Major boost for the pharma industry

Strong generic fundamentals - Despite the pricing pressure witnessed in the generic markets of US and Europe, the fundamental factors driving the generics industry remain strong. In the US and Europe, the aged population as a percentage of total population is on the rise and is expected to rise further by 2025 resulting in a strain in their healthcare budgets. To give a perspective, the ageing population of Europe (as a percentage of regional population) is expected to rise from the current 20% to around 26% by 2025. Similarly that of the US is expected to rise from the current 16% to around 25% by 2025 (Source: Ranbaxy presentation). At the same time, the governments in these regions are under pressure to reduce healthcare costs, which can be achieved through relatively cheaper generics.

Cost competitiveness - A new concept that is gaining momentum in the pharma industry is contract research apart from contract manufacturing. Given the low cost high quality advantages, Indian companies are poised to benefit from contract research business on behalf of multinationals. As for contract manufacturing is concerned, large global pharmaceutical companies are finding it profitable to outsource production. To cash in on these opportunities, many large production houses in the country are becoming US FDA compliant. To put things in perspective, excluding US, India currently has the highest number of US FDA approved plants at 61.

Structural changes - The penetration of health insurance is abysmally low in the country. The entry of private players would not only bring in quantum leap in the health insurance business but also increase capital inflows into this sector. It would also bring in the concept of managed healthcare in the country. This would finally lead to overall increase in per-capita usage of drugs.

New growth opportunities - Despite the price war, the domestic pharma industry continues to show decent growth rates, led by the chronic therapeutic (lifestyle) segment like anti-diabetic, cardiovascular and central nervous system. Higher awareness, exposure to newer therapies and aggressive introduction of new drugs at a reasonable price has been the key driver of growth in the chronic/lifestyle segment. This trend is likely to continue going forward.

Increasing R&D focus - One of the positive developments has been the shift towards product patent regime from 2005 onwards. This will lead to a structural change in the industry, which will encourage innovation and greater investment in R&D. While there would not be any impact in the short term, in longer term this will lead to strengthening and consolidation of the industry. Companies have been increasingly stepping up their R&D expenditure in a bid to be recognised as research and discovery oriented companies in the global arena from a long-term perspective.

Lower end of value chain - Indian companies are cost competitive in manufacturing bulk drugs, which has made them an outsourcing destination for the global pharma majors. But this is the lower end of the pharma value chain and is basically a commodity making skill due to low entry barriers. Also, the Indian industry still lacks facilities and resources to develop a molecule, conduct clinical trials and then launch the product. Indian companies will thus have to depend on their international peers to undertake the more expensive clinical trials and product launches.

Weakness in domestic markets - Fierce price competition has become the order of the day for the domestic pharma industry, which has restricted the ability of the domestic pharma market to grow in value terms. Due to its highly fragmented structure, the pricing power of players has been pruned. The Indian markets have traditionally been and continue to remain price sensitive and premium pricing of products is extremely difficult to maintain.

Challenging generics environment - Competition in the US and European generics market has intensified in the past year on the back of minimal product launches leading to brutal price erosion. While the product flow is set to increase in the coming couple of years, pricing pressure is expected to continue. Generic players also have to contend with a host of other challenges such as increased difficulty in securing Para IV wins, presence of authorised generics and making the right acquisition to acquire scale and effectively compete in the market.

Stumbling blocks - Indian companies have been trying to enter US markets through Para IV filings. However, in recent times the industry has seen certain setbacks. This has reduced the companies' ability to generate strong cash flows to invest in ambitious R&D activities. This might lead to a delay in the R&D plans of domestic pharma majors.

Impact of the patent regime - The new patent regime brings in lot of promises for the industry in India, but it might not be good for the smaller players in the industry, as they will not be able to survive in the environment owing to scalability issues leading to consolidation of the industry. Also, the introduction of this law will gradually lead to a slowdown of new generic product launches from domestic pharma majors in the Indian markets. At the same time, the law provides an attractive opportunity to MNC pharma companies to step up product launches from their parent's product stable thereby providing competition to their domestic peers.

Government control - This attribute continues to stay, despite the various moves to liberalise the industry. Drug Pricing Control Organisation (DPCO) continues to exist.