January 1, 2005 is the day when Indian pharmaceutical sector will take its first step towards the fundamental shift from an unregulated market to a regulated market (though not as stringent as US or some European countries). Till date, government price controls and patent laws have determined the structure of the domestic pharmaceutical market. Although, the industry was in tight controls it still managed to grow at a rapid pace.
Since 1970, when the Patent Act came into force, the industry has grown by almost 14% CAGR till 2003. This growth was led by the global orientation of Indian pharmaceutical industry. The pharmaceutical exports of the country has grown at a rapid pace of almost 30% in last 15 years, thanks to increasing the cost efficiencies of Indian manufacturers. In the last few years, the domestic pharma market too has shown considerable growth (over 12.5% CAGR since 1970). The growth would have been much higher, had it not been for the fragmented nature of the industry (over 20,000 pharma companies). This has led to competitive and thus pricing pressure.
From 2005, the Indian pharmaceutical industry is set to move towards product patent regime (earlier it was process patent regime). This essentially means that a product for which patent has been granted or for which patent application has been submitted after January 1, 1995, cannot be reverse engineered and launched in the market by the generic companies. In light of this, the next decade is likely to see a fundamental shift in the industry structure.
Post 2005 we do not expect any drastic change in the industry growth rate of 6%-8%, which has been witnessed in the last 2-3 years. Our interaction with pharma companies (both MNC and domestic) suggests that patented products are likely to contribute significantly only after 2010 and may contribute about 8%-10% of revenues after 2010.
But the impact on domestic companies will be seen beyond 2007 or so, as new product introduction by these companies might slow down owing to the new product patent law. However, there are domestic companies, which have option of partnering with MNC companies that do not have a presence in India. Companies like Nicholas Piramal and Cadila Healthcare have already begun this process by strengthening their field force. Infact, Nicholas Piramal has started this process by entering into agreements with Ethypharma and Genzyme Corporation.
We do not foresee slackening of price competition in near future, but new-patented products with significant therapeutic advantage over the already existing products may see higher pricing as patients and doctors will like to move towards those products for better treatment. There might be price differential of more than 10 times in some cases. However, how much market share these new products will be able to get, depends on the purchasing power and the demographic profile of India.
However, it must be noted that the increasing activity in the economy and rapidly growing services sector has improved the purchasing power of Indian consumers. One thing to note here is that most of the new therapies are likely to come from the lifestyle segment, and people suffering from these diseases are more likely to pay higher for better therapeutic affect. Also, going forward we might see consolidation in the Indian pharmaceutical industry. Smaller players even in the organised sector might not be able to cope up with the changing environment.
However, one positive aspect that emerges out of this transition is that Indian companies are now focusing on R&D activities and are investing in developing NCE and NDDS products. This will lead to large domestic companies surviving the heat of competition by virtue of innovation. Already large Indian companies such as Ranbaxy, Dr Reddy's and Wockhardt have made significant R&D inroads, while smaller companies such as Glenmark Pharma and Orchid Chemicals are moving towards it. Going forward, we may see higher R&D expenditure to the tune of 7%-10% of revenues.
In the new regime, MNC pharma companies are likely to benefit the most. However, we do not expect MNC pharmaceutical companies to register immediate gains post 2005, but these companies will have advantage of their strong parent drug pipeline in the long run. Companies, which have strong presence in the domestic market, will have an added advantage on marketing front. According to us, companies like Glaxo, Pfizer and Aventis are likely to benefit the most in this scenario.
As an investor, one should look at both Indian as well as MNC pharma companies as an investment avenue. While MNC pharma companies are sure to benefit in the long run in this new patent regime, which pharma company will benefit the most is the question. It must be noted that MNC companies, which have strong parent back up and big marketing presence are likely to benefit the most. While, bigger Indian companies are likely to gain from their international operations, they will also benefit from Indian operations if they continue focusing on R&D activities.