Analysis of Health Care_Pharma Industry.pdf

7/29/2019 Analysis of Health Care_Pharma Industry.pdf

1/242

1

Analysis of Pharma Industry


2/242

Evolution of Pharma Industry : 3 Post-Patent Regime : 30

Industry Overview : 36

Review Indian Market : 50

Review Global market : 67 Player Profitability : 79

Future of Indian Pharma : 117

Manufacturing Opportunities : 145

Formulation Exports : 153

Bulk-Drug Exports : 205

Domestic Formulation : 233


3/242

Evolution of Pharma Industry


4/242

PRE-PATENT REGIMEPrior to 2005, the Indian regulatory system recognised only process

patents.

This helped to build the basis of a strong and competitive domestic

pharmaceutical industry.

The Indian pharmaceutical industry had price control mechanisms that

helped to deliver medicines at affordable prices to patients in India.

During that regime, multi-national companies (MNCs) were reluctant to

introduce new products in India and

Indian companies prospered by re-engineering the products of these

MNCs and marketing them in India.

Indian pharma industry was under the process patent regime until 2005


5/242

Up-to 1970


6/242

UPTO 1970

Until 1970, Indian pharma industry was dominated by MNCs and imports.

In 1970-71, the size of the pharmaceutical industry in India was nearly Rs4,000 million. The per capita spending on healthcare was restricted due tolow levels of income.It was mainly dominated by MNCs which largely imported formulationsfrom their parent companies and sold them in the domestic market.

Long before this, the government had realised the need for India to buildindigenous drug production capabilities so that the dependence on importscould be minimised and the country's population could have access toessential drugs at cheap prices.To fulfill this objective, it set up Hindustan Antibiotics Ltd in 1954 and

Indian Drugs and Pharmaceuticals Ltd (IDPL) in 1961.Soon these companies established themselves as major producers of criticaldrugs such as penicillin and other antibiotics which were being imported atthe time.


7/242

1970-1979


8/242

1970 to 1979

In 1970, India passed two regulations, Indian Patent Act and Drug PriceControl Order (DPCO) to achieve self-reliance.

In order to speed up the process of indigenisation and self-reliance, the

government introduced two landmark regulations in 1970, namely, the

Indian Patent Act and the Drug Price Control Order (DPCO).

These two regulations laid the platform for the domestic industry to take

off into a new growth spiral and be what it is today.Indian Patent Act, 1970

The rationale of the Indian Patent Act was to encourage domestic

producers to manufacture drugs and ensure self-sufficiency in medicines.

The Act granted patents only for the method and process of

manufacturing (globally patent protection is granted to new drugs,

irrespective of the process of manufacture.)

As a result, a number of Indian players began manufacturing products

based on the same bulk drug by varying the production processes.


9/242

1970 to 1979

DPCO, 1970

The DPCO governed the prices of all bulk drugs and formulations

in order to ensure the widespread availability of medicines at

reasonable prices.In conjunction with the Indian Patent Act, the DPCO had a

significant impact on the structure and growth pattern in the

industry.

In 1970, India passed two regulations, Indian Patent Act and Drug PriceControl Order (DPCO) to achieve self-reliance.


10/242

IMPACT OF INDIAN PATENTS ACT AND DPCO

MNCs share declined and the SSIs grew as the result of 1970 regulations.

Decline in the share of MNCs

The introduction of these two regulations caused great dismay among drug

MNCs. The reason for their annoyance was not difficult to fathom.

Since the regulations mandated price controls and did not recognise product

patents, most MNCs had little incentive to introduce new products in India.Not surprisingly, the share of multinationals in the total production of

formulations began to decline during this period.

The presence of multinationals in the industry declined further due to the

introduction of the Foreign Exchange Regulation Act (FERA), 1974, which

required all multinationals to dilute their equity holdings.

A combination of all these factors resulted in a dramatic reduction in the

share of multinationals in the total industry production.


11/242

IMPACT OF INDIAN PATENTS ACT AND DPCO

MNCs share declined and the SSIs grew as the result of 1970 regulations.

Growth of small scale units

At the same time, the number of small-scale units (SSIs) in the industry

increased rapidly due to the following reasons:

The low entry barriers in the industry (a formulations unit can be set up

for Rs 120-150 million) Abundant availability of bulk drugs

Numerous incentives to SSIs, such as the absence of price control on

drugs produced by them

A vast geographically dispersed market.

In addition, many large producers began to outsource production to

smaller units in order to contain costs, which further encouraged the

growth of the small-scale industry.


12/242


13/242

1979 to 1987

Relaxation in DPCO

Spread of research know-how

Increased bulk drug production

Continued decline in the share of multinationals

Indian pharma industry gained momentum during 1979 to 1987.


14/242

1979 to 1987

RELAXATION IN DPCO

Nine years after DPCO came into existence, the government made

some changes to it.

In 1979, the number of products under price control was brought

down from 347 to 163.

Additionally, the government permitted a higher mark-up over the

cost of production, from 40-60 per cent in 1970, to 75-100 per cent in

1979.

The production of bulk drugs increased due to a surge in exports.

In 1970, DPCO was relaxed for more than 50% of the products and thegovernment permitted a higher mark-up which increased profitability.


15/242

1979 to 1987

Indian companies began getting into research know-how during thisperiod

Spread of research know-how

The sales of many Indian pharmaceutical companies such as Cipla,

Ranbaxy, Lupin and Torrent rose significantly during this period.

Encouraged by the process patent regime and the availability of skilled

research personnel, some Indian companies gradually began investing in

research, and introduced new products through process reengineering.

Government research institutes such as CDRI (Central Drug Research

Institute) and CSIR (Council of Scientific and Industrial Research) also

contributed to the gradual build-up in the indigenous research base.The smaller players were also not left behind during this era of growth

ushered in by the Indian Patent Act and the DPCO.


16/242

1979 to 1987

Proportion of bulk drug increased during this period.

Increased bulk drug production

Apart from controlling the prices of certain drugs, the DPCO also

regulated the production pattern of pharmaceutical companies by

fixing a ratio between the formulations and bulk drugs producedby the companies.

This led to greater investments in the production of key bulk

drugs such as antibiotics and cardiovascular drugs and hence,

ensured their availability


17/242

1979 to 1987

Share of MNCs continued to decline and Indian players began to focuson exports.

Continued decline in the share of multinationalsThe share of MNCs in total production continued to slide.Many formulations imported and distributed by MNCs had a limitedmarket due to high prices (as a result of the high tariff structure).In addition, MNCs were unable to match the low prices offered by Indian

producers, who were more cost-competitive.Indian players leveraged the advantage to increase exportsAfter creating a niche for themselves in the domestic markets, a number ofIndian players such as Ranbaxy, Lupin, Torrent and Dr Reddy's turnedtheir sights on exports.

They initiated steps to capitalise on their technical skills of reverseengineering and low cost structure in order to tap the overseas markets.Statistics indicate that their efforts were fairly successful. The share ofexports in total bulk drug production soared from 5 per cent in 1980-81 to19 per cent in 1986-87.


18/242

1987 to 1994


19/242

1987 to 1994

The industry continued to build on its strengths in the late eighties and

the early nineties.

The period from 1987 to 1994 was one of high growth for the domestic

pharmaceutical industry.

The growth rate of formulation production went up from 10 per cent per

annum during 1980-1987 to 18 per cent per annum during 1987-1994, due

to a sharp rise in the number of new drugs introduced as well as low

prices.

Moreover, the per capita income rose and people were willing to spendmore on modern allopathic drugs.

