Under the magnifying glass
The Indian pharmaceutical market is today amongst the fastest growing pharma markets across the globe. In 2006, the growth rate in the world pharma market was five percent, while the Indian market growth rate was in the mid-teens. This Indian industry is one of the developing world’s largest and most developed, ranking fourth in the world, in terms of production volume and 13th in domestic consumption value. Over the last 30 years, India’s pharmaceutical industry has evolved from being almost non-existent to a world leader in the production of high quality generic drugs. India has garnered a worldwide reputation for producing high quality, low cost generic drugs.
Indian pharmaceutical market is about $6.5 billion compared to the total world market of $395 billion, ie. it comprises about two percent of world pharma market in values terms. The reason behind this small share of India in world’s pharma market can be explained by several reasons like low comparable pricing, disease profile and competition which ultimately lead to the underlying reason ie. policy decisions taken at various points in time. Indian pharma sector underwent a gradual change over the years. In fact the initial years, the development process was fairly slow. However, post-2004 the industry experienced changing trends more evidently. The early 1970s to 2004, was a long phase where the country recognised only process patents, which ensured high competition in almost every product and high dominance of foreign players.
The Patent Act of 1970s was primarily introduced to develop Indian pharmaceutical industry and to make low cost drugs accessible to Indian consumers. Here, the manufacturing ‘process’ patents were given preference to product-specific patents, which allowed Indian companies’ to reverse engineer or copy foreign patented drugs without paying a licensing fee. This allowed the domestic industry to build up considerable competencies, and offer a large number of cheaper generic versions legally in India at a fraction of the cost compared to their global counterparts. On the other hand, prices were controlled through The Drug Prices Control Order (DPCO), which ensured the affordability aspect. Thus, the need, availability or the desire to commit funds to developing new chemical entities was low.
However, the industry underwent a major change after introduction of Patents (Amendment) Act 2005. To meet its TRIPs obligations, India amended its 1970 patent law in 2005 wherein, in addition to process patents law, product patents were reintroduced. It also made reverse engineering or copying of patented drugs illegal after January 1, 1995. Thus, this Act effectively ended the protection regime, resulting in many foreign players entering the industry.
Almost 35 years of protected regime helped Indian pharmaceutical companies to strengthen their scientific and manufacturing capabilities. Today, India is one of the fastest growing economies in the world with Indian pharmaceutical industry complementing the pace. Indian pharma companies now need to invest much more in R&D to develop proprietary products in the dawn of the product patent regime and set up world class infrastructure to capture the new opportunities internationally.
Another development observed in Indian pharmaceutical industry is mergers and acquisitions. Most of these activities were undertaken by Indian pharmaceutical companies to penetrate overseas markets and widen their global footprint, diversify and enhance their product portfolios, offer their customers an offshore option, improve their R&D capabilities, acquire existing brands, and gain access to the highly regulated markets.
Thus, Indian pharmaceutical industry came a long way over the years and as is evident from the paragraphs mentioned earlier regulations/policies played a crucial role in shaping the Indian pharmaceutical industry. With world becoming an open market and Indian pharmaceutical industry playing an important role, regulation has to hence adjust to the new conditions. Controlling should give way to monitoring and facilitating.
USD 6.5 Bn
|Market Composition||Generics account for almost the entire market since product patent regime came into force only from 1-Jan-05|
|Pricing||Improved pricing over the past years compared to almost stagnant price growth in the 2002-04 period. Nearly 25 percent of the market falls under price control (DPCO)|
|Distribution||Complex distribution network with about 18,000 distributors and 300,000 pharmacies serving 400,000+ doctors. The pharma distribution market in India is likely to witness ambitious expansion plans and investments by big corporations like Apollo Group,Reliance, Pantaloon, Medicine Shoppe and LifeKen.|
|Growth Outlook||ORG-IMS expects the Indian pharma market to register 10-11 percent CAGR till 2008|
ICICI Prudential Mutual Fund has been and continues to be one of the largest investors in the Indian pharma sector. We view the Indian pharma as a high growth sector with strong competencies to take on the world market. Domestically, the growth in the business seen last year is likely to sustain for the next few years in line with the nominal GDP growth. We have come long way for the 1970s in terms of per capita income and we are seeing a better penetration of healthcare insurance also. High competition is also ensuring right prices to the consumer and ensuring affordability. The government has taken the right steps to reduce the span of control under DPCO, and the next step should be to move to price monitoring and selective action rather than moving back to fixing prices for every drug. The semi-urban and rural markets are an area of higher growth. Recent estimates by some analysts put rural market contribution at 20 percent of the overall market growing at a rate of 36 percent. While pharma companies are directly investing in these markets, there is a room to have an institutional set up to facilitate the penetration in these areas.
