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Pharmaceutical industry - India, a giant in the making
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted June 26, 2006
A $10billion industry today, Indian pharma will grow to $25 billion by 2010.The country's drug sector had shown a growth of 10 percent compared with 7 percent for the global industry.
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India's Pharmaceutical industry is expected to register a growth of 11% enhancing its size to $13 billion by 2007-08, as against $10 billion in 2006-07, according to the findings of a study undertaken by Associated Chambers of Commerce and Industry of India (Assocham).
The study says the industry will substantially enlarge its exports to the regulated generic drug markets of the US and Europe, where $65 billion worth of drugs are expected to go off patent soon. The study says the Indian pharmaceutical exports have tremendous potential to grow at around 18% by 2007-08.
Assocham President Anil K. Agarwal said low production costs would give India an edge over other countries, particularly China and Israel, in the case of generic drugs. Agarwal said drugs worth $40 billion in the U.S. and drugs worth $25 billion in Europe will go off patent by 2007-08. He felt that it would be easier for Indian manufacturers to seize a larger market share of overseas markets than in the domestic market where price controls are likely to continue.
Consequently, pharma majors would have no options but to explore export opportunities.
The chamber is also of the view that the migrations into a new regime of product patent would change the fortunes of domestic pharma industry in the long term and would bring with it new innovative drugs. Though this will increase the profitability of multinational pharma companies, and force domestic players to focus on research and development, besides forcing consolidation of small players who may not be able to cope up with the challenging environment.
According to research by London-based researcher Global Insight, Indian drugmakers will have a 33% share of the global generics market by 2007, compared with 4% today.
Well-positioned
Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world.
The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It is an extremely fragmented market with severe price competition and government price control.
The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles.
There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations.
According to another study conducted by KPMG, the Indian pharma industry is well positioned to capture much of the $65 billion new business expected to open up globally next year. "The Indian pharma industry is currently worth $6 billion - in a global industry worth $650 billion - and is growing at 10 percent, compared to the global industry rate of seven percent," said John Morris, global head of KPMG's pharmaceuticals practice, commenting on the new study.
"The generics business remains at the heart of everything India does well and so it should, considering that India accounts for 22 percent of the global generics market. Bearing in mind that $65 billion of prescription medicines in Europe and the US are to lose their patents in 2007-08, India is ideally positioned to sweep up much of that new business."
Morris however pointed out that opportunity now exists for India to become so much more than just a generics player and shape up as a developer of new drugs.
Policy to address short-comings
The KPMG report quotes a leading industry figure to point out that despite recent improvements in the Indian market infrastructure, many people still "talk about India but invest in China".
Much of this is attributed to shortcomings in the current Indian regulatory environment - India still offers no data protection unlike China. There is also the issue of domestic drug pricing. The report claims that drug prices in the Indian domestic market are the lowest in the world.
"The aims of the Indian industry - and of the government - are ambitious but will require a strong pricing environment if the Indian people are to access the life-saving and innovative medicines they need," the report states.
The Indian pharma companies are marred by the price regulation. Over a period of time, this regulation has reduced the pricing ability of companies. The NPPA (National Pharma Pricing Authority), which is the authority to decide the various pricing parameters, sets prices of different drugs, which leads to lower profitability for the companies.
The companies, which are lowest cost producers, are at advantage while those who cannot produce have either to stop production or bear losses. Indian pharma sector has been marred by lack of product patent, which prevents global pharma companies to introduce new drugs in the country and discourages innovation and drug discovery. But this has provided an upper hand to the Indian pharma companies. These are the major weakness of the country that the government is addressing to.
In an attempt to develop a world-class pharmaceuticals industry, the Prime Minister's Office (PMO) is working on a policy for the sector.
The new drug policy is an all encompassing policy framework that is being drafted by an expert committee to provide guidelines to the pharma industry. The main objectives of this policy are: to ensure availability of essential pharma products at reasonable prices; to strengthen the indigenous capability to produce cost effective and quality products and export pharmaceuticals by reducing barriers to trade in the sector; to strengthen the system of quality control over production and distribution; to encourage R&D in the sector; and to create an incentive framework for the industry which promotes new investment into the industry.
The industry has been long expecting reforms in the numerous policies that govern the sector. One of the most crucial areas that the policy seeks to address is pricing of drugs, which has been a bone of contention between the industry and the authorities ever since the price control was instituted.
Meanwhile, alarmed by the government's move to bring more medicines under cost-based price control, multinational companies (MNCs) drug makers told the government that they would prefer greater monitoring of drug prices as the right prescription to ensure that prices don't spiral out of control. Chiefs of all major MNC drug makers, including Pfizer MD Keval Handa, GlaxoSmithKline MD Kalyana Sundaram and Novartis vice-chairman and managing director Ranjit Shahani have recently met senior ministry officials and proposed that the government should move out of price control to a regime of greater monitoring. This would meet the objectives of the new drug policy and the common minimum program, they said. The ministry, which has circulated its draft pharma policy to other ministries, asked if the companies could provide alternative models of price regulations that would ensure accessibility of essential medicines at reasonable costs.
