India’s booming pharma market

India’s booming pharma market

Indian pharma is growing and everyone knows about it. But how much is the real question. Viveka Roychowdhury, armed with estimates from various reports, tries a dose of reality

Endorsing the strong growth signals of the Indian pharma industry, a report from McKinsey & Company predicts that by 2015, this market will triple to touch US$ 20 billion. The report titled, “India Pharma 2015: Unlocking the potential of the Indian Pharmaceuticals Market,” by the Pharmaceuticals & Medical Products practice of McKinsey & Company, discusses the future outlook of India’s pharma market. It states that if India’s high economic growth rate holds steady, at a compounded annual growth rate (CAGR) of 12.3 per cent, the absolute growth of US$ 14 billion will be next to the growth potential of the US and China, and in the same league as the growth in Japan and Canada and the UK.

Another report by Goldman Sachs predicts that India will be the fifth largest pharma market in the world by 2020, with sales of $43 billion. This is if it maintains a CAGR of 14 percent.

“Five factors will drive the growth of the Indian pharma market over the next decade,” says Palash Mitra, Partner, McKinsey & Company and co-leader of the Pharmaceuticals & Medical Products Practice. “Doubling of disposable incomes and the increase in numbers of middle-class household will account for nearly 40 per cent of this projected growth as both affordability and access will increase dramatically; significant expansion of medical infrastructure will make-up another 20 per cent; greater penetration of health insurance will add another 15 per cent; a gradual shift in disease profile and adoption of patented products an additional 10 per cent; and finally population growth and other factors will comprise the remaining 15 per cent,” he adds.

Medical infrastructure in particular physical infrastructure like hospital beds, are likely to increase from 1.7 million in 2005 to 3.7 million by 2015 with top tier private hospitals accounting for 40 per cent of this growth, medium-tier private hospitals for 11 per cent and private nursing homes and government hospitals the balance.

The Goldman Sachs estimate also draws attention to the fact that a major trigger of this growth is a shift in disease profile to lifestyle and chronic diseases, related to greater urbanization and aging populations. Lifestyle diseases will double to nearly 50% of drug sales in the country by 2020. Cancers, cardiovascular diseases and diabetes will also more than double their share of the total market to 34 percent.

Undoubtedly, India is a branded generics market and the positive outlook is rooted in four key aspects. To begin with the current pipeline of generics products is strong. Further, a wide-range of pre-1995 products and the potentially continued access to several post-1995 molecules will ensure that companies have the ability to continually augment product offerings. Finally, the sales and marketing infrastructure of domestic companies has grown substantially over the past decade and has penetrated enough to sustain the dominance of generics products. On the other hand, patented products are likely to see substantial growth momentum as their share of the pie grows from nominal levels at present, to $2 billion on the back of a supportive regulatory environment, and greater interest by MNCs.

Finally, the McKinsey report says that with the addition of 46 million households with high and medium levels of affordability Tier 2 markets will account for US$ 4 billion of the overall market and rural India for another US$ 4.8 billion by 2015. But Tier 1 markets will still continue to champion growth accounting for the remaining US$ 11.2 billion.

“These trends have strategic implications for pharma companies – Indian and multinationals and policymakers,”points out Gautam Kumra, Director, McKinsey & Company and the leader of the Pharmaceuticals & Medical Products practice in India. “For Indian companies the challenge will be to focus on not just ensuring product access, and building robust sales and marketing capabilities but also creating new markets and crafting differentiated business strategies to service these markets. On the other hand, multinationals need to raise their game in India, and accordingly customize their business models, and invest in their India operations. Similarly, the action agenda for policymakers is also substantive. Their past efforts are appreciable but not sufficient. Now the need is to create an encouraging environment for the industry. So measures such as incentives to support capability building in R&D, ensuring broader access through higher levels of health insurance penetration, and building public health infrastructure and capability are important areas amongst others that require their intervention,” added Kumra.

The McKinsey research uncovers three important trends that will shape the evolution of India’s pharma market:

(i) mass therapies will remain important despite a shift towards specialty therapies that will account for 45 per cent of the market by 2015; (ii) generics will dominate with the share of patented products rising to a sizeable 10 per cent from current nominal levels;

(iii) tier 2 markets including rural India will contribute to almost half of the pharma growth till 2015.

Mass therapies will remain important despite the shift towards specialty drugs for two reasons. First, the gap between the prevalence and treatment rates remains high in a range of diseases spanning anti-infective, gastro-intestinal, respiratory and pain management therapies, e.g. today a fifth of the population suffers from anaemia but only 25 per cent receives treatment. Second, about 140 million people will move above the poverty line during the next decade, which will impact the spending on basic healthcare and the consumption of mass therapy drugs for acute ailments.

The report’s definition of poverty is based on a calorie intake and is set at 2,400 calories per capita per day for rural areas and 2,100 calories for urban areas. It differs from that of the government’s definition of poverty line.

Changing strategy

According to a recent survey done by Pricewaterhouse Coopers, Big Pharma from the West is re-looking their outsourcing strategy. In the previous model, major pharma is thinking of outsourcing more clinical research and R&D, rather than manufacturing operations. The research was based on interviews with 185 senior pharmaceutical executives, from both global and Asian companies and found that 72 percent of multinational companies had considered outsourcing clinical trials to Asia to “some” or “great” extend. China and India were the two destinations of choice in the Asia-Pacific region to outsource clinical trials.

This is in line with an Ernst & Young report which states that in 2005, India attracted around $120m (€87m) of the global contract research market, while China’s share is believed to be about a quarter of this. A huge pool of scientific talent as well as a huge patient population are the two major draws for such investments.

India has recently created a clinical trial registry and has joined the World Health Organisation’s (WHO) clinical registry platform, in a further attempt to streamline and make the process more transparent. This, more than anything, has increased the confidence levels of Big Pharma as it allows regulation authorities as well as the scientific community to track Indian research activities. This will automatically improve and raise standards of research. Considering that countries like Germany and Brazil, which have a much larger section of the clinical trial market are yet to join the WHO clinical registry platform, India’s move speaks of an ambition and drive to achieve set goals.

The Indian Government has also done its bit by providing taxation incentives for R&D and this has particularly boosted the fortunes of Contract Research Organisations (CROs).

On the regulation front, ever since India entered the TRIPS era in 2005, the country’s IP environment has improved. Notwithstanding the recent decision to reject Novartis’ patent plea for Glivec, the laws are in place and there is currently a lively debate amongst stakeholders on the pros and cons of Section 3(d) of the Indian Patent Act.

A dose of reality

Based on these analysts’ report, the way ahead seems reasonably smooth for Indian pharma, provided it continues on the path it has chosen; ie to respect IP, follow international norms and maintain a CAGR of 12-14%. Ground reality involves negatives like increasing spend on Para IV filings and price erosions in the generics market.

However, the industry is already evolving its own strategies to cope with these realities. Out-of-court settlements reflect the fact that Indian companies have found a pragmatic solution to long-winded legal battles. The recent settlement between Dr Reddy’s Laboratories (DRL) and Teva Pharmaceuticals for the sales of generic Zoloft (sertraline hydrochloride) is a case in point. DRL has agreed not to sell generic Zoloft in the US except to Teva. Further, DRL will have to provide a 30-days advance notice to Teva of any import, sale or use of the API sertraline hydrochloride.

No doubt, the Indian pharma industry will continue to adapt to future threats and turn them into opportunities.