Overall growth rate and the no. of new drugs improved between 1987 to1994


20/242

KEY FEATURES : 1987 to 1994

Growth in Bulk drugs driven by exports

Increased investments

Renewed interest by multinationals

Growth of Indian Producers

Increased competition


21/242


Growth in Bulk drugs driven by exports

Production continued to increase during the 1987-1994 period, led by

higher exports.

Bulk drug production rose at a compound annual growth rate (CAGR)

of 16 per cent and bulk drug exports grew at a CAGR of 40 per cent.

By 1994, the share of bulk drug exports in total bulk drug production

went up to 50 per cent.

Share of bulk drug exports went upto 50% of the total production in 1994.The investments also doubled during this period.

Increased investments

To meet the ever-growing demand, investments in new capacities went upsubstantially (largely by Indian players).

They increased from Rs 7,000 million in 1986-87 to nearly Rs 13,800 million

in 1994-95.


22/242


Renewed interest by multinationals

A major turning point, as far as MNCs were concerned, was the

liberalisation programme initiated by the Narasimha Rao government in

1991.

As part of the reforms process, tariff barriers were lowered and Foreign

Exchange Regulation Act (FERA) regulations were relaxed.

This restored MNCs confidence to a certain extent and encouraged

greater foreign investment in the domestic pharmaceutical industry.

Most multinationals undertook comprehensive cost-containmentprogrammes through plant relocation and retrenchment of work force, and

enhanced the pace of their new product introductions.

Liberalization process made MNCs to re-look at India for pharmainvestment in manufacturing.


23/242


Liberalization process also helped the Indian companies as they wereable to import large quantity of bulk drug intermediates.

Growth of Indian producers

The reforms process also benefited Indian producers who were

able to increase the rate of new bulk drug introductions (due to the

large quantity imports of bulk drug intermediates) as a result oflower tariff and non-tariff barriers.

Many Indian players also made efforts to heighten their presence

in the international markets by setting up branch offices and

subsidiaries.


24/242


This period also saw increased competition with the number of unitsalmost doubled.

Increased Competition

Due to the surge in demand, the level of competition in theindustry also went up.The number of units rose from an estimated 10,000 units in 1987

to over 20,000 units in 1994.Most new producers introduced brands in large-sizedand fast growing categories such as antibiotics, NSAIDs andcough preparations.Hence, the number of competing brands in a single categorysoared to over 100 in many cases.


25/242

1995 to 2004


26/242

Further relaxation of DPCO and agreement to adhere to the productpatent regime were the major decisions taken in this period.

1995 to 2004

In 1995, the government again amended the DPCO and brought

down the number of drugs under price control from 146 to 74.

The share of the market covered by price control declined from 70

per cent in 1987-88 to 52 per cent in 1997 and further, to 40 per centin 2001.

The most important development during this period was that the

Indian government, as a member of the World Trade Organisation

(WTO), agreed in 1995 to adhere to the product patent regime from2005.


27/242


Increased interest of multinationalsThe government's commitment to recognise product patents in drugs after 2005fuelled the expectations of MNCs.The parent companies of a number of multinationals began increasing theirequity stakes in their Indian operations. For instance, Sanofi-Torrent and EliLilly-Ranbaxy purchased the equity stake of their Indian partners in order to

increase their presence in the Indian market.Yet another factor that drew the attention of MNCs was the low cost ofproduction in India.Multinationals began increasingly looking at India as a market and amanufacturing base (the world over, multinationals are attempting to lower costsof production by shutting down uneconomic facilities and relocating plants to

low cost countries.)MNCs sped up the pace of new product launches and aggressively built marketshares by expanding their field force, in addition to reducing the cost ofproduction (by closing down high-cost plants and offering VRS to theiremployees).

Since 1995, MNCs have been increasing their presence both as amanufacturing base and a market for introducing new products.


28/242

Indian Producers Leverage Strength

A major fallout of the product patent recognition is that the ability of Indianproducers to reverse engineer international proprietary drugs may no longer

prove to be a significant competitive advantage.

There is a flip side to it, though. A number of Indian producers have already

achieved a critical mass, in terms of the size of operations, and are increasingly

adopting a global view of their organisations.

To strengthen their presence in the domestic and international markets, Indian

producers have been following a number of strategies, such as:

Setting up manufacturing and marketing joint ventures (JV) overseas

Building world class facilities for bulk drug production, in order to tap the

fast growing market for generic drugs in developed countries

Entering into alliances with multinationals, in order to launch new drugs Conducting clinical trials in India in order to enable multinationals to reduce

the development costs of new drugs

Strengthening their brand (and market) franchises

Significantly expanding their geographical reach within the country

Though the benefits of reverse engineering capabilities no longer exist,Indian companies are emerging stronger through their strategic initiatives.


29/242

Though the competition increased, the profitability remained high due tonew product launches and forward integration strategy of the players.

Competition and Profitability

The rate of introduction of new drugs grew consistently and the pressureto introduce new products at affordable prices rose in order to ensurereasonable volumes.New product prices are generally higher than those of older drugs.Hence, in spite of greater competition, the profitability of Indianpharmaceutical companies improved marginally.

Operating profit margins of the Indian pharmaceuticals industryincreased from 20.9 per cent in 1996- 97 to 21.6 per cent in 2001-02.In the bulk drugs segment, margins are lower due to intense pricecompetition in the domestic and export markets.Increased competition in the domestic market, especially in large and old

products led to heavy pressure on the margins of bulk drug producers.In order to maintain profitability, many bulk drug producers haveforward integrated into the manufacture of formulations.Large bulk drug producers have also increased exports of new moleculesto non-regulated markets where margins are relatively higher.


30/242

Post-Patent Regime


31/242

In line with its commitments to WTO, the government passed an

ordinance to introduce the product patent regime from January 2005.

It helped in integrating India into the global pharmaceutical market.

The amendment to the Indian patent act made copying of post-1995

patented drugs illegal in India.

While this discouraged the process reengineering of products patented

post 1995, it is expected to gradually increase the confidence of large

global players on Indian companies.

INTRODUCTION OF PRODUCT PATENTS

Product patent regime began in 2005.


32/242

IMPACT OF PRODUCT PATENT REGIME

Product patent regime is expected to encourage drug discovery in the longterm.

While the process patent helped the Indian pharmaceutical industry toflourish into a world-class generics industry, the product patent regime isexpected to encourage new drug discovery in the long term. In the past, pharma multinationals have maintained a low-key presence inthe Indian market due to the absence of product patents and rigid price

controls. Hence, the recognition of product patents will gradually increase theconfidence levels placed by large global players on IndiaSince January 2005 to date, India has seen a total of 15 patented productlaunches. Pfizer has launched three of them, while Roche and GSK launchedtwo and one, respectively.The launch of patented products in India has been slow as the innovatorsare taking their time seeking clarity on data protection, patenting ofderivatives and pre and post-grant opposition. While not much has changedon this front, the attitude of MNCs is gradually changing.


33/242

Indian pharma continue to look at exports as an important growth driver.

Rising focus on exportsIndia gained its foothold in the global arena with its

innovatively-engineered generic drugs and active pharmaceutical

ingredients (API), and it is now seeking to become a major player

in outsourced clinical research as well as contract manufacturingand research.

There are around 100 US Food and Drug Administration (FDA)

approved manufacturing facilities in India, more than in any other

country outside the US. In 2007, Indian companies received about24 per cent of all Abbreviated New Drug Applications (ANDA)

approvals by the US FDA.


