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 revenues generated by the industry are approximately US$ 7.6 bn and have grown at an average rate of 10% over last five years. The Indian pharma industry accounts for about 1% of the world's pharma industry in value terms and 8% in volume terms.
• In the recent past, Indian companies have targeted international markets and have extended their presence there. While some companies are exporting bulk drugs, others have moved up the value chain and are exporting formulations and generic products. India also offers excellent exports opportunities for clinical trials, R&D, custom synthesis and technical services like Bioinformatics.
• 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 spend of the top five companies is about 5% to 10% of revenues. Despite growing at a CAGR of over 50% over the last four years, the ratio is still way below the global average of 15% to 20% of sales. However, despite the relatively low R&D spending, Indian companies are stepping up their research activities to make themselves more self sufficient in terms of product development, now that the product patent regime has come into force.

• 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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• Another problem which impacted the pharma sector was the stringency of the US FDA while inspecting manufacturing plants. As a result many companies such as Ranbaxy, Lupin and Sun Pharma’s subsidiary Caraco were found guilty by the US FDA for not complying with quality manufacturing standards. This impacted their performance during the year. In all cases the issues with the US FDA have yet to be resolved.
• The European market posed a set of challenges for Indian generic companies. While the UK was bogged with severe pricing pressure, the government’s of Germany and France undertook various healthcare reforms, which impacted the revenues of companies having a presence in these countries. Further, the global economic slowdown only worsened matters.
• In the domestic market, FY09 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 took centrestage relegating the acute therapy segment to the background. While the former recorded a robust 21% YoY growth, the latter grew by 11% YoY.
• MNC companies did well during FY09/CY08 as compared to last year wherein they had performed poorly. On an average, MNC companies were able to clock topline growth in the range of 10% to 15%. On the margin front, performance was mixed with only GSK Pharma managing to expand margins on account of a superior product mix. Aventis also did well with exports surging once again after a slew of poor quarters.

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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$ 108 bn are expected to go off patent between CY09 and CY13. 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 and anti-depressants will continue to be lucrative and fast growing owing to increased urbanisation and change in lifestyles. Growth in domestic sales in the future will depend on the ability of companies to align their product portfolio towards the chronic segment.
• 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. Currently, India has the highest number of US FDA approved plants outside the US at 75 plus.

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