Indian Pharmaceutical Industry
Pharmaceutical industry is among the fastest growing industries in the world. It comprised a sale of $1.3 trillion around the world in the year of 2018, with 44% sales accounted by North America.
Indian Pharmaceutical Industry supplies about 20% of the global exports in terms of volume which consist of more than 50% of various vaccines on a global level. It also caters to about 40% generic demand in United States of America and up to 25% of all the different medicines in United Kingdom. With the onset of a much more liberalized market in India, the pharmaceutical industry has witnessed a boom starting from 1970s. The Indian Patent Act being passed also added to this rapid growth of the industry. As of September 2018, the industry has a CAGR of 22.4% which is massive as compared to the other industries. The biggest player in Indian Pharmaceutical industry in terms of annual turnover is Sun Pharmaceuticals (273.28 billion rupees), closely followed by Lupin Limited and Dr. Reddy. Cipla is in the 4th position (155.77 billion rupees). The different pharma firms in India received about 305 ANDA approvals from USFDA in the year 2017. The players in Pharmaceutical sector in India implement multiple strategies including dominance in cost through integration along vertical, making more differentiated products, focusing different markets and growing continuously through mergers/acquisitions. These strategies become extremely important to be profitable and to create a competitive advantage among the different players, given the number of strict regulations on quality as well as distribution.
The above graph depicts the steady growth of the Annual turnover of Indian Pharmaceutical Market and shows the fluctuation in quarterly growth of the market.
The following are the 4 major segments in the Indian Pharma industry in which different firms operate. The segments involve products as well as services, for base companies or for outsourcing for clients inside as well as outside the country.
- Active Pharmaceutical Ingredients(APIs): refers to that component in a drug that produces the desired effect. Some drugs will be having multiple APIs to treat different symptoms caused by a single disease or condition. Though APIs were traditionally produced by pharma companies in base country itself, with the onset of API import from foreign countries, the regulations have been made much strict in India.
- Contract Research & Manufacturing Services(CRAMs): outsourcing of Research and manufacturing to countries with a cost advantage as compared to home ground. India has already emerged as a major CRAM in pharma and biotechnology industry with its cost advantage and adherence to quality standards set by different international regulatory bodies.
- Formulations: refers to the chemical composition of any drug where different active drugs are treated in the right conditions and mixed to get the final product. Formulation development involves great amount of research and development as well as capital.
- Biosimilar: refers to a similar version of a medicinal drug that’s already existing in the market. They go through the same quality, safety and other regulatory tests as the actual medicine. Normally, a biosimilar is produced when the patent of the actual drug expires.
- The amalgamation of Pharmaceutical sector with Biotechnology contributed to the growth of the sector majorly. This was seen much essential during the period as India witnessed increased mortality rate.
- The cheap labor and other natural resources available in India complemented the growth of the sector and helped in attaining approximately 33% lower cost of production as compared to the production costs in US.
- Steadily increasing disposable income among customers in India allowed them to be more health-conscious and made them more dependent on latest medicines rather than traditional medical cures and practices.
- Introduction of Cheap and effective health care plans combined with growing insurance coverage and rising patient awareness highly increased the sale of different medicines, hence boosting the turnover in the sector.
- Different pharmaceutical schemes all across India increase the amount of transparency in the sector, hence supporting R&D in the field and increased manufacturing for domestic consumption as well.
- The increased allocation of capital in the sector in union budgets and different policies in favor of the industry makes the sectors growth curve steady and strong.
- Different investments in multiple firms in the sector and mergers/acquisitions of the firms make it more favorable for the growth of the industry in India.
- Threat of New Entrants
The threat of new entrants is comparatively low for this industry making it more attractive. Different factors which make it possible are as following:
- Capital Intensive Industry: The capital requirement in this industry is very high. The industry involves heavy Research and Development, the latest technology machinery, multiple licensing as well as operational processes related to exports and distribution inside/outside country. This makes the initial investment and the operational cost involved very high, thus serving as a barrier for entry for the potential entrants.
- Indian Patent Act: The possibility of patenting different formulations by players in the industry stop the exact imitability of the product to a great extent of time. This serves as a roadblock in manufacturing the same formulation medicines and hence is a barrier for new entrants.
- Policies and Regulations from the government: As the Pharmaceutical Industry is in the health sector, there are multiple strict governmental regulations and policies which require the players involved to maintain a high standard of safety as well as quality. The price involved is also closely controlled. This acts as a great hindrance to new entrants.
