The Indian pharmaceuticals market has characteristics that make it unique. First, branded generics dominate, making up for 70 to 80 per cent of the retail market. Second, local players have enjoyed a dominant position driven by formulation development capabilities and early investments. Third, price levels are low driven by intense competition. While India ranks tenth globally in terms of value, it is ranked third in volumes. These characteristics present their own opportunities and challenges.
In 2007, we undertook an exercise to assess the potential of the market by 2015. At that time, the country was beginning to witness greater affordability and higher spending across a range of categories driven by a decade of reforms. The total market for healthcare products and services had grown at a compounded annual growth rate of 14 per cent from 2000 to 2005. The pharmaceutical industry had grown at a compounded annual growth rate of 9 per cent during that period. We felt in 2007 that the Indian pharmaceutical market was poised for a clear and discernable step-up in its growth trajectory.
In our report, India Pharma 2015 - Unlocking the Potential of the Indian Pharmaceuticals Market, we projected that the market would grow at a compounded annual growth rate of 12 to 14 per cent to become a US $ 20 billion to US$ 24 billion market by 2015. This growth would be driven primarily by rising incomes, and be supported by five other factors: enhanced medical infrastructure, rise in the prevalence and treatment of chronic diseases, greater health insurance coverage, launches of patented products and new market creation in existing white spaces.
These factors are now bearing fruit, and market growth has kept pace with projections. Various industry reports suggest that the industry has been growing at 13 to 14 per cent over the last 5 years-a sharp rise from the 9 per cent compounded annual growth rate between 2000 and 2005. Most of the growth drivers have kept pace with expectations . India's GDP from 2005 to 2009 grew at about 8 per cent, a notch higher than the 7.3 per cent assumed in our earlier report. Growth in medical infrastructure has been in line with expectations. Health insurance coverage has increased steadily. Private retail and corporate coverage grew at over 25 per cent annually, and the Rashtriya Swasthya Bima Yojana (RSBY) scheme provided coverage for 19 million households below the poverty line. The treatment of chronic diseases has gone up. While the number of patent product launches have not matched expectations, the remarkable success of a few recent launches demonstrates the true potential of the market Clearly, the market has grown in confidence over the past four years. Along with the change in growth momentum, the central question about the Indian pharmaceuticals market has changed as well.
A market growing with confidence
The global pharmaceuticals industry is in the midst of major discontinuities. Among these, the most prominent is the rising importance of emerging markets .
Almost all major pharmaceutical players have articulated a clear aspiration forwinning in emerging markets. Investments in emerging markets have increasedover the last 5 years, and we expect this trend to continue . These investments have been made in both organic growth acceleration as well as in inorganic deals.
Over the past few years, while emerging markets have grown in importance, the Indian market has grown in confidence and stature. Five indicators demonstrate this:
Clear step-up in growth trajectory: The growth rates of 13 to 14 per cent over the last 4 years have been a clear step-up vis-à-vis the 9 per cent growth from 2000 to 2005, and the 6 to 7 per cent growth in the 1990s . The new growth trajectory is underpinned by rising income levels and enhanced medical infrastructure. With both these trends set to continue, the industry is confident of at least maintaining the current trajectory.
Growth along several dimensions: The market has witnessed growth across therapies and geographies. While specialty therapies have grownt above average rates, mass therapies have also seen robust growth. As expected, rural markets have increased their share of the overall market.
Nevertheless, urban markets remain the mainstay and have grown impressively at about 13 per cent.
Greater focus on non-traditional opportunities: Players have begun to invest and build businesses in seemingly non-traditional opportunities. As many as six players in the top 10 have invested significantly in mass consumer healthcare businesses. A few leading players have created their biosimilars portfolio, while some innovators have successfully launched patented products. These ventures have gone beyond being experiments. Organisations are now expecting their non-traditional businesses to match up to their traditional ones in terms of performance.
Innovation in business models: The pace of innovation in business models has been unprecedented. Deep-seated beliefs and approaches have been challenged. Several multinationals have dramatically expanded their sales forces to enhance market coverage. Many of them have launched branded generics businesses with well-defined expectations and resourcing that differ from their traditional businesses. Innovators and local players have collaborated to launch patented products. Multinationals have launched rural businesses, with the broader objective of enhancing access.
Bolder aspirations: Expectations from the India businesses have risen. Backed by investments, several multinationals have set their sights on market leadership in the medium term. Leading Indian players have decided to invest, in some cases to regain lost ground. For these companies, the declining attractiveness of major generics markets worldwide implies a heightened importance of their India businesses.
