Pharmaceuticals Sector Analysis Report 

• The Indian Pharmaceutical industry is highly fragmented with about 24,000 players (around 330 in the organised sector). The top ten companies make up for more than a third of the market. The Indian pharma industry grew by a robust 18% YoY in 2011 to ` 565 bn (approx. US$ 12.5 bn). It accounts for about 1.4% of the world's pharma industry in value terms and 10% in volume terms.
• Besides the domestic market, Indian pharma companies also have a large chunk of their revenues coming from exports. While some are focusing on the generics market in the US, Europe and semi-regulated markets, others are focusing on custom manufacturing for innovator companies. Biopharmaceuticals is also increasingly becoming an area of interest given the complexity in manufacture and limited competition.
• The drug price control order (DPCO) continues to be a menace for the industry. There are three tiers of regulations - on bulk drugs, on formulations and on overall profitability. This has made the profitability of the sector susceptible to the whims and fancies of the pricing authority. The new Pharmaceutical Policy 2006, which proposes to bring 354 essential drugs under price control has not been officially passed as yet and has been stiffly opposed by the pharmaceutical industry.
• The R&D spends of the top five companies is about 5% to 10% of revenues. This ratio is still way below the global average of 15% to 20% of sales. Indian companies have adopted various strategies for their R&D efforts. Some have entered into collaboration and partnership agreements with innovator companies; others have out-licensed their molecules for milestone payments. Hiving off R&D units into separate companies has also become a preferred option for many Indian pharma players. That said, given that the research pipelines of Big Pharma are drying up, they have now begun to dabble in generics. In this regard, these innovator companies are either buying out Indian firms or are forging alliances with them.

• Supply
• Higher for traditional therapeutic segments, which is typical of a developing market. Relatively lower for lifestyle segment.
• Demand
• Very high for certain therapeutic segments. Will change as life expectancy, literacy increases.
• Barriers to entry
• Licensing, distribution network, patents, plant approval by regulatory authority.
• Bargaining power of suppliers
• Distributors are increasingly pushing generic products in a bid to earn higher margins.
• Bargaining power of buyers
• High, a fragmented industry has ensured that there is widespread competition in almost all product segments. (Currently also protected by the DPCO).
• Competition
• High. Very fragmented industry with the top 300 (of 24,000 manufacturing units) players accounting for 85% of sales value. Consolidation is likely to intensify.

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• FY11/CY10 was a strong year for domestic pharma companies on back of strong growth in both domestic and exports sales. There was good growth seen in generics especially in the US and the semi regulated markets. Europe continued to face pressure. Companies focusing on custom manufacturing for innovators did not see a sign of recovery this year as well. Further, the efforts of global innovators to entrench in the domestic market intensified with many strategic tie-ups and small acquisitions of Indian companies. Now with Abbott taking over Piramal's domestic division and Daiichi Sankyo having acquired Ranbaxy, 2 of the top 3 players in the Indian market are MNCs..
• Another problem which continued to hamper the pharma sector was the stringency of the US FDA while inspecting manufacturing plants. Ranbaxy and Sun Pharma are yet to come to a resolution with respect to their plants with the US FDA. Aurobindo Pharma was new in the list to receive the warning letter for one of its biggest manufacturing unit.
• In the domestic market, FY11 was a decent year for the pharmaceutical industry with most of the top players managing to clock a double-digit growth. However, it was the chronic therapy segment, which once again stole the thunder of the acute therapy segment. While the former recorded a robust 18% YoY growth, the latter grew by 14% YoY.
• MNC pharma companies did well during FY11/CY10. On an average, they were able to clock topline growth in the range of 10% to 15%. On the margin front, performance was not good. Most of the companies saw increase in costs on the raw material costs and employee costs.
• The intensifying competition led to higher attrition and the industry is facing huge increase in the employee costs.

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• The product patents regime heralds an era of innovation and research resulting in the launch of new patented product launches. In the longer run, domestic companies would face fresh competition from MNCs, as they would make aggressive new launches. However, the latter would most likely be subject to price negotiation.
• Drugs having estimated sales of over US$ 100 bn are expected to go off patent between CY10 and CY14. With the governments in the developed markets looking to cut down healthcare costs by facilitating a speedy introduction of generic drugs into the market, domestic pharma companies will stand to benefit. However, despite this huge promise, intense competition and consequent price erosion would continue to remain a cause for concern.
• The life style segments such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers will continue to be lucrative and fast growing owing to increased urbanisation and change in lifestyle patterns. High growth in domestic sales in the future will depend on the ability of companies to align their product portfolio towards the chronic segment as the lifestyle diseases like hypertension, congestive heart failure, depression, asthma, and diabetes are on the rise.
• Contract manufacturing and research (CRAMS) is expected to gain momentum going forward. India's competitive strengths in research services include English-language competency, availability of low cost skilled doctors and scientists, large patient population with diverse disease characteristics and adherence to international quality standards. As for contract manufacturing, both global innovators and generic majors are finding it profitable to outsource production. Although the scenario has yet not improved for this space after the financial crisis, it is expected to improve going forward as the pressure to prune costs increases.

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Related Links for Pharmaceuticals Sector
Quarterly Results | Sector Quote | Over The Years