Thus, the growth rate for the central nervous disease, segment was 15-16 per cent in calender 2001, while it was 20-22 per cent for the cardiovascular segment, and 35 per cent for the anti-diabetes segment. The increase in the relative importance of these segments follows the rise in the incidence of lifestyle-related diseases and changes in the country's demographic profile.

The changes in the relative importance of the various therapeutic segments in the Indian retail formulations market is expected to influence the realizations and prospects of individual pharmaceutical companies in a significant way.

Costs

The three important cost heads for the Indian pharmaceutical industry are: material costs; marketing & selling costs; and employee costs. This is in contrast to the cost structure of the global majors, for whom the key costs are: selling costs, general and administration costs; manufacturing costs; and R&D expenses.

Opportunities in R&D

With the regime of process patents set to expire, reverse engineering is unlikely to bring in the kind of revenues post-2005 as they are at present.

The alternatives, therefore, for large Indian companies are independent research for NCEs, NDDS, and improved chemical entities (ICEs). However, these activities have high attendant risks and involve long lead times, large financial commitments, and experience in interacting with international regulatory authorities. The opportunity in R&D therefore calls for a balance between the risks and prospective gains. Given this, the model that is emerging is one of out-licensing the discovered products to global majors.

The trend of global pharmaceutical majors outsourcing research also offers opportunity to Indian players. Here, Indian players can set up the requisite infrastructure (complying with international practices) and provide contract research services in the pre-clinical research, clinical trials and intermediate stages. The contract research model in India would draw on the country's significant advantages in terms of availability of a vast pool of patients, prevalence of certain diseases that are non-existent in other parts of the world, and relatively low costs.

Pharmaceutical Products

Lower costs of production, established quality parameters and internationally-certified manufacturing facilities provide immense opportunities to Indian bulk drug and formulation manufacturers. Contract manufacturing bulk drugs for Indian and multinational pharmaceutical companies, forward integration into prescription formulations as well as OTC products opportunities in the domestic market.

Likewise, focusing on high growth therapeutic segments and OTC formulations, multiple branding of formulations to optimise returns provide greater opportunities.

International market

Already, some Indian players have accessed the generics markets of the US and Europe and are aggressively filling Abbreviated New Delhi Applications and Product Dossiers with the regulatory authorities in the countries concerned. Entering the developing markets like South Asia and Latin America through joint ventures and subsidiaries. For instance, Brazil, the eight largest pharmaceutical market globally, has emerged as an attractive investment destination on account of its market size, favourable regulatory changes, and preference for increased generic substitution.

Thus companies like Ranbaxy, Torrent and Orchid are increasing their presence in Brazil for marketing formulations. China is another attractive destination with its huge market (seventh largest in the world). Focusing on institutional sales to Governments of developing countries (such as those belonging to the Commonwealth of Independent States and Africa) and to multilateral aid agencies. However, the pre-requisites here are cost effectiveness and possession of quality-certified facilities.

Post-2005 outlook

With the institution of the system of product patents in India post-2005, the domestic pharmaceutical industry is likely to undergo significant changes. Already, the prospect of a products patent regime has set off various initiatives in the industry, which are likely to reach their logical conclusion around 2005 and beyond.

- ICRA