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Pharma: Beyond 2005 - Views on News from Equitymaster
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  • Aug 21, 2003

    Pharma: Beyond 2005

    The pharma stocks are off late having a dream run on the bourses. Most of the stocks have breached their 52-week high levels, while others are on the verge of crossing the same. The rally has been across the board and even the mid-cap stocks have benefited.

    Although the upswing is not justifiable for all stocks, there is no denying the fact that the pharma industry as a whole has tremendous growth potential. The growth potential is seen mainly in the exports market combined with outsourcing opportunities from foreign counterparts. However, the hype surrounding these opportunities has resulted in ignoring the very crucial domestic pharma market.

    The domestic market has been showing low growth rates for quite some time now. This has been mainly due to the fact that the prices of drugs are regulated thereby restricting the realizations growth. But does that mean that there is no potential for growth in the domestic market. Take a look at the following chart.

    As can be seen from the above chart, the expenditure on healthcare as a percentage of GDP is only 4.9% as against 5.3% in China, 7.8% in Japan and as high as 13% in the US. So does this mean that the Indians do not fall sick or that they are very close-fisted when it comes to spending on health. So, what are the reasons for such poor spending?

    A close look at the above graph indicates that the government's contribution to the total health expenditure is the lowest in India (17.8%). In comparison, China (36.6%), Brazil (40.8%) and USA (44.3%) have a major portion of their health spending financed by the government, which is yet to break ground in India in a big way. This is primarily on account of lack of adequate social security cover to Indian citizens as compared to the other countries. Although there have been some efforts on this front by the government (like the health insurance cover provided to farmers in South India), it is not enough. The public health facilities that were initiated with the purpose of providing cost effective medication to citizens have met with little success. Hence, Indians will have to continue financing a major portion of the health expenditure through their pockets. But will they be able to do so? This is where health insurance comes in.

    Health insurance has not been very popular in India. Rigid price regulations on drug prices and the availability of low cost generics ensured that the medical cost were not very high. Even those who did take a medical cover did so solely for the purpose of claiming tax deductions. Thus, there was very little awareness among the Indian masses regarding health insurance. This coupled with lack of innovation in insurance cover for medical purposes have resulted in very few people opting for the same. Further, the premium charged also ensured that that policies remain beyond the bounds of a majority of the Indian population.

    However, post 2005, with the introduction of product patents, the prices of medicines in India could increase many folds. Thus, people will find it increasingly difficult to meet their medical expenses and will consider having an insurance cover over their health expenses. Further, with the opening up of the insurance sector, many private players have also entered the market with attractive mediclaim policies. All these factors could translate into higher subscriptions to these policies and consequently a drop in the premium charges thereby making it even more affordable.

    Consequently, post 2005, although drug prices could rise, the health insurance will provide a cushion. There will thus be an increase in the domestic spending on medical expenditure resulting in a sharp rise in the revenues for the companies competing in the domestic markets. Thus, going international need not be the only strategy for survival for a domestic pharma company. The growth opportunities in the domestic market over the longer term remains promising.



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