Pharmaceuticals and Healthcare - 2017 PDF

UNNATI INVESTMENT MANAGEMENT AND RESEARCH GROUP
UNNATI
SECTOR
REPORT
PHARMACEUTICAL AND HEALTHCARE
2017-18
SANCHIT AGARWAL SSA| ADITYA VINEET JSA | VISHAL K TIBADEWAL JSA

Pharmaceuticals and Healthcare
Table of Contents
1.1. Pharma 101 ........................................................................................................................................... 6
1.1.1. Active Pharmaceutical Ingredient (API) or Bulk Drug ............................................................... 6
1.1.2. Formulations.................................................................................................................................. 7
1.1.3. Patented Drugs .............................................................................................................................. 7
1.1.4. Generic Drugs ................................................................................................................................ 7
1.1.5. Acute Ailments............................................................................................................................... 7
1.1.6. Chronic Ailments ........................................................................................................................... 8
1.1.7. Audit ............................................................................................................................................... 8
1.1.8. Pharmaceutical Value Chain ......................................................................................................... 8
1.2 Pharmaceutical Industry: A brief overview ...................................................................................... 10
1.3. Sector Overview – Pharmaceuticals.................................................................................................. 11
1.3.1. Domestic Markets ........................................................................................................................ 12
1.3.2 Breakup of Domestic Industry .................................................................................................... 13
1.3.3 International Markets .................................................................................................................. 14
1.3.4 Challenges in International Market ............................................................................................ 16
1.3.5 Patent Cliff..................................................................................................................................... 16
1.4. Industry Characteristics..................................................................................................................... 18
1.5. Major Market Segments of the Industry ........................................................................................... 20
1.5.1. Based on Products/Services ....................................................................................................... 20
1.5.1.1. Active Pharmaceutical Ingredients (API) or Bulk Drugs ......................................................... 20
1.5.1.2. Formulations ...................................................................................................................... 23
1.5.1.3. CRAMS (Contract Research and Manufacturing Services) ................................................. 25
1.5.1.4. Biopharma .............................................................................................................................. 28
1.5.2. Based on Patent Status ................................................................................................................ 30
1.5.2.1. Patented Drugs .................................................................................................................... 30
1.5.2.2. Generic Drugs...................................................................................................................... 31
1.5.3. Based on Mechanism the drug is prescribed and bought ...................................................... 31
1.5.3.1. Branded markets................................................................................................................. 31
1.5.3.2. Unbranded markets ............................................................................................................ 32
1.5.4. Based on legislated requirement to buy a drug ........................................................................ 32
Unnati Sector Report 2017-18 | 1

1.5.4.1. Prescription drugs ............................................................................................................... 32

1.5.4.2. Over-the-counter (OTC) drugs ............................................................................................ 32
1.5.5. Based on therapeutic areas ........................................................................................................ 33
1.5.5.1. Acute Segment .................................................................................................................... 33
1.5.5.2. Chronic Segment ................................................................................................................. 34
1.6. Drug Discovery and Development Process .................................................................................... 35
1.6.1. Discovery Process ....................................................................................................................... 35
1.6.1.1. Pre-discovery ....................................................................................................................... 35
1.6.1.2. Drug Discovery .................................................................................................................... 36
1.6.1.3. Pre-clinical Trials ................................................................................................................. 36
1.6.2. Drug Development Process ........................................................................................................ 36
1.6.2.1. Clinical Trials.......................................................................................................................... 37
1.6.3. Drug Manufacturing .................................................................................................................... 37
1.6.3.1. Phase 4 Trials ......................................................................................................................... 37
1.7. Approval Process ................................................................................................................................ 38
1.7.1. ANDA Process ............................................................................................................................. 38
1.7.1.1. Impact on Indian Players....................................................................................................... 39
1.7.2. Drug Master File ........................................................................................................................ 41
1.8. Evolution of Pharma Industry in India .......................................................................................... 42
1.9. Budget 2017..................................................................................................................................... 46
1.10. Recent Mergers and Acquisitions ................................................................................................ 47
1.11. Porter’s 5 Forces Analysis .............................................................................................................. 49
1.11.1. Competitive Rivalry................................................................................................................ 49
1.11.2. Barriers to Entry..................................................................................................................... 50
1.11.3. Threat of Substitutes .............................................................................................................. 50
1.11.4. Power of Buyers ..................................................................................................................... 50
1.11.5. Power of Suppliers ................................................................................................................. 50
1.12. Strategies Adopted ........................................................................................................................... 51
1.13. Balance Sheet analysis of Pharma Companies ............................................................................... 52
1.14. Key Players...................................................................................................................................... 53
1.14.1. SUN Pharmaceuticals ............................................................................................................. 53