34/242

There has been series of regulations to bring down the taxation levels

VAT implementation

The government also introduced VAT from April 1, 2005.Under the VAT regime, pharmaceutical products would be charged at4 per cent lower than the past levels of 8-12 per cent sales tax.Besides, full credit would be available to companies for taxes paid onthe inputs used to manufacture goods.

Moreover, players would get full credit for inputs used to manufactureexport goods, thereby reducing the total cost to companies.

Reduction in customs duty on chemicalsThe government slashed the customs duty on APIs and intermediatesfrom 12.5 per cent to 7.5 per cent in the annual budget 2007-08.

As most of the bulk drug imports in India are from China, thecompanies that use imported bulk drugs from China for exportproduction benefited from the duty cut.


35/242

There has been series of regulations to bring down the taxation levels

Reduction in excise duty of chemicalsThe government reduced the excise duty on formulation drugs from 16

per cent to 8 per cent and fully exempted the excise duty on the anti-

AIDS drug Atazanavir, as well as the bulk drug used for its

manufacturing.

Reduction in customs duty for specific drugs

The government has also reduced the custom duty on six drugs / drug

kits and bulk drugs for their manufacture from 10 per cent to 5 per cent.

These specific drugs are used in the treatment of diseases such as

cancer, diabetes, asthma and hepatitis B.


36/242

36

Industry overview


37/242

Overview

The Indian pharmaceutical industry is estimated to be worth $21.5 billion (including

exports) in 2009-10.

In value terms, the domestic formulations market contributed only 1 per cent to the

global pharmaceutical market in 2009-10, due to lower penetration of healthcare and

lower drug prices vis-a -vis the developed markets such as US and Europe.

India's healthcare spending is about 6 per cent of its total gross domestic product of

India.


38/242

Pharmaceutical value chain


39/242

Pharmaceutical value chain

Bulk drugs also known as or active pharmaceutical ingredients (APIs) are the raw

materials used to manufacture formulations, which in turn are the end products

administered to patients and are ready-to-use forms of bulk drugs (including

capsules, tablets, syrups and injections).

Bulk drugs made by combining more than two chemicals or intermediaries. They are

intended to directly affect on the diagnosis, cure, mitigation, treatment or prevention

of a disease.

in 2009-10, of the total domestic pharmaceutical sales (in value terms), formulations

accounted for 65 per cent, while bulk drugs contributed the balance.


40/242

Highly fragmented domestic formulation industry

The domestic formulations industry is highly fragmented both in terms of the

number of manufacturers as well as the variety of products.

There are about 300-400 units in the organised sector and about 15,000 units in the

unorganised (small scale) sector that form the core of the segment.

These players together manufacture a over 100,000 drugs spanning across various

therapeutic categories.


41/242

Supremacy of Indian companies vis-a-vis MNCs

Indian companies dominate the domestic formulations market by occupying seven

out of the top ten spots.

The formulations market in India is fairly concentrated at the top. In 2009-10, the top

five formulations companies, Cipla, Ranbaxy, GlaxoSmithKline, Cadila Healthcare,

and Piramal Healthcare, accounted for 22.5 per cent of total formulation sales.


42/242

Market share of top 10 players in 2009-10


43/242

Concentrated manufacturing

In geographic terms, Indian pharma companies carry out manufacturing operations

largely from Maharashtra, Gujarat and Andhra Pradesh.

However, many players have shifted their manufacturing bases to excise-free zones

like Baddi (Himachal Pradesh), Haridwar (Uttaranchal) and Sikkim, after the

government imposed the MRP-based excise duty system.


44/242

Low per capita annual drug expenditure in India (2006)


45/242

Low per capita annual drug expenditure in India (2006)

Per capita annual drug expenditure in India is very low at $3 as compared to $412

and $191 in Japan and US, respectively.

This can be attributed to India's large population and declining share of health

expenditure in total government expenditure.

This can be attributed to India's large population and declining share of health

expenditure in total government expenditure.


46/242

Low coverage of health insurance in India (2006)


47/242

Low coverage of health insurance in India (2006)

In India, a majority (around 80 per cent) of the patients pay out of their pockets. Only

3 per cent of the population is covered under health insurance.

Unlike US, India lacks a strong health insurance sector to share the healthcare cost

with the patients. Conversely, in the US, consumers do not directly pay for the

medicines.

Here, government organisations and managed care organisations reimburse most of

the drug costs to patients.

However, with rising drug expenditure in recent times, patients in the US are being

asked to take on a larger share of their healthcare expenses.

This has prompted consumers to opt for generic drugs over high priced branded

drugs.


48/242

Market dynamics

Supply scenario

Unlike commodities, capacity formation in the domestic pharmaceutical industry

does not bunch-up due to a low capitalintensity and low gestation period.

Hence, companies expand capacities in line with market demand patterns.

A USFDA-approved API manufacturing facility can cost up to Rs 150-200 million as

compared to Rs 30-50 million for an unapproved facility.

The cost is higher in the case of the former owing as cost of compliance with the

USFDA norms is high. Setting up a USFDA approved formulations manufacturing

plant costs about Rs 200-300 million as compared to Rs 120-150 million for an

unapproved facility.


49/242

Cost of setting up manufacturing plant

Also, unapproved units have lower gestation periods.

The average gestation period for a USFDA approved manufacturing facility is 18-24months as compared to 6-12 months for an unapproved facility.


50/242

50

Review - Indian market


51/242

Prominence of acute ailments in India

Chart 1: Types of ailments


52/242



Ailments can be typically classified into acute and chronic.

An acute ailment is a condition characterised by sudden, severe exposure (usually a

single large exposure) and rapid onset.

Herein, the patient shows intense symptoms for a brief duration (not longer than 30

days).

Acute ailments are self-limiting and examples include infectious diseases such as

common cold, fever, etc.

However, acute ailments may turn chronic if left unaddressed. Chronic ailments are

characterised by prolonged or repeated exposures over many days, months or years.


53/242



As per current medical knowledge, chronic diseases can only be alleviated with

treatments but not fully cured.

Chronic ailments don't usually resolve on their own accord, unlike acute ailments.

Examples of chronic diseases include diabetes, asthma, blood pressure, cancer, etc.

Due to the relatively poor sanitation facilities in developing countries (including

India), the proportion of acute diseases to chronic diseases is higher in developing

countries as compared to developed countries.

Thus, drugs addressing infectious (acute) diseases are predominant here. For

instance, in India, about 69 per cent of total drugs sold are for treating acute diseases.


54/242

Review: Domestic formulations market

Domestic formulation sales grew by 17.9 per cent y-o-y to Rs 417 billion in 2009-10.

This growth rate was higher than the traditional growth rate of 12-14 per cent, owing

to a low base in 2008-09 (on account of inventory rationalisation at the retail level).

Among therapeutic categories, growth was primarily driven by chronic segments such

as cardiac, antidiabetic, gastrointestinal, gynaecology, while anti-infectives also grew

steadily.

Over the next few years, the therapeutic category mix is expected to gradually move

in favour of speciality therapies.

However, mass therapies such as antiinfectives and gastrointestinal will continue to

grow stably, due to rising demand from rural areas, which don't have proper

sanitation facilities and are thus more prone to acute ailments.

Currently, tier-II cities (with a population of less than 1 lakh) and rural markets

constitute about 40 per cent of the total market size. Demand from these markets is

expected to grow at a much faster rate than tier-I cities.


55/242

Table 1: Domestic formulations (Sales of top 10 drug classes)


56/242

Table 1: Domestic formulations (Sales of top 10 drug classes)

In 2009-10, the top 5 drug classes by size were cephalosporins, anti-rheumatic non-

steroidals, anti-peptic ulcerants, oral anti-diabetics and cough preparations.