For years, MNC pharma companies operating in India have been slow in introducing new products in India due to lack of patent protection. Now, with product patents getting recognition in India, they are likely to introduce more products from their pipeline in India that too along with their global launch. This will provide Indian patients with new global medicines. On the other hand, Indian companies will need to beef up their own R&D investments to compete in the changing market landscape. The government has been providing tax incentives for conducting basic research needed to develop new drugs. Hopefully, these will continue and will be enhanced to enable Indian companies to take new molecules developed by them to the market independently instead of licensing them out at an early stage.
With a large talent pool, low cost base and quality processes, Indian companies have been able to establish strong presence in developed markets. The Hatch Waxman Act has provided a good platform for the Indian companies to compete in the US generics market. Indian companies have not only been able to supply the same products at a fraction of cost but also introduce products through the non-infringing route and benefit from a near exclusivity position in some products. In the first quarter of the current calendar year, the USFDA received 193 DMFs, of which 93 were from Indian manufacturers and only 33 from Chinese companies.
An emerging opportunity for Indian companies is in the area of CRAMS. The rising cost of drug development in the developed markets has led to pressure on innovator companies to outsource some of the services to companies in low cost destinations like India. There is an expectation that the business that is attracted due to costs will be retained and expanded due to quality. Even large pharma majors in India have set up a separate division to address this market opportunity.
Where the opportunity is large and lucrative, there are also challenges. Indian pharma companies have general challenges like other sectors, which include sharp currency appreciation and infrastructure bottlenecks. There are also specific challenges like high investment requirements in facilities, long gestation product development cycles and high risk associated with R&D. The market is also highly fragmented. This can lead to a round of consolidation as in the global pharma industry.
Pharma is one of the most sensitive topics of discussions in many countries, and drug pricing likely the most debated. Regulators have a responsibility to ensure both commercial as well as social viability of their policies. Providing a regulatory landscape which ensures healthy competition is an important challenge for policy makers. Taking an example from the US generics market, the number of companies that launch the product the very first day after the product have gone off-patent has been increasing substantially. This has in many cases led to price of the drug dropping 99 percent in one day! Propagators of a market driven economy would preach that competition will ensure that no single producer makes more than normal profits.
As far as India is concerned, the Indian pharmaceutical industry has come a long way from waiting for imports of bulk drugs from global majors for reverse engineering to becoming an industry which is driving product development and breaking new grounds in medicine research worldwide. According to the Associated Chambers of Commerce and Industry of India (Assocham), the Indian pharmaceutical market is expected to grow at an average annual rate of 13.6 percent during 2006-2010 to reach $9.5 billion in sales by 2010. This growth is expected to be driven by access to low cost, high volume generic drugs, mergers and acquisitions, industry consolidation, and India’s growing importance as a pharmaceutical contract manufacturing and services location.
Though the Indian pharmaceutical industry has grown substantially over the years, we have only seen the tip of the ice berg as far as biotechnology in pharma is concerned. Indian companies have the necessary skills to participate in global biogenerics market as well as collaborate with global majors in developing newer drugs in this area. Even in domestic market, in-licensing opportunities exist ie. there are numerous small companies internationally who do not have the necessary marketing capabilities in the Indian market and Indian companies who have large sales force and deep penetration in the market can benefit. Thus, given the potential of growth of Indian pharmaceutical companies, ICICI Prudential AMC is positive on the sector over medium to long term.
(The writer is a Fund Manager at ICICI Prudential AMC)