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The domestic pharmaceutical market: A change in the underlying structure? - Views on News from Equitymaster
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  • Jul 22, 2000

    The domestic pharmaceutical market: A change in the underlying structure?

    The pharmaceutical industry, till recently, was considered a recession proof industry. However, the slowdown in the industry has seen a de–rating in pharma stocks over the last twelve months. Is this a mere slowdown or is there a change in the underlying structure of the industry itself? What would be the way out for the companies out of this straitjacket, if it were one? But first a recap of the developments of the last 12–18 months.

    The overall formulation market grew by only 9.2 percent during the last year (financial year 2000) and the current year is expected to be only marginally better. Most of the pharmaceutical companies with the exceptions of Dr Reddy’s Laboratories Sun Pharma (among Indian pharma companies) E Merck (among MNC companies) have shown a lacklustre performance for financial year 2000. A part of the reason for the across the board pressure on margins was the rampant price–cutting indulged via the introduction of unbranded generics. (Unbranded generics basically constitute products of pharmaceutical companies who sell their formulations to the trade without their labels at discounted prices. The discounts in case of unbranded generics are almost 50 percent higher than the normal trade margins. This unbranded generics segment came into being primarily because the slowdown in volume growth led to an inventory pile up with companies.)

    Therapeutic areas Ranbaxy Dr. Reddys Glaxo Cipla Hoechst Wockhardt
    Antibiotics 54.5% 19.0% 26.0% 40.0% 28.0% 19.0%
    Analgesics/NSAIDS 6.6% 18.0% 7.0% 5.0% 24.0% 25.0%
    Anti–ulcerants 4.0% 25.0% 7.0% 3.0% - -
    Anti–hypertensives   24.0% 1.0% 9.0% 10.0% 5.0%
    Vitamins & Expectorants 8.6% - 8.0% 1.0% - 14.0%
    Anti–diabetes - - - - 11.0% -
    Anti–asthamics - - - - - -
    Anti–histamine 1.0% 3.0% - 17.0% 9.0% -
    Dermatologicals 5.5% - 18.0% - - -

    The one indication of the change in the underlying structure of the market could be the performance of companies with a heavy dose of antibiotics in their product profile. Companies where antibiotics contribute substantially to the turnover have struggled to maintain margins. (And this, despite the fact that nearly 70 percent of the formulations sold in the country address infections.) Say, for example companies such as Ranbaxy and Cipla where antibiotics contribute over 40 percent to the turnover have witnessed a decline in margins.

    A classic example of the company bucking this trend is Dr Reddy’s Laboratories where its anti–ulcerant and anti pain segments have grown by over 25 percent and have helped the company report a 16 percent growth in both topline and bottomline in financial year 2000. Multinationals such as Glaxo and Hoechst Marion Roussel despite a relatively lower proportion of revenue accruing from antibiotics vis-à-vis their Indian counterparts such as Ranbaxy and Cipla have a higher proportion of revenue from drugs coming under price control (60 percent plus) and this explains the sedate growth in profits.

    The stagnating margins for antibiotic companies are mainly due to the fact that the demand for antibiotics is being met to a considerable extent by unbranded generics. Another reason for the slowdown is the generational change within the sub–segment. For instance the newer generation antibitoics such as cephalosporins and quinolones are expected to gain market share at the expense of the older antibiotics (ampicillin and amoxycillin) and macrolides (erythromycin, clarithomycin and azithromycin). So even within the antibiotic segment there is a subtle shift towards the newer generation antibiotics. Similar is the case in the antacids/anti–ulcerants segment. The newer generation anti–ulcerants such as omeprazole are taking market share from the older generation ranitidine and famotidine. The third possible reason for the slowdown is the change in the disease profile itself where companies catering to life style diseases such as cardiovascular, ulcer, depression have been relatively unaffected by the current slowdown. The most prominent example of the company catering to life style diseases is Sun Pharma (catering to the neurology, psychiatry, gastroentology) which has comfortably outpaced the industry by consistently growing topline at over 25 percent over the last few years.

    One way out of this straitjacket for the MNCs could be the introduction of new products into India. For instance the product portfolio of Glaxo India is quite different from its international’s parent’s portfolio. While the parent is a leader in the anti–asthma segment with a 31 percent share in the global market, its Indian subsidiary gets less than 5 percent of its revenues from respiratory drugs. Similarly while anti–bacterial drugs contribute around 10 percent to the parent’s turnover, in India it amounts to a fourth of the company’s turnover.

    The reason that has been advanced for the difference in product portfolio is the difference in disease profiles between a tropical region and the temperal region. However, India is a very big market for viral infections (which include AIDS) and respiratory diseases, treatment for which contributed almost 48 percent to Glaxo Wellcome’s turnover. Similarly, the lack of purchasing power has been touted as another reason for the reluctance on the part of the MNCs to introduce their top of the line products. However if one sees the growth numbers of companies highly dependant on antibiotics vis-à-vis those which are relatively less dependant it is evident that the latter have done much better of late. The reluctance for the introduction of new products by MNCs seems to stem from an apprehension that their products would be copied and they would rather wait for the patent law to be in place.

    As far as Indian companies are concerned those, which have been active in reverse engineering of lifestyle drugs have benefited over the last few years. Quite a few such as Ranbaxy and Cipla are now likely to introduce sildenafil citrate (called Viagra by Pfizer worldwide). This could be the one strategy that could boost their profitability! Or so they hope.



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