- Threat of Rivalry
The pharmaceutical industry comprises a large number of players with great potential for growth for the entrants. The top 5 market shareholders of the industry in India account for only 20-25% of the market share. The industry holds great growth prospects in reserve for the entrants. The working capital requirement for running a firm is quite high.
- Threat of Bargaining Power of Buyers
The hospitals and other health organizations have greater control on the prices of the products they purchase from different pharmaceutical firms, as there are a lot of players in the industry. Also, influencers such as doctors and consultants exercise power as they have the choice to select products from multiple firms. The end consumers are left with limited decision-making powers as a result of all the above factors. There has been a considerable increase in the prices of generic drugs over the last few years.
- Threat of Bargaining power of Suppliers
Just as there are a large number of firms in the Pharmaceutical industry, the number of manufacturing firms supplying raw materials to the pharmaceutical firms is quite high. This increased number of players in the pharma raw material industry makes it extremely competitive and fragmented.
Due to the abundance of firms supplying required chemicals for manufacturing medicinal products and due to the lack of seasonality in the supply of raw materials, the pharma firm will have an upper hand on these suppliers(very less cost of switching suppliers), thus making the bargaining power of the suppliers very less.
- Threat of Substitutes.
With different chains of hospitals relying on pharmaceutical companies for medicinal products, the threat from substitutes is very less. The available substitutes for the industry are Naturopathy, Ayurvedic and Homeopathy.
Pharmaceutical sector is one industry where the firms have to abide to a lot of legal/ governmental regulations with consideration of different political factors. They form different formal as well as informal boundaries or rules under which the firm should operate. Some examples for these are restrictions on trade, different policies of tax, laws of employment, environmental regulations etc. The Indian government introduced National Pharmaceutical Pricing Policy(NPPP) in 2012 to control the cost of 348 drugs considered essential, based on their dosage as well as potency.Firms or manufacturers can sell the products only at process equal to or less than these fixed values. With NPPP implemented the profit margin went down drastically for retailers(20% to 16%). This has created a lot of confusion in the minds of investors regarding the future of pharma industry in India.
On ensuring the transparency in the industry, Medical Council of India(MCI) gave out strict guidelines, thus having a close control on bribing and unethical deed among doctors and other medical practitioners in hospitals as well as different healthcare firms. As part of the Indian Patent Act, licensing has been made mandatory for the pharma firms based on the guidelined given in section 84. As per the Section 84 guidelines, firms need to ensure that the medicine prices are reasonable, medicine met the citizens need or requirement and that the patent was not regionaly created.This ensured that the generic drugs which were over priced earlier are available to the population of India in reasonable prices now.
Different Economic factors play a major role in the customers purchasing power for different medicines. This also ensures that there is an equilibrium between the demand and supply of different drugs, esp, the ones for common diseases. Some of the factors which affect the Macro economy as a whole are rate of inflation, cost of labour, work skill, etc. Also, the different threats analysed in porters 5 forces above give more details on different economic factors. The different social factors in pharma sector are mainly based on demographics, age groups, behavioral as well as cultural aspects. This depends upon the life style, health consciousness education, safety emphasis etc.
Different technological factors have been widely covered in the industry analysis done above. They affect the barrier to entry, sale of products, efficiency of production, etc. Technological factors combined with technical factors like implementation of AI, Machine Automation, R&D, etc also affect the growth in the industry.
Current and Future Situation of Indian Pharma sector
The Pharma industry is growing at a rapid rate in India now and is expecting double-digit growth in the upcoming financial years. The following excerpts describe the different situations in Pharma sector now and how the Indian firms are acting in the situations.
- Strict Compliance regulation in USA: The earnings for different pharma firms in India are much lesser as compared to their competitors in USA. In the last few years, Indian firms have been facing heat from USA regulatory body in terms of compliance to regulations and policies, with the firms losing business over corrective actions and penalties issues by USFDA.
- Competition in the international market: With the domestic firms receiving fast approvals for drug formulations in USA and much more strict regulatory compliance made mandatory for exports to USA, Indian firms are dealing with the situation by bringing in more differentiated products including biosimilars, complex generic medicinal products, etc. But, this has pre-requisite or more capital investment and expertise. Also, the profitability of these initiatives depends entirely on the strategy chosen by individual firms.
- Penetration into China Market: Recently, more opportunities are gradually appearing in the Chinese market for the Indian pharma firms. Major Pharma players in India like Dr. Reddy Labs and Cipla limited are trying to utilize these opportunities to materialize distribution in Chinese market. Though the US-China Trade wars have seen different sanctions and tariffs for exports to China, Indian firms are trying to strengthen the export into china market. Cipla is aiming at starting new facilities in China in near future to start production/distribution and hence to diversify their portfolio.