Amarket in the midst of discontinuities
As the global pharmaceuticals market deals with discontinuous trends, the Indian market faces its own set of discontinuities. The broader healthcare landscape in India is in the throes of discontinuous development. Competitive intensity has gone up and industry structure is in flux. Traditional sources of growth are making room for newer ones. Finally, performance expectations have undergone a fundamental re-rating, for both top line and bottom line. Discontinuous development of the Indian healthcare sector: Consumer spending in healthcare is undergoing a steep rise. Till 2025, consumer spending in healthcare is expected to be among the highest growth categories, second only to communications. Moreover, patients are increasingly becoming more knowledgeable, and demand better standards of care. On the other hand, government spending in healthcare is set to grow six times by 2020.
While private insurance coverage will make a real difference in high-cost surgeries and treatments, the government's RSBY programme will enable fundamental shifts in basic care for population below the poverty line. Private investments in care delivery will add unprecedented capacity in secondary and tertiary care, and lead to the emergence of new hospital formats.
Industry structure in flux: Inorganic as well as organic investments in the past 3 to 4 years have brought about remarkable changes in a leader board that had remained steady for over a decade. Three of the top 4 players today are multinationals. Four of the top 10 players, including the market leader, are relatively newer entrants. Historically, the Indian market has been more fragmented than other emerging markets such as Russia and Brazil Driven by inorganic activity and the advantages of scale, further consolidation is expected.
Fast paced changes in sources of business growth: The most striking example is the diminished importance of new product launches. In 2007, there were nearly 200 molecules yet to be launched in India1. These included several globally successful and large molecules such as Etodolac and Rifaximin. The number of such possible launches has now reduced significantly. Our estimates indicate that 70 to 80 molecules remain available.
New sources of business are fast replacing old ones. Opportunities such as vaccines, biologics and consumer healthcare will drive growth. To make up for the loss of new products, large brands need to grow above market rates and create major franchises spanning a range of formulations and indications. Players have started to reallocate investments and embrace new opportunities.
Fundamental re-rating in performance expectations: Bold investments have led to bolder expectations. In a market growing at 15 per cent, leading players aim to grow at 20 to 25 per cent. Short-term investments notwithstanding, improving profitability is a major objective. For multinational companies, India businesses need to compete for investments with other emerging markets, and hence, need to match up on profitability. For Indian players, India businesses need to fund, at least in part, their efforts in innovations and internationalisation.
The Indian pharmaceuticals market has grown in confidence and moved on to a new growth trajectory. Strong underlying growth drivers, coupled with discontinuities, have raised interest and engagement manifold in this market.
Base case growth will be driven by rising affordability
From a market size of US $ 13 billion in 2009, the Indian pharmaceuticals market will grow to US$ 55 billion, with the potential to reach US$ 70 billion in anaggressive growth scenario. In a pessimistic scenario characterised by regulatory controls and economic slowdown, the market will be depressed and reach US$ 35 billion.
With market diversity on the rise, the drivers of growth have proliferated and become more nuanced. We identified 11 drivers of growth grouped underfour dimensions: epidemiological factors, increasing affordability, enhanced accessibility, and rising acceptability. First, the pool of patients will inevitably grow driven by the increase in population and rising prevalence of disease. Second, the affordability of drugs will rise due to sustained growth in incomes and an increase in insurance coverage.
Third, accessibility to drugs will expand due to growth in medical infrastructure, new business models for Tier-II towns and rural areas,launch of patented products and greater government spending on healthcare.Fourth, acceptability of modern medicine and newer therapies will increase due to aggressive market creation by players to enhance diagnosis and treatment rates,an increased acceptance of biologics and preventive medicines, and a greater propensity to self-medicate.
Continuing importance
Income levels will rise steadily: Recent forecasts of long-term GDP growth by the McKinsey Global Institute indicate that real GDP could grow at nearly 8 per cent over the next decade5. This would cause the average per capita disposable income to grow by nearly 5 to 6 per cent. Rising incomes will drive 73 million households or around 340 million individuals into the middle and upper income segments.
Research by the McKinsey Global Institute has highlighted that spending on healthcare will increase disproportionately with rise in income levels. By 2025, healthcare will account for the third largest share in household consumption, behind food and beverages, and transportation.
Health insurance coverage will expand dramatically: Of all the growth drivers mentioned in our earlier report, health coverage is the one that has undergone discontinuous and above-expected growth. In the past 5 years, coverage has grown annually at over 25 per cent, resulting in the coverage of nearly 300 million people in 2010.
This growth has taken place at two ends of the income pyramid. On one hand, private insurance players have enhanced coverage among the 'upper' and 'middle' income segments. On the other, the central and state governments have sponsored coverage for the 'below poverty line' (BPL) segment.
By 2020, up to 45% of the population, nearly 655 million people, will enjoy health insurance coverage . Private insurance players will drive market creation and nearly 15% annual growth till 2020. Coverage by government and employee health insurance schemes will grow at lower rates, but still account for nearly 145mn
people by 2020.
Courtesy: McKinsey & Company report