Together, these contributed about 23.4 per cent of the total market share.

Fastgrowing drug classes largely included lifestyle-related drugs such as oral anti-

diabetics (28.4 per cent share), cough preparations (23.9 per cent), statins (23.6 per

cent) and anti-peptic ulcerants (20.2 per cent).


57/242

Table 2: Domestic formulations sales by top therapeutic categories


58/242

Chart 2: Classification of key therapeutic categories under acute and chronic

segments


59/242

Acute segments

Anti-infectives

Anti-infectives sales posted a 2-year CAGR of 12.2 per cent to Rs 72.1 billion in 2009-

10 from Rs 57.3 billion in 2007-08.

In 2009-10, the 14.7 per cent growth in the anti-infectives segment was slower than

the formulations industry's growth of 17.9 per cent and accounted for about 17.3 per

cent of the total formulations sales.

The key drug classes among antiinfectives were cephalosporins, ampicillin/

amoxycillin and quinolones.

Together, these three accounted for about 77.3 per cent of the anti-infective sales in

India.


60/242

Gastrointestinals

The gastrointestinal segment posted a CAGR of 16.6 per cent during 2007-08 to 2009-

10 and contributed about 11 per cent to total domestic formulation sales in 2009-10.

The largest drug class in this category is anti-peptic ulcerants, which accounted for

about 44 per cent of the segment's total sales.


61/242

Pain/analgesics

The pain / analgesics segment accounts for 8-9 per cent of the total domestic

formulations sales.

It registered a CAGR of about 13 per cent between 2007-08 and 2009-10.

The anti-rheumatic, non-steroid, non-narcotic anti-pyretics, antiosteoporosis, topical

anti-rheumatics and muscle relaxants systemic drug classes accounted for about 94

per cent of the segment's total revenues in 2009-10.

The top five players in this segment were Novartis, Ranbaxy, GlaxoSmithKline,

Piramal Healthcare and Alkem, cumulatively accounting for 42-43 per cent of total

sales.

Pain / analgesics are colloquially termed as painkillers and act in various ways on

the peripheral and central nervous system.


62/242

Pain/analgesics

Examples of such drugs include paracetamol (acetaminophen); non-steroidal anti-

inflammatory drugs (NSAIDs) such as salicylates, narcotic drugs such as morphine;

synthetic drugs with narcotic properties such as tramadol; and various others.

Drug classes such as tricyclic anti-depressants and anti-convulsants, not generally

categorised under analgesics, are also used to treat neuropathic pain syndromes.


63/242

Chronic segments

Cardiovascular system

Therapies for cardiovascular (CVS) ailments rely primarily on control of blood

pressure and cholesterol, especially since high blood pressure increases the risk of

heart disease and strokes.

In 2009-10, this segment continued to be one of the fastest-growing segments in the

domestic formulations market.

It grew by about 20.1 per cent to Rs 47.4 billion in 2009-10 as compared to Rs 39.5

billion in 2008-09.

The segment constituted about 11.4 per cent of total domestic formulation sales.

The leading drug classes in this segment are statins, hypotensive combinations, anti-

coagulants, diuretic combinations, calcium channel blockers and beta blockers.


64/242

Respiratory

Sales in the respiratory segment posted a 2-year CAGR of 14-15 per cent to Rs 37.7

billion in 2009-10.

Cipla continues to lead the segment with a share of about 27-28 per cent.

The top five players - Cipla, Piramal Healthcare, Pfizer, Cadila Healthcare and

GlaxoSmithKline together accounted for 60 per cent of total sales during the year.

The major drug classes include cough preparations, bronchodilator inhalants, anti-

histamines, bronchodilators solids and cold preparations.

Together, these contributed about 91-92 per cent of the total respiratory market sales.


65/242

Neuro/Central Nervous System (CNS)

In 2009-10, the Neuro/CNS segment expanded to Rs 23.3 billion at a 2-year CAGR of

15 per cent.

The major drug classes within this segment include anti-epileptics, anti-depressants,

tranquilisers and anti-psychotics.

These four classes contributed to about 75 per cent of sales in the neuro/CNS

segment.

Sun Pharma is the dominant player in this segment with an 18-19 per cent share.

Other major players include Intas Pharmaceuticals, Torrent Pharma and Abbott

Laboratories; together these four players accounted for 48-49 per cent of the

segment's sales in 2009-10.


66/242

Neuro/Central Nervous System (CNS)

In 2009-10, the Neuro/CNS segment expanded to Rs 23.3 billion at a 2-year CAGR of

15 per cent.

The major drug classes within this segment include anti-epileptics, anti-depressants,

tranquilisers and anti-psychotics.

These four classes contributed to about 75 per cent of sales in the neuro/CNS

segment.

Sun Pharma is the dominant player in this segment with an 18-19 per cent share.

Other major players include Intas Pharmaceuticals, Torrent Pharma and Abbott

Laboratories; together these four players accounted for 48-49 per cent of the

segment's sales in 2009-10.


67/242

67

Review - Global market


68/242

Declining growth in the global pharmaceutical market continues

Sales in the global pharmaceutical have been declining since 2003, largely driven by a

rise in drugs going offpatent across major therapeutic categories; declining research

and development (R&D) productivity and stricter scrutiny of the value of medicines

and their pricing levels.

In 2009, global pharmaceutical sales grew by 4.5 per cent y-o-y (with a constant US

dollar) to $808 billion (includes audited and un-audited markets).


69/242

Figure 1: Global pharmaceutical sales (2002-2009)


70/242

Table 1: Pharmaceutical sales by region (2009)


71/242



72/242


In terms of size, the pharmaceutical industry is dominated by North America (mainly

the US), Europe and Japan.

The North American market remained the single-largest market, with sales of $322.1

billion in 2009 resulting in a 3.3 per cent y-o-y growth, as against a 1.4 per cent growth

in in 2008.

This growth was backed by an improving US economy and lower price deflation in

the generics segment.

Meanwhile, sales in Europe remained flat and the region's contribution to global sales

fell marginally to about 31 per cent in 2009 from about 32 per cent in 2008, mainly as

the euro weakened versus the US dollar.


73/242


Sales in the Asian and African markets (excluding Japan and including Australia and

New Zealand) grew by 15.9 per cent in 2009 and accounted for 12-13 per cent of total

global pharmaceutical sales.

Sales in China rose by more than 20 per cent for the second year running, while that

in India grew by about 17 per cent.

A strong economy and an increase in penetration of healthcare in these markets,

aided this growth.

Sales in Latin America declined by 1.5 per cent in 2009 to $45.8 billion owing to

exchange rate fluctuations.

However, adjusting for exchange rate changes, these markets grew by over 10 per

cent.


74/242

Table 2: Therapy-wise sales: Oncology leads the pack


75/242

Table 2: Therapy-wise sales: Oncology leads the pack

Among therapeutic categories, sales of respiratory agents, anti-diabetics, angiotensin-

II antagonists and autoimmune agents grew strongly by more than 10 per cent each,

reflecting the increase in the launch of innovative products by large global players.

Sales of autoimmune agents grew the fastest by 18 per cent, thus reporting a nearly 20

per cent growth for the fifth consecutive year.This category includes blockbuster drugs such as Remicade, Enbrel and Humira that

treat a wide variety of immunological diseases.

Oncology remained the top therapeutic category, growing 8.8 per cent to achieve

sales of $52.4 billion in 2009.It also had the largest share (7 per cent) in total global pharmaceutical sales. The

launch of innovative compounds such as Gardasil (the first vaccine to prevent cervical

cancer) and Sutent (for renal cancer) also contributed to this growth.


