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Pharma: Global Vs local - Views on News from Equitymaster
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  • Jun 10, 2004

    Pharma: Global Vs local

    There are two types of companies in the Indian pharma industry. While some are subsidiaries of global giants, others are home grown companies. Glaxo, Pfizer, Aventis and Novartis fall in the former category, while Ranbaxy, Cipla, Dr Reddy's, Wockhardt and Nicholas Piramal fall in the latter. Let's compare their business models and their performance.

    MNC pharma companies
    These companies were once ruling pharma markets in India, but over the period their share has come down considerably. To put things into perspective, the contribution of MNC pharma companies in Indian markets during the early 70's was as high as 75%, but now it has reduced to mere 21%-22%. One of the major reasons for this has been the lack of product patents in the country. India recognises process patent since 1970, because of which Indian drug makers were able to copy new drugs and bring in cost competition. This practice discouraged the MNC pharma companies to launch new drugs in the country. Consequently, it meant declining share in the Indian market for global majors. Let's look at some of the performance ratios of these companies.

    MNC Pharma Companies...
      Glaxo Pfizer Novartis Aventis Average*
    Sales Growth (5 yr Avg.) 8.5% 16.2% 3.0% 8.1% 8.8%
    OPM (5 yr Avg.) 12.0% 18.1% 14.3% 15.3% 14.3%
    NPM (5 yr Avg.) 8.1% 10.8% 13.9% 9.9% 10.1%
    ROE (5 yr Avg.) 19.0% 29.0% 32.2% 25.5% 24.7%
    ROA (5 yr Avg.) 13.1% 16.7% 19.3% 13.9% 15.1%
    *Based on the weighted average of sales in FY04

    Glaxo holds a major share among MNC pharma companies and is twice as big as its nearest rival. Most of the companies have grown in line with the industry growth over the same period. Most of these companies have relied on their core brands for the growth, in light of their aging portfolio. Also, the DPCO coverage for these companies is higher. Consequently, their topline and bottomline has also been affected by the price cuts. Cost competitive domestic companies too eat into their market. This reduces the growth in value terms, even though the volume growth may be healthy. To put things into perspective, in FY04 Aventis Pharma registered volume growth of 10.5%, but due to price competition and cuts, its real growth in value terms was only 8.2%.

    Indian pharma companies
    Benefiting from the government support, Indian pharma companies started gaining ground from the year 1970 and now have a market share of 78%-80% in the Indian pharma market. Apart from serving Indian markets, Indian pharma companies are now eyeing the generics business globally. The following table shows certain performance parameters of top Indian pharma companies.

    Indian Pharma Companies...
      Ranbaxy Cipla Dr Reddy's Wockhardt Nicholas Piramal Average*
    Sales Growth (5 yr Avg.) 30.30% 25.0% 58.4% 13.7% 27.3% 32.6%
    OPM (5 yr Avg.) 18.30% 19.6% 23.6% 18.1% 19.3% 19.6%
    NPM (5 yr Avg.) 11.70% 17.0% 17.2% 15.8% 20.2% 15.1%
    ROE (5 yr Avg.) 22.40% 24.9% 27.6% 28.8% 22.7% 24.4%
    ROA (5 yr Avg.) 12.6% 12.6% 21.3% 16.0% 10.6% 14.3%
    *Based on the weighted average of sales in FY04

    From the table above it is evident that the growth rates for Indian companies were much higher than their MNC counterparts. The basic reason for this was that while MNC companies focused only on Indian market, the Indian companies started exploring opportunities in export markets. Most of the companies started as a bulk drug supplier to pharma major in US and Europe and are now moving up the value chain, entering the generics and formulations markets in those countries.

    All this is of course, past history. What does the future hold?

    Year 1970 brought about a sea change in the Indian pharma industry. Year 2005 is again going to be a crucial. It is the year when India may start recognizing product patents (subject to approval by Parliament). Does this mean that the equilibrium will again shift towards MNC pharma companies? May be. In our view, over the next two to three years not much is likely to change. New product launches will start coming in slowly. Another factor that has to seen here is the demographic profile of the country. People in the country may not be able to afford the costly-patented drugs of MNC companies, which may restrict these companies progress. Lack of health schemes by the government also is not very encouraging for MNC companies to launch new drugs.

    Consequently, it can be said that patent regime in the short term is not going to make any difference in the market share shift in the Indian pharma industry. Over a longer period of time, however, it may shift in favour of MNC companies, but the quantum of shift will not be as much as it was in 70's. The reason for this is that the Indian companies over the years have build competencies and made significant investments in R&D activities. These companies too, may come up with new drugs in a few years.



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