The companies are expected to present a few alternative models which would not be too harsh on them, while meeting the government's social objectives.
Individual companies shine
The performance of the pharmaceutical sector in terms of growth in sales and profits has been in double digit in the current year so far.
The Indian pharmaceutical industry has bettered the global market growth by 4 percent during 2006. The country's drug sector had shown a growth of 10 per cent compared with 7 percent for the global industry.
The financial results of 50 large companies during the last three quarters of the current year indicate that their net sales had gone up by over 23 per cent and profits by 38 per cent over the same period of the previous year. The net profit as percentage of net sales also improved to 14.4 per cent in the nine months of the current year as against 12.8 per cent in the previous year. A general increase in other incomes during the current year is partly responsible for the substantial growth in profits of some companies. Although this did not include some top MNCs and Indian companies like GSK, Pfizer, Merck, Ranbaxy and Wockhardt on account of their year closing in November-December period, the performance of 50 companies is quite representative of things to come.
Judging from the overall performance of the pharma sector in the current year so far one can say it is heading for good times despite odds like new patent law, increasing regulatory restrictions and tough competition in the world markets. And the profits are mostly generated from overseas operations and not from domestic sales. This is indeed remarkable especially when the government has not been doing anything worthwhile to give a boost to this sector.
Stocks led by Cipla Ltd, Dr Reddy's Laboratories, Sun Pharmaceuticals, Matrix Laboratories, Ranbaxy Laboratories and Torrent Pharmaceuticals are now attracting investor interest in anticipation of a robust earnings growth in the next two years.
Analysts said the stock prices of pharmaceutical companies have started moving up on purchases by fund houses, which were underweight on the sector over the last one year.
"The stock prices of pharmaceutical companies were underperforming over a year or so due to pressures in terms of margins and due to the fact that there were no new launches during that period," said a Research Analyst . Going forward, the pressure in terms of margins will be lesser and the growth robust on the back of a number of new launches by the pharma companies, he said.
The Economic Survey of India has also expressed satisfaction on the performance of the pharmaceutical industry that has recorded domestic sales of $4.5 billion and over $3.8 billion in exports.
A word of caution for investors: Invest in the pharma sector only for the long-term. Don't look at short-term gains. And choose your companies wisely. Another method of investment is to opt for a pharma sector fund if you don't want to buy shares of the pharma companies and would rather have an expert do it for you.
Another manufacturing destination
Indian manufacturers are one of the lowest cost producers of drugs in the world. With a scalable labor force, Indian manufactures can produce drugs at 40% to 50% of the cost to the rest of the world. In some cases, this cost is as low as 90%.
To cut costs in the tightening price environment, overcome the polarized generics market, to spend on litigations/acquisitions, R&D expenditure, shareholders value, EBIDTA margins and to take on competition in a big way, major pharma companies are thinking of merging. The heightened M&A activity in the generics industry is adding momentum with several majors viewing India as a key manufacturing destination. One of the key drivers for the generics consolidation is the vertical integration into active pharmaceutical ingredients (APIs). India has been traditionally a volume player with approximately a third of global sales, but a 10% share in value terms.
In order to grow bigger in the global market, the pharma distribution chain has to see a great transformation, according to an Ernst & Young report titled 'Health Quotient'.
Indian companies can offer an attractive option with both strong API cash flows with more than 75 US FDA approved plants. The industry is on the threshold of strong growth, driven by consolidation in the global generics market, untapped potential in the domestic market, if distribution-led reforms take place in the country, says the report highlighting the issues and opportunities in Indian pharmaceuticals, biotech and healthcare sectors.
US biopharmaceutical companies prefer India to China for their immediate expansion plans through outsourcing to get a foothold into the market. Though lack of knowledge of the market and the Indian regulatory issues are an issue, the US companies are, however, keen to strike alliances with Indian companies.
They are keen to expand their business in India in the next two years while their interest in China is more long term, according to a joint survey conducted by Cygnus, business consulting & research organization in Hyderabad, and ATS Ventures Advisors, NY.
The domestic pharmaceutical sector has the potential to double its existing market size by the year 2010 and thereby become the second major manufacturing base in the world next to China provided it is supported by the right regulatory framework, according to D.S. Brar, Chief Executive Officer and Managing Director of Ranbaxy Laboratories Ltd.
Brar said that the Indian pharma sector has the potential to grow and double the number by 2010.The challenge is to transform the industry from being predominantly small and medium to one where many large companies contribute significantly for the sector's growth. It is high time for large companies to lead this charge. The Asian companies have the potential to transform and provide global quality products and services, he said.