76/242

Leading drugs by global pharmaceutical sales (2009)


77/242

Pfizer still at the top; Merck surges to second spot

The top ten players strengthened their share in total global sales to 45.1 per cent in

2009 from 42.6 per cent in 2008.

Despite the decline in sales, Pfizer continued to lead the market with a total market

share of 7.6 per cent in 2009.

Pfizer was followed by Merck, which galloped to the second position in 2009 from

the eighth position in 2008 due to added sales from its acquisition of Schering Plough

in 2009.

At the same time, GSK toppled to the fifth position from the second position as its

two major drugs - Valtrex and Avandia - went off-patent.

Sales of Johnson & Johnson declined by over $3 billion in 2009, reflecting the loss of

marketing exclusivity for two of its patented products - Risperdal and Topamax.


78/242

Top corporations by global sales (2009)


79/242

79

Player profitability


80/242

Changing industry trends

Large players still dominate investments in pharma, earn higher profits

To understand the strategies, dynamics and performance of domestic pharmaceutical

companies (formulations and bulk drugs players) listed on stock exchanges, they have

been segregated into large, medium and small, on the basis of their turnover (as of

2009-10). As per this measure, companies with a turnover of more than Rs 25 billion

can be termed largesized players, those with a turnover between Rs 3 billion and Rs 25

billion would be medium-sized players, while smallsized players would be those with

a turnover of less than Rs 3 billion.

Similarly, in case of bulk drugs players, those with a turnover above Rs 2 billion have

been termed large-sized players.


81/242

On analysing the performance of the above player groups, we observe the following

trends:

Formulation exports to semi-regulated markets decline; pull down overall

sales

Over the past few years, Indian pharmaceutical players have been increasingly

tapping opportunities in global generics markets, especially the US and Europe.

Several medium-sized and small players have targeted the semi-regulated markets of

Africa, Asia and Latin America to enhance their distribution expertise, before

exporting to the regulated markets.

Buoyed by such player actions, formulation exports grew by over 25 per cent

between 2003-04 and 2008-09.

However, in 2009-10, exports were badly hit and grew by just 2.2 per cent y-o-y.


82/242

Formulation exports to semi-regulated markets decline; pull down overall

salesThe decline was mainly due to a fall in exports to semi-regulated markets, on the

back of the EU's seizure of drug shipments, currency fluctuations and a high base in

2008-09.

Traditionally, exports have contributed more than half of the revenues for most largeformulation players.

In recent years, export revenues of medium-sized and small formulation players too

have increased rapidly, with exports contributing about 50 per cent of revenues for

mid-sized players and 20-25 per cent for smaller players.During 2005-06 to 2009-10, exports of large formulation players posted a CAGR of

25.9 per cent, while those of medium and small players recorded a CAGR of 23.6 per

cent and 18.1 er cent, res ectivel .


83/242

High reliance on exports hits revenues of large players, smaller firms fare

better

After rising by 23 per cent y-o-y in 2008-09, revenue growth of large formulation

players moderated to 7.9 per cent in 2009-10, due to lower-than-expected exports.

Further, a high base in 2008-09, on account of one-time sales opportunities enjoyed by

a few large players, too affected exports. Smaller players, however, reported a

relatively robust revenue growth of 15.6 per cent y-o-y.

Sales of medium-sized formulation players grew by 14.6 per cent y-o-y on the back of

positive performance by some top players in the category like Torrent Pharma, Ipca

Labs, Glenmark Pharmaceuticals and Alembic.


84/242

High reliance on exports hits revenues of large players, smaller firms fare

better

In the bulk drugs segment, growth moderated in 2009-10 from the previous years, as

exports slowed, growing by 15 per cent in 2009-10, as global players reduced their

inventory holdings in the wake of the global credit crunch. Between 2004-05 and 2009-

10, revenues of large players bulk drug players registered a CAGR in 20.5 per cent,

while smaller players posted a 23 per cent CAGR.

On a y-o-y basis, revenues of large bulk drugs players grew by 10.8 per cent in 2009-

10, while that of smaller bulk drug rose by more than 30 per cent


85/242

Large players enjoy better profitability, invest more

Typically large players (in both formulations and bulk drugs segments) are more

profitable due to their ability to fetch higher realisations, as they enjoy a wide base in

regulated markets.

The presence of strong brands in the domestic market helps large formulation players

further.

However, a significant exposure to international markets are also makes large players

vulnerable to risks such as currency volatility, overall market performance and

outsourcing plans of key players in the target destinations, etc.

In terms of capital expenditure too, large players score over smaller formulation and

bulk drugs firms, as the latter have a fewer number of US FDA-approved plants,

which significantly reduces their capex requirements.


86/242

Formulation players

Aggregate financial analysis of formulation players

The financials of formulation players are discussed in detail in the following section

(they have been segregated as mentioned earlier). In 2009-10, the aggregate turnover

of large formulation companies grew by about 7.9 per cent to Rs 354 billion in 2009-10.


87/242

Turnover of players, across different sizes, registered sturdy growth

Turnover of formulation players


88/242



Turnover of large players (aggregate of 7 companies) registered a CAGR of 21.4 per

cent between 2005-06 and 2009-10 to Rs 354 billion.

However, sales growth moderated to 7.9 per cent y-o-y in 2009-10 due a to high base

in the previous year, as players such as Dr Reddy's Labs and Sun Pharma had one-

time opportunities to sell exclusive drugs in 2008-09.

Revenues of medium-sized players (aggregate of 10 companies) posted a CAGR of

21.3 per cent during 2005-06 to 2009-10 and increased by 14.6 per cent (y-o-y) in 2009-

10, to Rs 110 billion.

Key performers in this category were Glenmark Pharmaceuticals, Ind-Swift Labs,

Torrent Pharmaceuticals and Ipca Labs.


89/242



Turnover of small players (aggregate of 10 players) recorded a CAGR of 13.4 per cent

during 2005-06 to 2009-10.

On a y-o-y basis, turnover grew by 15.6 per cent to Rs 20.9 billion in 2009-10, on good

performances by players such as Ajanta Pharma, Group Pharmaceuticals Ltd, Syncom

Formulations, TTK Healthcare and Twilight Litaka.


90/242

Share of export revenues almost stagnant in last 3 years

Contribution of exports to total sales


91/242



Large players have greater access to international markets as they have the required

capital, labour and better infrastructure/manufacturing plants which comply with

GMP (good manufacturing practices) requirements.

Large players registered a CAGR of 25.9 per cent in exports during 2005-06 to 2009-

10. However, the share of exports in total sales continued to hover at 66-69 per cent, as

domestic sales also grew at the same pace as exports.

Exports of medium sized formulators grew at a CAGR of 23.6 per cent during 2005-06

to 2009-10, while for small sized players, exports recorded a CAGR of 18.1 per cent.


92/242



On a y-o-y basis, in 2009-10, exports of medium-sized players accounted for 51.3 per

cent of total revenues, while for small players the share of exports was 22.8 per cent.

Even though many medium-sized players have ventured into the US by setting up

manufacturing facilities compliant with the regulatory requirements of the US FDA;

semi-regulated markets continue to be their forte. By and large, smaller players export

wholly to semi-regulated markets.


93/242

Formulation exports of large players


94/242

Formulation exports of medium and small sized players


95/242

Higher export realisations makes large players more profitable

Cost structure of large players (2009-10)


96/242

Higher export realisations makes large players more profitable

Cost structure of large players (2009-10)

Typically, for large and medium-sized players, input costs form 35-45 per cent of

sales, while being at 50-60 per cent for smaller players. Large players have an

advantage on input costs as they earn higher realisations, have better brands and a

larger scale of operations.