1.14.2. Aurobindo Pharma ................................................................................................................. 54

1.14.3. Dr. Reddy’s Labs ..................................................................................................................... 55
1.15. Key Trends ........................................................................................................................................ 56
1.15.1. Distribution Channel Consolidation in US ............................................................................... 56
1.15.2. USFDA Warning Issues ............................................................................................................. 57
1.15.3. Spurt of Inorganic Growth ........................................................................................................ 58
1.15.4. Pharma Policy Draft .................................................................................................................. 58
1.15.5. Increasing R&D Expenditure .................................................................................................... 59
1.16. Miscellaneous Notes......................................................................................................................... 60
1.16.1. Brexit ......................................................................................................................................... 61
1.16.2. GST............................................................................................................................................. 61
2.1 Healthcare - Sector Overview............................................................................................................. 63
2.2 Classification of Hospitals ................................................................................................................... 64
2.2.1. Classification of hospitals based on services offered ............................................................... 64
2.2.1.1. Primary care/dispensaries/clinics ................................................................................... 64
2.2.1.2. Secondary care ................................................................................................................ 64
2.2.1.3. Tertiary care .................................................................................................................... 65
2.2.1.4. Quaternary care .............................................................................................................. 66
2.2.2. Classification of hospitals based on complexity of ailment...................................................... 66
2.2.3. Classification based on ownership............................................................................................. 67
2.2.4. Classification based on clientele ................................................................................................ 68
2.2.4.1. Local vs Non Local ........................................................................................................... 68
2.2.4.2. Free Patients ................................................................................................................... 68
2.2.4.3. Indian vs Foreign ............................................................................................................. 68
2.2.5. Classification based on Business Strategy ................................................................................. 69
2.2.6. Emerging Business Model in Healthcare ................................................................................... 69
2.2.6.1. Lease Contracts ............................................................................................................... 69
2.2.6.2. Tier – 2 and Tier – 3 expansion: ...................................................................................... 70
2.2.6.3. Operation & Maintenance Contract ............................................................................... 70
2.2.6.4. Medicities (one-stop shops):........................................................................................... 71
2.2.6.5. Franchise Arrangements ................................................................................................. 71

2.3. Industry Characteristics..................................................................................................................... 71

2.3.1. Revenue and Cost Structure ....................................................................................................... 72
2.3.1.1. Revenue Structure ................................................................................................................. 72
2.3.1.2. Cost structure of hospital....................................................................................................... 74
2.4. Operating Efficiency ........................................................................................................................... 76
2.5. Allied Industries ................................................................................................................................. 77
2.5.1. Curative Services ......................................................................................................................... 78
2.5.2. Manufacturing ............................................................................................................................. 78
2.5.3. Preventive care ............................................................................................................................ 79
2.5.4. Support services .......................................................................................................................... 79
2.5.5. Diagnostic Centres....................................................................................................................... 79
2.5.6. Pharmacy store chains ................................................................................................................ 80
2.6. Market Trends .................................................................................................................................... 81
2.6.1. Current Scenario.......................................................................................................................... 81
2.6.2. Lowering Operating Margins...................................................................................................... 81
2.6.3. Standalone Hospitals ill health ................................................................................................... 82
2.6.4. Rising ARPOB levels .................................................................................................................... 82
2.6.5. Painful aggressive expansion ..................................................................................................... 83
2.6.6. Rating distribution ...................................................................................................................... 85
2.7 Key challenges ....................................................................................................................................... 86
2.8. Growth drivers ..................................................................................................................................... 87
2.8.1. Need for greater health coverage ........................................................................................ 88
2.8.3. Rising income levels ........................................................................................................... 90
2.8.4. Increasing health awareness ................................................................................................ 90
2.8.5. Government policies ........................................................................................................... 91
2.8.6. Growing health insurance penetration ................................................................................ 93
2.8.7. Medical tourism in India ..................................................................................................... 94
2.8.8. Other Key Growth Areas………………………………………………………………………………………………...96
2.8.9. Investor Sentiments…….………………………………………………………………………………………………....97
2.8.10. M&A and Other PE Investments……….…………………………………………………………………………....97