"There are a lot of good things going for India now. Over the next few decades, India will have the largest population in the age group of 15 to 60 years. This will mean that India will have the potential to become one of the fastest growing markets in Asia along with China.
The economic activity will shift to Asia provided the necessary regulatory environment is created. India has the potential to become a major centre for global corporations particularly in the areas of information technology and pharmaceuticals, " Brar said.
Looking for more funding
The Indian pharmaceuticals and healthcare sectors are showing a growing appetite for expansion. Consequently, the industry is likely to see a surge in fund-raising activities during the year, especially the number of private equity deals. While pharmaceutical players will account for the largest share of the pie, healthcare players and those in the biotech space are also likely to see an increase in private equity funding. "There is definitely a growth in the number of deals being negotiated," says Sanjiv Kaul, MD, ChrysCapital.
Cipla's announcement to raise $200 million in foreign currency convertible bonds (FCCBs) is the latest in a series by Indian pharma companies seeking to raise funds abroad.
With Cipla's and Panacea Biotec's $100 million offering, total overseas borrowings by Indian pharma companies by way of FCCBs and depository receipts has crossed $1 billion in a fiscal for the first time.
Still, this may just be the tip of an iceberg. Ranbaxy, which has permission from its board to raise up to $1.5 billion, is likely to hit the market with a $400 million issue, market sources said.
Recently Dr Reddy's went to its board seeking an expansion of investment and borrowing limits.
The vagaries of the stock markets would compel Indian pharmaceutical companies to look at new and innovative ways of funding research, both in generics as well as in new chemical entities (NCEs).
With global investment funds including Warburg Pincus, 3i and Carlyle Group looking to invest in niche sectors in the Indian market in a major way, pharma companies will look at funding their R&D activities through infusion of private equity (PE) funds and venture capital (VC). They will also increasingly enter into collaborative research with companies abroad, according to industry observers. PE funds are a costly proposition and cannot be accessed by companies at will. Also, they would mean sharing profits with the funding firm in the form of royalty payments. But when fund raising gets tough, they become likely options. Recently, mid-size pharma firm Glenmark's US subsidiary Glenmark Pharmaceuticals Inc entered into a unique royalty deal with US based Paul Capital Partners' royalty fund, Paul Royalty, an international healthcare investment fund.
Foreign investors eagerly eyeing
Even as the Indian pharmaceutical industry is grappling with the product patent regime in force, the domestic companies could leverage the emerging opportunities in the changed scenario to evolve into the global pharma outsourcing capital in the immediate future.
With patent protection in place and foreign investors eagerly eyeing India's wealth of human resources, and its massive domestic market, significant growth opportunities abound for Indian companies.
The patent change regime in 2007-08 would open a huge international market worth $65 billion for the Indian pharma industry, the report said.
Through proactive measures such as public-private partnerships, and encouragement of research and development India could hope to capitalize on the opportunity, feels Sanjay Aggarwal, pharmaceutical sector leader for KPMG in India.
"Multinational companies that have re-entered the market since the new product patent system seek out the domestic industry's skills and infrastructures to boost their research and manufacturing activities in the subcontinent and also open up this vast, virtually untapped market," said Aggarwal.
The Indian government's decision to allow 100 percent foreign direct investment into the drugs and pharmaceutical industry has steadily aided the growth of contract research in the country. Of course, fearing the dishonoring of patents in the country, technology transfer to 100 percent Indian subsidiaries of MNCs was not done on a comprehensive basis so far; the new regime should aid this. The Indian pharmaceutical industry is also getting increasingly US FDA compliant to harness the growth opportunities in areas of contract manufacturing and research.
A healthy future
At an average growth rate of 9 per cent per year, the pharmaceutical industry in India is well set for rapid expansion. As a result of the expansion, the Indian pharmaceutical and healthcare market is undergoing a spurt of growth in its coverage, services, and spending in the public and private sectors. The healthcare market has opened a window of opportunities in the medical device field and has boosted clinical trials in India. Many multinational companies have penetrated into India with an aim to market drugs and conduct clinical trails.
Thus, Indian pharmaceutical research, manufacturing, and outsourcing have received an impetus, thereby, creating an image of a potential healthcare market and a land of opportunities in pharmaceuticals. The economic liberalization policies coming to force in the 1990s and the strong emergence of private sector in the Indian economy has heightened the pace of development of the pharmaceutical industry and will continue to do so. The Indian Pharmaceutical industry has shown tremendous progress in terms of infrastructure development, technology base and wide range of products. The industry produces bulk drugs belonging to all major therapeutic groups requiring complicated manufacturing process and has also developed excellent Good Manufacturing Practices (GMP) compliant facilities for the production of different dosage forms. The strength of the industry is developing cost effective technologies in the shortest possible time for drug intermediates and bulk actives without compromising on quality. This is realized through country's strengths in organic synthesis and process engineering.
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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