97/242

Large, medium-sized players report healthy margins, RoCE

Average OPM and RoCEs (2004-05 to 2009-10)


98/242

Large, medium-sized players report healthy margins, RoCE

Average OPM and RoCEs (2004-05 to 2009-10)

The average operating margins of large and medium-sized players have remained at

similar levels over the past 5 years despite differing trends in sales growth.

However, on a y-o-y basis in 2009-10, aggregate operating margins of formulation

players across sizes slightly declined.RoCEs, on the other hand, showed mixed trends. As a result of significant capital

expenditure incurred by large players to enter regulated markets, their average RoCEs

were lower than that of medium-sized players but higher than smaller players.

Returns of medium-sized players were higher owing to the robust growth in their

profits. Returns of smaller players have gradually improved over the past 5 years, in

line with the rise in their profits. Moreover, capital expenditure for these players have

been limited, as they primarily focus on low-cost Asian and African markets.


99/242

Industry has a sound financial profile marked by comfortable gearing

levels

Trends in gearing levels


100/242

Industry has a sound financial profile marked by comfortable gearing

levels


The gearing levels of Indian formulation players have traditionally remained

comfortable during 2005-06 to 2009- 10 as players generated adequate cash accruals to

fund their capital requirements.Gearing levels of large players has remained constant at about 1 times over the last 2

years. In 2007-08, gearing levels of large players increased to as high as 1.3 times on

account of foreign mergers and acquisitions (partly financed through external funds)

by players such as Ranbaxy, Dr Reddy's and Wockhardt.

However, with a moderation in acquisitions and healthy cash accruals, gearing againimproved to favourable levels since 2008-09.

Gearing levels of medium and small players improved marginally in 2009-10 as

com ared to the revious ear.


101/242

Bulk drug players

Bulk drugs players - Aggregate financial analysis

Among bulk drug manufacturers, large players are those having revenues of above

Rs 2 billion, while the others are categorised as small players.

Large bulk drug players witness healthy growth in turnover

The turnover of large bulk drugs players grew by 10.8 per cent in 2009-10, driven by

strong revenue growth of players such as Aurobindo Pharma, Matrix Labs and Nectar

Lifescience laboratories.

However, the poor performance of Divi's Labs pulled down aggregate turnover

growth. During the last 5 years (2005-06 to 2009-10), large bulk drug players registered

an aggregate CAGR of 20.5 per cent.


102/242

Trends in turnover of large bulk drugs players


103/242

Revenue growth of smaller players outperform larger players

Revenues of small bulk drug players registered a 24.5 per cent CAGR between 2005-

06 and 2009-10. On a y-o-y basis, their revenue growth was better than that of large

players, rising 29 per cent in 2009-10.

The growth was driven by a strong growth in turnover of companies such as

Granules India Limited and Anuh Pharma Limited.


104/242

Turnover trends of small bulk drugs players


105/242

Bulk drug players capitalising on growing export opportunities

Indian bulk drug manufacturers are increasingly resorting to signing contract

manufacturing deals with global players, by providing services such as custom

synthesis and manufacturing bulk drugs for both off-patent and patented drugs.

to the generic players and innovators respectively.

Contract manufacturing deals from global innovators have been increasing in recent

years on account of greater confidence of innovators in on Indian players.

Accordingly, the share of regulated markets in India's total bulk drug exports has

risen to 55-57 per cent in 2009-10 from 38-40 per cent in 2004-05.


106/242

Bulk drugs exports by large players


107/242

Bulk drugs exports by large players

Exports accounted for more than 65 per cent of the total turnover of large players in

2009-10 and registered a CAGR of 19.1 per cent during 2005-06 to 2009-10.

On a y-o-y basis, however, growth in exports moderated to 6.5 per cent in 2009-10,

lower than the 23.9 per cent rise in 2008-09.

The slowdown was due to the poor performance of Divi's Laboratories in the

regulated markets. Similarly, exports of small players increased by 29 per cent y-o-y in

2009-10 mainly due to robust export numbers reported by players such as Granules

India and Anuh Pharma.


108/242

Exports by small bulk drugs players


109/242

Exports by small bulk drugs players

The share of exports in the total revenues of large players grew from 58.6 per cent in

2005-06 to 70.4 per cent in 2008- 09, but subsequently fell to 66.6 per cent in 2009-10, as

several global pharma companies reduced their inventories, which affected bulk drug

exports.

The proportion of exports to total sales for small players stood at 62.7 per cent in

2009-10, marginally down from 63.8 per cent in 2008-09.


110/242

Bulk drug exports (as per cent of sales)


111/242

Exposure to regulated markets helps large players to earn higher returns

Average cost structure (2005-06 to 2009-10)


112/242

Exposure to regulated markets helps large players to earn higher returns

Average cost structure (2005-06 to 2009-10)

The average raw material cost (as a proportion of sales) is lower for large bulk drug

players due to higher realisation earned by them.

Their penetration in the regulated markets, where realisations are typically higher as

compared with the semi-regulated markets, is significantly higher.

Other costs such as labour, selling & distribution, etc do not vary significantly among

players in the bulk drugs segment.


113/242

Average OPM and RoCE (2005-06 to 2009-10)


114/242

Average OPM and RoCE (2005-06 to 2009-10)

A surge in exports to regulated markets and the increasing proportion of exports to

innovators have resulted in better realisations for large players.

As a result, their average operating margins were substantially higher than that of

small players.

However, the average RoCE of large players was comparable to that of smaller

players as larger players have been aggressively investing in manufacturing facilities

that meet the higher regulatory requirements of the regulated markets.

Gearing levels improved for large players; remained stable for small players


115/242



116/242


The gearing levels of small bulk drug players remained rangebound between 0.5 and

0.6 times during 2005-06 to 2009-10, while that of large players hovered at 1.1 - 1.3

times in the last 3 years.

Gearing of large players is higher as a portion of their capital expenditure has been

funded by debt.


117/242

117

Future of Indian pharma


118/242

Indian pharma firms need to diversify, gradually evolve into innovators

Over the last 40 years, since its inception, the Indian pharmaceutical industry hasthrived on the generic model by leveraging on its process chemistry skills and low-

cost manufacturing advantage.

This has enabled players to tap the huge generic opportunity abroad.

However, the R&D productivity of large global pharmaceutical players (innovators)

has considerably slowed down over the past few years which is underscored by the

declining number of new molecules (New Molecular Entities - NMEs) being approved

by the US FDA each year.

Taking this trend forward, the lack of new drug launches between 2010 and 2015

onwards will mean that the generic opportunity set to open up in the next decade

(post 2020) is likely to be significantly lower. (assuming average age of 8-10 years of

patent exclusivity)


119/242

Indian pharma firms need to diversify, gradually evolve into innovators

These changes in the global pharmaceutical landscape could cause a slowdown in thegenerics segment and hence, the Indian pharma industry will be forced to look at

newer avenues for growth.

In the following section, we have provided our opinion on how the global forces of

change will shape the strategy of Indian players.


120/242

Growth in generic market to slow down over the next decade

Revenues of large global pharma companies (innovators) depend on the performance

of their novel, patented molecules.

Hence, the R&D productivity of such players is of critical importance and

accordingly, they invest heavily in R&D (about 20 per cent of revenues excluding

capitalised R&D expenditure).


121/242

Large global players suffering from low R&D productivity

Over the past few years, R&D activities by large global players have resulted in the

innovation of only a handful of new and significant molecules.