2.9. Use of Emerging Technologies……..…………………………………………………………………………………….……...…98
2.10. Government Policies and Budget Impact…………………………………………………………………..……………..….99
2.11. Key Players …………………………....…………………………………………………………………………………..……………..105
3.1. Diagnostics in Heathcare ................................................................................................................... 108

3.1.1. Dr. Lal Path Labs………….………………………………………………………………………………………………...…..110
3.1.2. Thyrocare………..…………………..…………………………………………………………………………………………….111
4.1. Sectoral Comparison ......................................................................................................................... .112

4.1.1. BSE Healthcare v/s BSE SENSEX…………..……….………………………………………………………………....…112
4.1.2. NIFTY PHARMA v/s NIFTY 50..……...………………..……………………………………………………………..…..113

1.1 Pharma 101

Pharmaceutical Industry is one of the most unique industries. It has several characteristics which require
the understanding of a number of jargon. Following are some of commonly used terminology in the
Pharma industry followed by a short notes on them and their relevance:
1.1.1.Active Pharmaceutical Ingredient (API) or Bulk Drug
API or a Bulk Drug is the molecule that lends a medicine its claimed therapeutic effect or in
simple terms the part of any drug that produces its effects. Simply put, it is the ingredient that
gives a medicine its medicinal effect. Some common examples of an API is Paracetamol.
A medicine contains more than just the API. It also contains what is known as an Excipient – an
inactive ingredient that serves as a vehicle or medium for a drug. A drug cannot be functional
without an Excipient. Same API with different Excipients lead to different medicines with the
same therapeutic effect (as the API remains the same). The following diagram illustrates how it
works:
In the industry, multiple companies can sell their analgesics under Paracetamol by varying their
Excipients.

1.1.2. Formulations
As mentioned above, the pharma company is at a liberty to choose its excipients depending on
chemical feasibility and commercial interests. However, a drug can be consumed in a variety of
ways – tablets, capsules, syrups, drops, intravenous fluids etc. These final forms of consumption
are called as Formulations.
1.1.3. Patented Drugs
Developing a new drug is a highly capital-intensive process. It requires extensive Research and
Development for several years that can often yield unsuccessful results. Once a company discovers a
new drug, it acquires a patent for it for a certain period of time, usually around 20 years. During this
time, the company charges an exorbitant price for the drug and recovers its R&D expenses and makes
a profit out of it. Such new drugs are also called as Innovator drugs.
Some of the famous companies around the world known for such drugs are Pfizer, GSK and Merck.
1.1.4. Generic Drugs
When the patent of an innovator drug expires, it allows the competitor firms to copy and replicate
the drug themselves. Generic drugs are the low-cost version of those drugs whose patents have
expired, with the same qualitative and quantitative composition.
1.1.5. Acute Ailments
These ailments are characterized by sudden, severe exposure and rapid spread of the disease. The
patient shows intense symptoms for a brief duration (not longer than 30 days). Infectious diseases
such as common cold, fever, etc. are some examples. However, some acute ailments may turn
chronic if left unaddressed.
1.1.6. Chronic Ailments
Characterized by repeated exposures over a prolonged period. They can be only alleviated through
treatments, but not fully cured. Unlike acute ailments, they do not usually resolve on their own
accord. Examples include diabetes, asthma, blood pressure, cancer, etc.

