Link: https://www.equitymaster.

com/research-it/sector-info/pharma/Pharmaceuticals-
Sector-Analysis-Report.asp

The Indian Pharmaceutical market (IPM) accounts for approx. 1.4% of the global pharmaceutical
industry in value terms and 10% in the volume terms. The IPM is valued at Rs 860 bn for the year
ending March 2015. The growth in 2015 stood at 12.9%. Owing to robust historical growth and future
prospects, many MNC companies have active presence in the Indian pharma space.

1. The Indian Pharmaceutical market (IPM) accounts for approx. 1.4% of the global
pharmaceutical industry in value terms and 10% in the volume terms. The IPM is valued at Rs
860 bn for the year ending March 2015. The growth in 2015 stood at 12.9%. Owing to robust
historical growth and future prospects, many MNC companies have active presence in the
Indian pharma space.

2. The IPM is highly fragmented with about 24,000 players (330 in the organised sector). The top
ten companies including domestic and MNC companies make up for more than a third of the
market. The market is dominated majorly by branded generics, which constitutes nearly 70%
to 80% of market.

3. Besides the domestic market, Indian pharma companies also have a large chunk of their
revenues coming from exports. Major companies are focusing on the generics market in the
US, Europe and semi-regulated markets, others are focusing on custom manufacturing for
innovator companies. Biopharmaceuticals is also increasingly becoming an area of interest
given the complexity in manufacture and limited competition.

4. The past few years have been glorious ones for the Indian companies, as major blockbusters
lost their patent protection, paving way for generics. However, every passing year is leaving
lower patented drug opportunities for the Indian companies for the launch of generics. Thus,
Indian pharma companies have increased their R&D expenses. The companies are spending
more to establish niche product portfolios for the future.
5. The year gone by was one where M&A activity continued to attract interest of companies
globally. This included many Indian names too. Indian companies such as Lupin, Cipla, Dr
Reddys and others also showed keen interest. Lupin announced a mega deal worth US$ 800
m for acquiring Gavis. On the other hand, Cipla and Dr Reddys too made acquisitions in the
US and India respectively.

Key Points

Supply Higher for traditional therapeutic segments, this is typical of a developing

 market. Relatively lower for lifestyle segment.

Demand Very high for certain therapeutic segments. Will change as life expectancy,
literacy increases.

Barriers to entry Licensing, distribution network, patents, type of drug portfolios.

Bargaining power Distributors are increasingly pushing branded products in a bid to earn higher
of suppliers margins.

Bargaining power High, a fragmented industry has ensured that there is widespread competition
of buyers in almost all product segments. Currently, the domestic market is also protected
by the DPCO.

Competition High and fragmented owing to many small players in the industry.
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Financial Year '15

FY15/CY14 was quite a challenging one, particularly on the export front. On the domestic front, the
year was a mixed bag for companies

Post the pricing policy announced by National Pharmaceutical Pricing Authority (NPPA) in 2013-14,
many MNC pharma companies got impacted. This had resulted in poor performance being reported
by major MNC companies. Their performance was even below the domestic players. The trend
continued for FY15 too. Only a couple of companies exhibited better growth. The margins of these
MNC players remained subdued due to increasing expenses and slower topline growth.

In the US, generic companies witnessed mixed growth. While some of the companies benefited
from low competition launches, others got impacted by delay in approvals. Though there were not
many blockbuster launches during the year, there were just a handful companies that displayed
robust performance. On the other hand, Indian companies having presence in emerging markets
were severely battered. The currencies of major countries witnessed sharp depreciation, leading to
poor realisations. Further, slowdown in some countries impacted their growth. Over and above, the
companies also witnessed pressures owing to slower approval rate. This was seen in regions of
Latin America.

Currency depreciation had both positive and negative impact on the Indian pharma companies.
Depreciating rupee helped some companies garner better margins. On the other hand, those with
forex loans on their books witnessed higher payments.

The industry continued to face bigger challenges on the regulatory front. The companies faced
issues from the USFDA, as they lacked good manufacturing practices (GMP). Because of this,
there were instances of import alerts being issued, drug recalls, warning letters and so on. The
regulators have become more stringent now and have also been conducting surprise checks.
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Prospects
The IPM size is expected to grow at 9-12% CAGR between 2013-18. The growth in Indian domestic
market will be boosted by increasing consumer spending, rapid urbanization, increasing healthcare
insurance, drugs and so on. On the global front, the IPM is ranked 13th in terms of value. Owing to
robust growth, its ranking is expected to improve to 11th position by 2018.

The life style segments such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers
will continue to be lucrative and fast growing owing to increased urbanisation and change in lifestyle
patterns. Going forward, better growth in domestic sales will depend on the ability of companies to
align their product portfolio towards these chronic therapies as these diseases are on the rise.

In various global markets, the government has been taking several cost effective measures in order
to bring down healthcare expenses. Thus, governments are focusing on speedy introduction of
generic drugs into the market. This too will benefit Indian pharma companies. However, despite
promising outlook, intense competition and consequent price erosion would continue to remain a
cause for concern. Over and above this, following GMP will be an important criterion for companies
in order to grow in the global markets.

For the US market, Indian companies are developing niche portfolios in various segments. High
margin injectables, dermatology, respiratory, biosimilars, complex generics etc. have become an
area of interest. Most of the Indian pharma companies have been working on these niche drugs to
optimize growth and margins. Thus, post patent cliff, the companies which have developed their
product basket in the niche category will be ahead in the curve. Moreover, generic penetration in
the US is expected increase to 86-87% over the next couple of years from 83% currently.