Meanwhile drug development costs have escalated. The cost for developing a new

molecular entity (NME) has more than doubled to $1.5 billion over the past 5 years.

During the same period, the number of NMEs approved by the US FDA continued tohover around 15-20 with an occasional rise to over 20 as seen in 2004 and 2008.


122/242

R&D spend vs NME approvals


123/242

R&D spend vs NME approvals

Low R&D productivity is further reflected by the decline in the number of NME

applications with the US FDA. 2010 recorded the lowest number of NME applications

in the past 15 years.


124/242

NME filings hit a 15-year low in 2010


125/242

Higher risks and lower returns: New drugs over the last two years fail to

deliver

In addition to low R&D productivity, innovators' returns from novel molecules have

substantially declined over the last few years.

None of the new drugs approved over the past 2-3 years have been blockbusters

(with sales over $1 billion) or even sales greater than $750 million.

This decline in sales is primarily due to the availability of substitutes (generic as well

as patented) for existing diseases. Rising emphasis on usage of generics has also

steadily reduced the prescription of patented molecules.


126/242

Blockbuster molecules fading away


127/242

Number of Para IV filings has increased substantially


128/242

Number of Para IV filings has increased substantially

Moreover, uncertainty on returns from on-patent molecules has risen substantiallydue to Para-IV filings by global generic companies.

When a generic company certifies that its generic product does not infringe on a

patent listed in the US FDA Orange Book, it applies for an ANDA approval with a

Paragraph IV (Para IV) filing).As competition in the generic space has intensified, more and more generic

manufacturers are looking for Para-IV opportunities to boost sales and profits.

Such a trend has induced caution among innovators in launching new drugs.


129/242

Fewer drugs going off-patent to result in an inevitable slowdown in generic

space

Over the past few years, off-patent drugs have been the key growth drivers in the

generic market.

Between 2005 and 2010, the generic market is estimated to have expanded by a

CAGR of 13 per cent.With $130 billion of new drugs going off-patent during this period, new generic sales

grew by 15 per cent while sales of existing generics grew by 4 per cent.

Research believes that in the next decade (post 2020), growth in the generic market is

likely to slow down to 3-5 per cent.


130/242

Fewer drugs going off-patent to result in an inevitable slowdown in generic

space

Fewer drugs going off-patent coupled with lower prices of the patented drugs (as a

result of the availability of substitutes) will key reasons that will result in a

significantly lower incremental generic opportunity.

Patented drugs launched over the 2 years have not been able to garner sales in excessof $1 billion as seen in the case of Lipitor, Plavix, Nexium, Diovan, which were

launched between 2000 and 2005.


131/242

What to expect: The best and worst

Based on the current trends in the global R&D, three scenarios could

emerge beyond 2010:


132/242



emerge beyond 2010:


133/242



emerge beyond 2010:


134/242



emerge beyond 2010:

Over the last two years, sales of new drugs have averaged at about $200 million per

drug.

Keeping the average sales per new drug constant, we estimate that size of drugs

going off-patent between 2020 and 2025 could range about $60 billion(as against $150

billion between 2010 and 2015).

Further, due to erosion in prices of off-patent drugs, the effective increase in generic

market is slated to be about $12 billion.


135/242



emerge beyond 2010:

This is significantly lower than the impending generic opportunity of about $50

billion during 2010 to 2015. (Refer to the formulations exports section for a detailed

analysis).

Further, competition in the global generic market is steadily intensifying. India's cost

arbitrage also has been steadily eroded, as most global generic pharma players have

outsourced manufacturing of bulk drugs/API to rival low-cost destinations such as

China.


136/242

Indian players have to increasingly diversify into other revenue streams


137/242

Indian players have to increasingly diversify into other revenue streams

The three major segments - domestic formulations, formulation exports and bulkdrug exports - have traditionally been the backbone of the Indian pharmaceutical

industry. With the generics market set to become extremely competitive in the long

term (next 10 years), Indian players will look to make the most of the current generic

opportunity and achieve a substantial scale of operations.However, going forward, with more MNCs foraying into India and a shrinking

generic market, Indian pharma players will have to increase their reach in segments

such as contract research, biopharmaceuticals and new drug development (NDD).

Global challenges will force Indian players to offer a whole gamut of products andservices to ensure stable revenues and margins.


138/242

Medium-term strategy: Increasing the scale of their generic operations

In the medium term (next 5-10 years), Indian players will look to expand theirpresence in the global generics market so as to maintain stable revenues in case of a

slowdown in the segment.

In addition to regulated markets, Indian players will also look to expand further in

the semi-regulated markets of Latin America and CIS, in order to stave offcompetition from large global players.

With a strong generic opportunity opening up over the next 5 years and the need to

expand market shares, Indian players will look at options such as contract

manufacturing deals, joint ventures (JVs) and overseas acquisitions.These strategies will be mainly geared towards expanding product portfolios, brand

building and having a well-established distribution network.


139/242


Such strategies are already gathering pace as witnessed in the contract manufacturingdeal signed between Pfizer and Aurobindo Pharma for sale of generic drugs in the

emerging markets.

Recently, Merck and Sun Pharma have signed a distribution agreement for the sale of

Sun Pharma's generics in the emerging markets, while Cadila Healthcare and BayerAG have set-up a joint venture for distribution of their drugs in India and abroad.

Additionally, overseas acquisitions will also be hand-picked to target specific

geographies as in the case of Taro's acquisition by Sun Pharma.

(Over 90 per cent of Taro's revenues are derived from the US market and it has a

strong presence in therapeutic segments in which Sun Pharma is not dominant).


140/242


Although the acquisition strategy has backfired in the past, the importance of havinga strong presence in the generic market will make the case for more foreign

acquisitions by the larger players.

While increasingly gaining a presence in key geographies (in both regulated and

semi-regulated markets) will help Indian players protect their territory, they will haveto make concerted efforts in research-driven areas to make sizeable profits in the long

term.


141/242

Innovation could shape the future of Indian players in the long-term

Until 2005, the Indian drug regulatory system recognised only process patents.

As a result, Indian pharma players began manufacturing generic copies based on the

same active ingredient using different processes.

This increased their expertise and process chemistry skills in reverse engineering

drugs.

As more and more opportunities emerged in the generic space, Indian players started

largely focusing on R&D for generic drugs (Bio-availability (BA)/Bio-equivalence (BE)

studies) as against developing new drugs.

Accordingly, India's R&D capabilities lie in reverse engineering drugs and in process

chemistry.

Additionally, in the past, Indian players also lacked the financial muscle to launch a

novel drug.


142/242


However, going ahead, we believe that a paradigm shift needs to take place in theIndian pharmaceutical industry.

Large Indian players have to enhance their focus on new drug development.

Research believes this to be an area with tremendous potential for Indian players in

the long run.The ability to discover novel drug molecules will enable Indian players to be present

across the value chain (bulk drugs to generic formulations to novel drugs).


143/242


However, going ahead, we believe that a paradigm shift needs to take place in theIndian pharmaceutical industry.

Large Indian players have to enhance their focus on new drug development.

Research believes this to be an area with tremendous potential for Indian players in

the long run.

The ability to discover novel drug molecules will enable Indian players to be present

across the value chain (bulk drugs to generic formulations to novel drugs).

Additionally, Indian drugmakers can also provide contract research services to global

innovators.

The size of the Indian contract research industry is about $275 million and it is set to

grow to by about 15-17 per over the next 5 years.

We believe that India has to enhance its presence in contract research that will also

build players' all-round expertise in new drug development.