1.1.7. Audit
Given the delicate nature of the products involved and the likelihood of dangerous side effects,
pharma industry is closely regulated by various bodies. Some of them are:
1. Central Drugs Standard Control Organization (CDSCO): It is the national regulatory

body for the pharmaceutical sector in India. It is responsible for the monitoring of different
drugs released, their side effects and the safety measures a company takes during the
manufacturing of a drug. It acts as a parallel body to other regulatory bodies such as
European Medicines Agency, Food and Drug Administration of USA etc.
2. US Food and Drug Administration: USFDA is the foremost administrative body in the
US pharmaceutical industry that is responsible for all its regulations. As US is a major
destination for Indian produced drugs, USFDA conducts regular audits of the pharma
company’s plants to ensure that they adhere to their safety norms. Their audits are closely
followed by investors and their results often cause a huge impact on the share price.
1.1.8. Pharmaceutical Value Chain
The value chain starts with the drug discovery process (elucidated in Section) which involves
identifying the right chemicals and intermediaries that will help in curing a ailment. These
chemicals are put together to form a molecule called as Active Pharmaceutical Ingredient (API),
also known as Bulk Drug. This molecule can be consumed in various forms, which are called as
Formulations. Once a drug is formulated, it is packaged, distributed and marketed.

Pharma Value Chain

1.2. Pharmaceutical Industry: A brief overview

The pharmaceutical industry broadly encompasses the discovery, development, manufacturing,
distribution, and sales of drugs meant to treat medical conditions. Based on the nature of drugs
being developed, the industry can be broadly divided into two segments:
1. Innovator pharmaceutical companies involved in developing patented drugs.

2. Generic pharmaceutical companies developing copies of off-patent drugs by means of
reverse engineering.
Development of patented drugs, most often based on a new chemical entity, is an expensive and
time-consuming procedure. An innovator pharmaceutical company must invest heavily to
maintain a strong drug development pipeline.
The product patent structure - prevalent in regulated markets and few semi-regulated markets – is
intended to encourage innovator companies to invest in product development by granting patent
protection to the drugs they develop. The patent protection bars competitors from launching the
same product till the patent protection period runs out. Typically, product patents are granted for
a period of 20 years. Global pharmaceutical Companies dominate this segment while the drug
development capabilities of Indian Companies are comparatively week.
Generic pharmaceutical companies are involved in developing copies of patented drugs by

alternative manufacturing process (reverse engineering). Unlike innovator companies, generic
drug manufacturers need not invest to develop a new chemical entity. Capital and time involved
in developing copy of an existing drug through reverse engineering is far lower compared to new
drug development. Consequently, drug developed through reverse engineering process tends to be
cheaper than innovator drugs. However generic companies are prevented from launching their low-
cost alternatives due to the patent protection prevalent on the innovator drug.
Indian pharmaceutical industry, which followed process patent structure for close to 30 years -till
the amendment of Patent Act in 2005- was favorable for generic drug manufacturers. The process
patent structure allowed them to launch their low-cost alternatives to innovator drugs, as long as
the manufacturing process was different. India with its technically skilled labor force was able to
reverse engineer patented drugs, and hence became one of the largest and most developed generic
drug markets in the world.
The strong generic drug manufacturing infrastructure developed during the process patent regime
helped India to become the leading exporter of generic drugs. Additionally, heavy investments in
the manufacturing infrastructure which includes the highest number of US FDA certified facilities
(outside the US), also ensured Indian drug manufacturers to meet the quality standards mandated
by regulated drug markets like the US and EU.

1.3. Sector Overview – Pharmaceuticals
Indian pharmaceutical sector is one of the largest manufacturers and exporters of generic drug
formulations in the world. Expertise developed by pharmaceutical companies in manufacturing
low-cost generic drugs during the process patent regime has helped the sector in achieving this
feat. India is the largest provider of generic drugs globally with the Indian generics accounting for
20 per cent of global exports in terms of volume. With 70 per cent of market share (in terms of
revenues), generic drugs form the largest segment of the Indian pharmaceutical sector.
The total market is sized at $44.62 billion in 2016-17, accounting for 2.4% of the global
pharmaceutical industry in value terms and 10% in volume terms. It has shown strong growth over
the past few years and it is expected to continue for the next 5 years. Mckinsey’s analysis shows
that the Indian pharmaceuticals market will grow at a CAGR of 13% to $ 55 billion by 2020 driven
by a steady increase in affordability and a steep jump in market access. At the projected scale, this
market will be comparable to all developed markets other than the US, Japan and China. In terms
of volumes, India will be at the top, a close second only to the US market.
Indian Pharmaceutical Industry Sales in USD(Bn)
6.7
16.46
8.46
13
Domestic Formulations Formulations Exports Domestic Bulk Drugs Bulk Drugs Exports

