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New threats in the offing for MNC Pharma? - Views on News from Equitymaster

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New threats in the offing for MNC Pharma?

Sep 24, 2012

MNC pharma companies have always shown their interest in the emerging markets and India is one such preferred destination for the global MNCs. With the introduction of product patent law, the interest of MNC pharma has further grown. The MNCs started launching parent group's product portfolio with high margins in India. Through aggressive product promotions, companies were able to take higher market shares and position their products in the list of top 100 highest selling products.

But is this fact still breathing?

With the changing times; competition intensified, cost pressures increased and new regulations came up to impede the irregularities from various sectors. Plus global economies are going through a phase of downturn. During such times, how can pharma segment be spared? Below are the few challenges which an MNC pharma is witnessing today.

NPPA regulations - Challenges raised by NPPA

Last year, National Pharmaceutical Pricing Policy (NPPA) had proposed a new pricing policy. As per this policy, 348 drugs will come under pricing regulations. As the organization is still working on the methodology of pricing the drugs, the companies' fate remain vulnerable at the outcome of the policy. It's a known fact that a large part of MNCs drugs are among the top selling drugs in India. This means that, their revenues are too exposed to the pricing policy outcome. But this is not the end.

Recently new proposal has been put forth by NPPA - To check the prices of the imported drugs. This means, MNCs have to explain the methodology of arriving at the maximum retail price (MRP) of the drug to be sold in India.

2005 Patent Law - Is it really helping the MNCs?

With 2005 product patent law various MNCs introduced new drugs from their parent company's portfolio in the Indian market. Many of these drugs were very highly priced. Taking advantage of this, some of the Indian companies made a similar drug at very lower price, by using ways like non infringement or compulsory licensing.

The generic version of drugs like Tarceva and Nexavar were introduced, by local manufactures in the market much before their patent expiry. These companies have not only launched the drug but have also been successful in proving that their launch was ethical, under the various grounds. Some said that the innovator drug was highly priced; others that the generic drugs do not infringe the innovator's patent.

On the other hand MNCs articulated that they are charging for the innovation of a new drug and it was their cost pertaining to the R&D done in order to bring new drug in market.

Growing inorganically - No longer easy

In past, MNCs made many acquisitions in order to tap larger market share India. The classic examples being; Piramal Enterprises by Abbott India, Ranbaxy by Daiichi Sankyo, Shantha Biotech by Sanofi, Dabur Oncology by Fresinius Kabi.

After a chain of acquisitions, in order to protect the interest of the country, the government has put up a proposal for a diligent scrutiny of any such acquisitions. Thus any FDI investment in brownfield projects will have to be passed through more stringent process than earlier. Further, even after acquisition the related authorities will keep a check on the activities of acquired Indian entity. So that there is no misuse of the acquired entity by mispricing of certain drugs or creating artificial shortage of essential drugs.

Higher dependence on Acute Segment- Will diversification happen?

Various MNC companies generate large part of their revenues from acute segment viz; anti infectives, gastro intestinal, pain, dermatology etc. However, due to changing lifestyles, there has been increased occurrence of disease in chronic segment like cancer, diabetes, and various diseases relating to Central Nervous System (CNS) and Cardiovascular (CVS). Thus the companies whose product portfolio is largely exposed to chronic segment will be able participate in fast growing therapy.

Table 1: MNC companies higher dependence on Acute segment
Company Revenue contr. from acute segment (%)
GlaxoSmithKline Pharma 95
Pfizer India 85
Novartis 75
Abbott India 60
Source: IMS

Though drugs for acute segment accounts for almost 75% of the Indian pharma market, owing to the current trend, chronic segment is growing faster than the acute segment.

Over and above, the MNCs are facing increasing competition from Indian players. Almost all the companies have increased the sales force in order to promote their products. The sales force has gone up at to the levels of 7,000 medical representatives which earlier used to hover at the levels of 2,000-4,000.

It is pertinent to note that so far the MNCs have been surviving the competition and witnessing healthy growth. The MNCs have also been able to take some benefit of growing trends in pharma industry like - growth in GPs (General Practitioners), reaching Tier II -IV cities, increasing awareness of modern medicines etc. But, at the same time challenges are increasing and thus MNC pharma's growth sustainability has become questionable.

To conclude

MNC pharma companies' future performance will be dependent on the outcome of the proposed regulations and the way the MNC companies are able to address the challenges. Meanwhile investors must be very selective about buying stocks of MNC pharma companies, despite their past track record.

Bhavita Nagrani

Bhavita Nagrani (Research Analyst) is a Chartered Financial Analyst (ICFAI) with nearly six years of experience in the field of equity research. She has a deep understanding of the global as well as the domestic Healthcare industry and keenly tracks the developments therein. When it comes to stock investing, she is a strong advocate of the bottom-up approach to stock picking and has a remarkable ability to discern nuances in the business models of companies belonging to the same industry. Bhavita is the contributor to our large cap franchise, StockSelect.


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