Now the prices for vitamins and penicillin are double or triple the price. Similarly the cost of paracetamol has gone up. Another major impactt is that pharmaceutical companies faces disruptions due to extended factory closures in China. It may impact the supply of active material and ingredients (mainly from China), as well as the import and export of pharmaceuticals. There is also the potential for negative impacts of both a medium- and longer-term nature on R&D and manufacturing activities, as well as delay on projects/programmes not related to the core supply chain/data management operations. The Indian domestic pharma industry is highly dependent on imports, with more than 60 per cent of its API requirements being imported. Of the total imports of APIs and intermediates into India, China accounts for nearly 65-70 per cent.
- Rising price of drugs : India’s manufacturers rely heavily on imports of their APIs from China. As a result of the lockdowns and closures, slowed production of APIs resulted in less availability and higher costs for the materials required for generics production. As per the current data, cost of paracetamol has gone up from Rs 250-300 kg to 400-450 kg. SImilarly, the prices of vitamins and penicillin have also increased tremendously.
- India pharma’s global standing: Made-in-India drugs supplied to the developed economies such as the US, EU and Japan are known for their safety and quality. In recent years, India has seen increasing competition from China, and this in turn has led to killing of domestic manufacturing capacity for certain key APIs and their advanced intermediates. Therefore, current government’s focus on being self-relient and uplifting made-in India manufacturing will revive domestic manufacturing capacity for certain key APIs.
- Lack of supply of active pharmaceutical ingredients or finished drug products from China: India’s large import dependence on China (nearly 70% by value) has become a significant threat to India’s healthcare manufacturing and global supply chain. While Indian pharma players over a time period have steadily migrated up the value chain to focus on value-added formulations with higher margins, but this over dependence on China has increased the threat to the nation’s health security as some of these critical APIs are crucial to mitigate India’s growing disease burden.
- Alternate hub for manufacturing APIs and intermediates: The COVID 19 outbreak has also presented Indian pharmaceutical companies an opportunity to become a preferred alternate hub for manufacturing APIs and intermediates. Having recognised this opportunity and declaring Indian pharma’s dependence on Chinese APIs a threat to national security, the central government has approved a slew of measures to promote manufacturing of APIs and KSMs within the country. This includes approval of Rs 3,000 crores project to set up three bulk drug parks in coordination with three states, as well as a 20 per cent financial incentive for the next six years for manufacturers to make 53 critical bulk drugs, which are in turn used to make medicines. The scheme is expected to reduce manufacturing cost of bulk drugs in the country and dependency on other countries for bulk drugs. This incentive from the central government and the lessons from COVID-19 are with a hope to change the global footprint of Indian pharmaceutical companies and more importantly, reduce dependence of the domestic pharma companies on a single supplier like China
- Relative stability, reasonable valuations
HDFC Securities says Indian pharma has been relative resilient to the Covid disruption, and is poised to gain from favourable currency tailwinds and stable outlook for India and US business. India growth has picked up (~10% growth for IPM as of MAT Mar’20).
- India’s existing advantage of large-scale pharmaceutical production allows it to significantly leverage its soft power by investing in the outward growth of the healthcare sectors of other nations by:
a) Ramping up exports in pharmaceuticals: According to the Indian Brand Equity Foundation (IBEF), pharmaceutical exports of India from the financial year 2012 to 2019 have steadily grown from $10 billion to $19 billion.
b) Becoming a preferred medical tourist destination for those seeking affordable treatment in quality secondary/tertiary health services: Over the last few years, particularly since 2014, the number of people coming to India for medical treatment has grown annually at about 55% (see Figure 3). According to Ministry of Tourism, the medical tourism space was valued at around $3 billion (US$) in 2015 and at $9 billion in 2020
c) Pursue medical diplomacy by providing medical training and technical expertise to many other developing nations whose healthcare systems are much worse than India: To project itself as a country practicing medical diplomacy through soft-power, if there is one country from which the Indian state can particularly learn from, is Cuba. Despite being a small-nation with much lower per-capita income (as compared to many developed nations), Cuba’s public healthcare system is one of the best in the world
Prepared by- Abhijit Paul, IIM NagpurTags: CraftDriven, industryanalysis, marketinsights, marketresearch, pandemic, Pharma, pharmaceutical