Blockbuster drugs going off patent and marketing exclusivity aided the growth (14% CAGR) for
the Indian exports formulation players during 2011-12 to 2015-16. However, regulatory woes,
wholesale consolidation in US market and rising competition substantially impacted Indian players
in 2016-17, leading to a flat growth during the fiscal. In the 2017-18, formulation exports is
expected to remain flat to negative on account of weak FTF pipeline for the players coupled with
price erosion in base business.
Most of the Indian companies export significantly. This necessitates the segmenting of the market
into domestic and international. However, before we analyse the sector’s critical value drivers, we
need to understand the biggest change that is occurring in the pharma industry’s landscape – Patent
Cliff – as it has been impacting both domestic and international markets significantly.
1.3.1. Domestic Markets
The domestic formulations industry is passing through a medium term phase of regulatory changes
and increased price controls, which will put some pressure on revenue growth. However, going
forward the growth is expected to normalize, as volume growth will drive the chronic segment.
However, the growth will partially affected, as Government will continue to keep hold on pricing.
The domestic pharmaceuticals industry, which expanded 12.5% on-year in 2015-16 to $14.9
billion, grew by 10.2% to $16.4 billion owing to changes in domestic regulations. During the year,
prices of nearly 75 drugs were capped by the NPPA (National Pharmaceutical Pricing Authority).
Demonetisation did not have a substantial impact on the industry, as pharmacists were allowed to
take old notes for an extended period.

Domestic Pharmaceutical Market sales in INR billion from FY11- FY18
1.3.2 Breakup of Domestic Industry
In 2016-17, growth in chronic care drugs has been around 14-15%, outpacing 11-12% growth in
acute care drugs. High growth is being led by anti-diabetic, respiratory and cardiac drugs.
Conversely, among acute care drugs, gastrointestinal and dermatological registered double-digit
growth, which will likely limit the impact of slow growth in anti-infective drugs. This has
supported the overall double-digit growth for the year.
Domestic Market
$16.46 Billion
10.2%
Acute Chronic
Anti-effective Gastro-Intestinal Vitamins Cardio-Vascular Anti-Diabetic Respiratory

$2.31 Billion $1.86 Billion $1.07 Billion $2.02 Billion $1.44 Billion $1.24 Billion
14% 11.3% 6.6% 12.1% 8.8% 7.6%

1.3.3 International Markets
Indian Pharmaceutical industry is one of the largest exporters in the world. India’s generic exports
account for nearly 20% of the global generic export market by volume. International markets,
through exports to nearly 200 countries, contribute nearly 48% of the revenue of Indian
pharmaceutical industry. The current formulations export market in 2016-17 stands at $13.67
billion with US being the largest customer having imports worth $5.04 billion from India. A strong
manufacturing infrastructure that meets the quality standards of US FDA has helped Indian drug
manufacturers in exporting to regulated pharmaceutical markets.
Pharmaceutical exports accounted for 4.6% of total exports from India in FY 2017, compared to
only 2% of total exports in FY 1997. Within a span of two decades (FY 1997-2017),
pharmaceutical exports as a percentage of total exports have increased by 2.6 percentage points,
pointing to the strong export growth experienced by the industry.
The biggest growth happened in exports to the US market, which is the largest pharmaceutical
market in the world. During the time period FY 2000-17, the annual export of pharmaceutical
products to the US market increased from close to INR 1 Bn to approximately INR 328 Bn. This
represented a CAGR of close to 41%, approximately 20 percentage points higher than overall
growth in pharmaceutical exports during the same period. With this, the US became India’s largest
pharma export markets. The share of drug & pharmaceuticals exports to the US increased from
close to 4% in FY 00 to 42% in FY 17.

Outlook on formulation exports
India is well placed to tap this opportunity as it contains 791US Food and Drug Administration
(USFDA) approved manufacturing plants, the most number of such plants in any country other than
US. This has led to Indian companies consistently garnering a larger share of regulatory filings of
drugs, which is likely to support increase in exports to these countries. India accounted for ~30% of
ANDA approvals and ~48% of DMF fillings during 2015*.
ANDA (Abbreviated New Drug Application) Approval provides for the review and ultimate
approval of a generic drug product. Once approved, a company may manufacture and market
the product.
DMF (Drug Master File) is a document prepared by a pharma company that provides the
regulatory authority with confidential, detailed information about facilities, processes used in
manufacturing. Processing and storing of one or more human drugs. It allows it to file for
Intellectual Property.