144/242

Biopharmaceuticals holds immense potential for Indian pharma players

The Indian biopharmaceutical industry is in its emerging stages and is sized atapproximately $1 billion as of 2009-10.

Indian biopharma players largely export recombinant vaccines to semi-regulated

markets and launch biosimilars in the domestic market.

Players are yet to make meaningful inroads into regulated markets in the Europe andResearch believes that the biopharmaceutical segment has ample potential to make

up for the lack of opportunity in the formulation exports.

However, a lot would depend on the regulations on biosimilars in regulated markets

and India's capabilities in supplying a range of such products.


145/242

145

Manufacturing opportunities


146/242

Manufacturing opportunities for Indian pharmaceutical players


147/242


Manufacturing opportunities for Indian pharmaceutical players can broadly be

classified into formulations and bulk drugs.

The formulations segment can be further categorised into domestic and export.

Traditionally, the domestic formulations segment has been accounting for 60 per cent

of the total formulations production.

Although this share will continue to remain stable till 2014-15, the share of

formulations exports is set to rise gradually during the same period.

In the case of bulk drugs, we believe that as only around 20 per cent of the total bulk

drugs manufactured are utilised for domestic consumption, bulk drugs exports

represent a significant manufacturing opportunity for Indian players.

Hence, the Indian pharmaceutical industry is dominated by exports, which is

estimated to have contributed more than 60 er cent to the industr 's sales in 2009-10.


148/242


Formulations are exported either through contracts (supply) or directly sold (retail) in

the market.

Currently, contract manufacturing for formulations forms a small portion of total

formulation exports since most Indian players want to have a direct presence in the

concerned target markets.

On the other hand, bulk drugs are either supplied under a contract, in case of

patented drugs, or are outrightly sold in case of off-patent drugs.

Going forward, India is poised to extend its presence into the on-patent regulated

markets, while maintaining a strong foothold in off-patent drugs as well.


149/242

Indian pharmaceutical industry sales by key segments


150/242


Overall demand for pharmaceuticals is expected to post a strong CAGR of 15-17 per

cent to $43-46 billion by 2014-15 from an estimated $21.5 billion in 2009-10.

Between 2004-05 and 2009-10, formulation exports grew strongly by over 20 per cent.

During this period, exports to regulated markets also registered a robust CAGR of

around 30 per cent owing to the increasing penetration of generics in key markets

such as US and Europe.

Over the next few years, we expect formulation exports to continue to grow by about

15-17 per cent, driven by the growing generic opportunity in regulated markets and a

favourable growth in semi-regulated markets.

With competition intensifying, Indian pharma players are poised to tap the generics

space by shifting focus to mid- and smallsized molecules, in order to sustain

rofitabilit .


151/242


Domestic players' continuing efforts to bag a substantial share of Abbreviated New

Drug Application (ANDA) approvals are also indicative of India's aggressiveness in

pursuing regulated markets.

Meanwhile, bulk drug exports are expected grow faster (by 18-20 per cent) than

formulations exports.

This is because the growing generics market and rising cost pressures faced by

innovators provide a significant opportunity to Indian bulk drug players.

Additionally, India's key strengths such as low-cost manufacturing, high process

chemistry skills, manufacturing facilities and increasing number of drug master filings

(DMFs) are expected to lead the growth in bulk drug exports.


152/242


The domestic formulations market also witnessed strong growth of 14-15 per cent

during 2004-05 to 2009-10 driven by drug classes catering to lifestyle diseases.

We expect this trend to continue and the domestic market to expand to over $16

billion in 2014-15 from $8.7 billion in 2009-10 - at a CAGR of about 14 per cent.

A detailed analysis and assessment of the growth opportunities in each of the above

mentioned segments along with their regional distribution are discussed in the

subsequent sections.


153/242

153

Formulation exports


154/242

Introduction

With a size of $5.2 billion in 2009-10, formulation exports have been key growthdrivers for the pharmaceutical industry.

Indian players export to both regulated markets and semi-regulated markets. With

the opening up of generic opportunity in the regulated market in the last decade, the

share of regulated markets in India's total formulation exports have risen to about 43per cent in 2009-10 from 35 per cent in 2004-05.

Despite the gradual shift in focus, semi-regulated markets remain important target

markets, especially for mid-sized and smaller Indian pharma players.

For large players, presence in semi-regulated markets enables diversification from

the highly competitive regulated market.


155/242

Formulation exports have more than doubled in the past 5 years

Formulation exports have resgistered a CAGR of 20 per cent to $5.2 billion in 2009-10from $2 billion in 2004-05 driven by a robust 24.4 per cent growth in exports to

regulated markets.

A 17.2 per cent growth in exports to the semi-regulated markets also aided the

growth in formulations exports.


156/242

Formulation exports by India (2005-06 to 2009-10)


157/242

Formulation exports by India (2005-06 to 2009-10)

However, growth in formulation exports would have been higher if not for the slumpwitnessed in 2009-10.

Exports grew marginally by 2.2 per cent y-o-y in 2009-10, significantly lower as

compared to the previous years.

With the exception the US, growth in exports to other regions remained muted.

Exports to regulated market grew by around 10 per cent y-o-y in 2009-10, while

exports to semi-regulated markets fell by around 3 per cent y-o-y.


158/242

Among regulated markets, exports to US surge, Europe disappoints

The 10 per cent y-o-y growth in formulation exports to regulated market was drivenby a 31.4 per cent y-o-y growth in exports to the US.

The strong growth in exports to the US was partially due to a low base (exports had

remained flattish y-o-y in 2008-09).

However, exports to Europe fell by more than 12 per cent y-o-y.

The increasing pricing pressure and withdrawal of Indian players from highly

competitive tenders in these markets were key factors that aided the downfall in

exports.


159/242

Exports to semi-regulated markets declined

Although the 5-year growth in exports to semi-regulated markets has been strong,they declined by about 3 per cent in 2009-10 due to a series of drug seizures at

European ports in the middle of 2009.

A majority of these drugs were generics meant for sale in the Latin American and CIS

markets.The drugs were seized on the grounds that these products were still on-patent in

some countries in the European Union and had thus violated intellectual property

rights.

Subsequently, India raised this issue with the World Trade Organization (WTO) and

since then, the European Union has agreed to amend its laws to permit Indian

generics sales to semi-regulated markets.


160/242

Exports to semi-regulated markets declined

While the exact impact of these seizures is difficult to quantify, we believe it had asignificant bearing on the exports to the semi-regulated markets in 2009-10.

In addition, during the year, the US dollar weakened against local currencies in many

semi-regulated markets.

This resulted in lower sales realisations in dollar terms for Indian players.


161/242

Despite flattish y-o-y growth, long-term export prospects intact

Research expects formulation exports to grow strongly at a 15-16 per cent CAGRbetween 2009-10 and 2014- 15.

This growth will be mainly fuelled by exports to regulated markets, while semi-

regulated markets will continue to remain key export destinations for Indian players.


162/242

Outlook on India's formulation exports

O tl k I di ' f l ti t


163/242

Outlook on India's formulation exports

Drugs worth over $150 billion will go off-patent between 2010 and 2014, of which $40

billion worth of drugs will open up to competition in 2011 alone.

Accordingly, we expect the global generics market to grow moderately by 10-11 per

cent.

We expect formulation exports to regulated markets to grow by 17-18 per cent in the

next 5 years as Indian players are well placed to increase their presence in the generics

segment, especially in the US market as evidenced from their rising share in

Abbreviated.

New Drug Application (ANDA) approvals and tentative approvals. Additionally,

mi

Documents

Analysis of Health Care_Pharma Industry.pdf