Indian pharma: Where do you go... - Views on News from Equitymaster

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Indian pharma: Where do you go...

May 27, 2004

Indian pharma companies have shown very good growth numbers in last few years. While big guns have made their presence felt in the international business, some smaller companies too have made their space in the Indian pharmaceutical industry. If the current growth pace of pharma companies continues for some more time, we will have a dozen Rs 10 bn companies in about two years' time. The table below reveals the growth patterns of the top 5 Indian pharma companies by sales over the last three years. Ranbaxy, Cipla, Dr. Reddy's, Nicholas Pharma and Aurobindo Pharma are the top Indian companies in the industry. Barring Nicholas Piramal, the rest have done considerably well largely owing to their exploits on the global front. Several other companies, like Sun Pharma, Wockhardt, Lupin Labs and Cadila are also taking this route.

Consolidated Revenues...
(Rs m) FY02 FY03 FY04 CAGR
Ranbaxy 27,580 39,156 44,609 27.2%
Cipla 12,745 15,728 20,600 27.1%
Dr Reddy's 16,093 17,136 19,720 10.7%
Nicholas 8,662 9,642 12,961 22.3%
Aurbindo 9,737 11,139 13,221 16.5%

The major growth for these companies has been their international operations. Companies like Cipla who were laggards in this area, have now taken a lead in bulk drug exports and about 56% of the incremental growth for the company in FY04 has come from international business. But companies like Ranbaxy and Dr Reddy's, which started as bulk drug suppliers, have now moved up the value chain and entered the lucrative US and European generics markets. Currently, 24% of Ranbaxy's revenues comes from international business, which has clocked a CAGR of 38% in last five years. But this exemplary performance of the Indian companies has come in the backdrop on changing international trade conditions where all the WTO member companies will follow product patent regime. Fearing that they will be wiped out in the fierce competition with international majors, Indian companies started looking out for markets globally.

This growth in the international business has come on the back of cost competitiveness and expertise in chemical synthesis. Also, globally pharma companies are focusing on cost control measures and India is fast becoming a preferred destination to outsource their lesser value-add activities. Infact, Indian companies are the largest drug master file (DMF) applicants with the USFDA constituting 22% of the total DMF applications currently.

Going forward, these companies are going to show healthy growth rates given the international compulsions and opportunities. The above chart shows that the bulk drugs lies at the bottom of the value chain. An important thing to note is that the basic nature of bulk drugs is similar to that of commodities. Intensifying competition in this field will put pressure on the margins of the companies in the years to come.

While this threat is still some time away, to avoid this and for sustainable long term survival, the way forward is clearly to invest in R&D activities and move above the value chain. Not all companies need to look at pure research (search for new molecules). Some are already proving to be a viable global supplier of bulk drugs, some are setting themselves up as value for money service providers for clinical trials. But activities will only suffice till the next decade. Post that, in a patent regime, pure R&D led companies will call the shots. Therefore, for the good of domestic pharma industry, Indian companies must invest their cash earned from the bulk drugs and plain generic activities towards research in order to move up the value chain.

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