1.3.4 Challenges in International Market
Increased regulatory scrutiny in US markets along with heightened pricing pressure due to
consolidation of value chain, pricing controls in Europe and country-specific issues in semi-regulated
markets will keep growth rate subdued.
Increase in scrutiny by the US Food and Drug Administration (FDA) led to delay in new product
approvals and, hence, slow down Indian pharmaceutical industry's growth in these markets in 2016-
17. However, with remediation measures already taken by most players as per US FDA's notification,
several plants are expected to receive clearance in 2017. Therefore, the formulation growth is expected
to see steady revival in 2017-18. In the past five years, high demand for generics in the developed
markets of North America and Europe aided 11.7% annual growth of India's formulation and bulk drug
exports.
1.3.5 Patent Cliff
Many large pharmaceutical companies have seen great growth and booming revenues over the past
2 decades on the back of several successful patented drugs. In 2008, nearly half of the total revenue
came from the top 15 companies. As there were only a few big players and developing an Innovator
drug required huge capital, there were high barriers to entry which created a notion that the industry
was an oligopoly.
However, since the early 2010s, several of the major drugs have lost their patent rights. It has led
to several smaller companies’ mass produce generic variations of these drugs leading to a huge
decline in the revenues of the big companies that previously held the patent for the drug. This has
led to a burgeoning generic market and has attracted huge competition as it requires less capital to
set up a manufacturing plant that produces generics. It had created great opportunity for the Indian
market as most of the players in India produce generics.
The impact of a patent expiration was first seen in 2011 when Pfizer lost exclusivity of its
blockbuster drug Lipitor. Marketed under the name Atorvastatin, Lipitor is an anti-cholesterol drug
that generated a whopping $125 billion in sales between 1996 and 2002 to become the world’s
best-selling drug of all time. In 2005, it contributed to 40% of Pfizer’s profits. After the patent for
Lipitor expired in 2011, Pfizer instantly suffered from losing exclusivity; by the end of the first
fiscal quarter after Lipitor’s patent expiration, global sales of Lipitor fell by 42% and Pfizer’s total
profit declined by 19%. Allergan, AstraZeneca, AbbVie, GlaxoSmithKline and many other major
pharmaceutical companies will have patents for many drugs expiring within the next few years.
Morgan Stanley’s bottom-up analysis of the top 200 products in the United States identifies
potential opportunities for generic players over the next 5 years. These opportunities are based on

the new patent expiration of branded drugs, which gives generic players an opening to launch their
products. The report forecasts that roughly $80 billion in branded sales will lose patent protection
over the next 5 years, in addition to $23 billion in branded sales of complex products with limited
patent protection. This means a $20 billion opportunity in new generics. An expected incremental
$20 billion in generic sales could leverage the current $45 billion market to $65 billion, with
another estimated $6 to $7 billion in biosimilars opportunities over the next 7 years. This outlook
positions companies with the right product selection and strong R&D capabilities as being the
most successful.
The following picture gives a good idea of the impact a patent expiry creates on the respective
pharma companies:
Companies adopt various strategies in the wake of expiring patents and impending revenue losses.
Following are the 4 broad strategies:
1. Prevention Strategy: This strategy’s main motive is to temporarily prevent or distort

competition. The basic idea is to explore various ways in which the market exclusivity of the drug
can be extended, mostly by legal measures. Companies widely adopt two methods to implement
this strategy:
a) Adopt a strategy of filing multiple patents to form a network around the base patent, thus
forming a “patent cluster”. The primary patent can also be split into several patents.
b) Companies in EU can also apply for what is known as supplementary protection certificates
(SPCs) that provide additional protective mechanism to extend the patent right.
2 Innovation Strategy: This strategy’s main motive is to avoid competition through product or
business model innovation. It involves altering an existing drug and applying for its patent or
improvement in product manufacturing to achieve a higher level of purity and achieve cost
saving potential.

3. Extraction Strategy: The strategy looks to fully exploit the current market position without
making additional investments in the product innovation. Two ways of implementing this strategy:
a) To change the marketing mix by altering the drug’s Price and Promotion. Price cuts usually
lead to it directly competing with other generics.
b) Selling or licensing a patent to generic suppliers before the patent expiry.
4. Adaption Strategy: The strategy involves introducing branded generics by establishing itself
as an active player in the generic market. It can be offered either by
a) Developing a low-cost alternative in the form of wholly owned subsidiary focusing on
generic drugs, which operates separately outside the main organization
b) Offering of a generic through the innovator-company itself
1.4. Industry Characteristics
1. High Fragmentation: Over 100,000 drugs across various therapeutic categories, are produced
annually in India. The domestic formulations industry is highly fragmented in terms of both,
number of manufacturers and products. There are 300-400 organized players and about 15,000
unorganized players. However, organized players dominate the market, in terms of sales. In
2014-15, the top 10 formulations companies accounted for 44.9 per cent of total sales. Share of
the top seven MNCs has reached close to 19.3 per cent, as of March 2015

2. Export driven market: As mentioned in the previous section, exports account for nearly two
thirds of the revenue of the entire sector. This is because production costs are almost 50 percent
lower in India than in Western countries, while overall R&D costs are about one-eighth and
clinical trial expense are around one-tenth of Western Levels
3. Focus on R&D: Pharma is a sector that has significantly higher Research and
Development costs as compared to most of the other sectors. Companies always look to innovate
and invent new drugs. With several blockbuster drugs going off-patent, market has opened up
for generics. However, there has been an increasing focus towards R&D in the recent years with
most of the large companies actively looking to invent Innovator drugs.
4. Penetration of Insurance: World Bank data for 2011-15 suggests that India has one of the
least per capita annual healthcare costs in the world, at $75 as compared to $420 in China and
$9,403 in US. This is majorly due to the vast domestic population and lower share of
government expenditure on healthcare. Thus, nearly 85% of the medical expenses in India
are out of pocket. Such low costs have resulted in one of the least penetrated health insurance
markets in the world. Medical and Life Insurance is especially critical for poorer populace
as sickness often destroys the little wealth they hold.
5. Capital Intensity and Gestation Period: Unlike most of the industrial companies, setting
up new manufacturing plants is not a capital-intensive exercise in pharma. This allows companies
to meet increase in demand with relative ease. Setting up a US FDA compliant plant costs nearly
double the regular plant as well as a higher gestation period.

1.5. Major Market Segments of the Industry
There are several ways in which the pharma industry can be classified. The following section
attempts to discuss the broad categories and the subsequent subcategories:
1.5.1. Based on Products/Services
1.5.1.1. Active Pharmaceutical Ingredients (API) or Bulk Drugs
The US FDA defines API as ‘any substance or mixture of substances intended to be used in the
manufacture of a drug product and that, when used in the production of a drug, becomes an active
ingredient in the drug product. Such substances are intended to furnish pharmacological activity
or other direct effect in the diagnosis, cure, mitigation, treatment or prevention of disease or to
affect the structure and function of the body’. Put simply, an API/Bulk Drug is the chemical
molecule that lends the product the claimed therapeutic effect.
As is evident from this, there are ingredients other than the API in products sold as medicines.
These inactive ingredients may or may not change from product to product, while the bulk drug
would inevitably remain the same as it is the identity of the medicine. When the bulk drug is absent,
the product is no longer a medicine and when it is changed, it is a new medicine. In the case of
most of the existing bulk drugs, change of inactive ingredients doesn’t impact the curative quality
of the product, although there are exceptions.
The bulk drugs segment in India can be segregated into bulk drugs for exports and bulk drugs for
domestic consumption. Overall the bulk drugs production in India has grown at 6% CAGR (dollar
terms) for the last 5 years and the market is estimated to be worth $15.1 B. Export market has
grown at 10% CAGR (dollar terms) and is estimated to be worth $6.7B while the domestic
consumption grew by almost 10% and is at $8.5 B.

Despite slowdown for the formulation exports, bulk drug exports remained relatively strong in
2016-17 and grew by ~8% on-year in 2016-17. Focus on niche molecules and specialty helped the
sustain its growth during the year. The growth was also supported on account of slight recovery in
the crude oil prices during the year.
Going forward in 2017-18, the growth is expected to slightly slowdown on account of pricing
pressure on the players in formulation segment. The formulation players are likely to pass on the
impact of falling realisations on the entire value chain including the bulk drug players.
On the domestic front, we believe overall consumption is likely to grow at a moderate pace of 9-
11% in 2017-18, thereby supporting the growth for bulk drugs segment. However, the Government
is likely to continue to keep a hold on domestic priding through NLEM, thereby restricting any
further growth for the bulk drug players. However, over the long-term (2016-17 to 2021-22)
growth is expected to slowdown to 7% CAGR, as the domestic formulation players will pass on
the impact of pricing pressure to entire value chain. Also, the pricing pressure in domestic market
is on account of traditional product portfolio with relatively low innovation. Therefore, the players
face though competition from Chinese players in domestic market.
The growth in export of bulk drugs has largely been driven by the fact that Indian
companies have a cost advantage and therefore are a natural choice for foreign
pharmaceutical companies looking to cut costs. However, Indian companies have recently
moved to widen their product portfolios as is evident from the rising share of Drug Master
Files (DMF’s)* being filed. CRISIL Research projects bulk drug exports to record 7.5-8%
CAGR over the next five years to reach $9.5-10 billion by 2020-21. Further, this growth
is expected on the back of stable currency and oil prices. In the near term, demand for

bulk drugs in areas such as cardiovascular, anti-cancer and anti-viral would drive growth.
This is likely to translate into moderate double-digit growth between 2016-17 and 2017-
18.
1.5.1.1.1. Growth Drivers

Big pharma companies face severe pressure on their topline in the absence of innovation,
loss of patents and stiff competition within the industry. This pressure would translate to
more business for Indian pharmaceutical companies given the cost advantage and
superior process chemistry skills. Though Chinese firms have similar cost advantage
Indian companies are preferred due to concern over documentation (language) and
quality. China does however remain a favored destination for sourcing compounds and
intermediaries which lie lower in the value chain.
**A DMF is an indicator of the bulk drug manufacturing capabilities of players (in
terms of quality standards at their facilities for processing, packaging, storage
of drugs, etc.), which is used by global pharmaceutical companies that are
outsourcing production activities (innovators).
India also has the highest number of US FDA approved plants outside the USA about 546. Of the
total drug master files (DMFs) sent to the US FDA, India's share rose sharply to about 50.4% in
2016, from about 19% in 2001. India has consistently maintained its leadership in DMF filings.
This proves the capability of Indian players to meet the required export quality standards for
regulated markets.

1.5.1.2. Formulations
The Domestic formulations market can be divided into two markets – Chronic care
drugs and acute care drugs. Chronic drugs are used for treatment of chronic diseases -
disease lasting 3 months or more. Chronic diseases generally cannot be prevented by
vaccines or cured by medication, nor do they just disappear. Likewise, Acute care drugs
are used for treatment of acute diseases - diseases, that include a very rapid onset and/or
a short course. Acute diseases can occur throughout all bodily systems. Currently the
domestic formulations market is at Rs 1070B for FY17.
Domestic Pharmaceutical Trend

Of these two, Chronic care drugs is a faster growing segment, estimated to be growing at
14-15% in FY2017 while acute care segment growth is estimated at 11-12%. High growth
is expected to be led by anti-diabetic, respiratory and cardiac drugs. Conversely, among
acute care drugs, gastrointestinal and dermatological registered double-digit growth,
which will likely limit the impact of slow growth in anti-infective drugs. This will
support overall double-digit growth in the year. CRISIL research estimates similar
growth for both the segments in FY18 driven by volume growth and increases in drug
prices.
CRISIL estimates a growth CAGR of 10-11% for the next 5 years. Per capita
expenditure on health in India is around $75 which is one of the lowest among
developing nations and therefore there is a huge potential for growth. Also factors such
as rising incidence of life-related diseases, better healthcare, diagnostic and hospital
infrastructure, which has helped improve the disease detection rate would boost
healthcare expenditure, thereby aiding growth in the domestic market.
The share of chronic care has dropped from 41% in 2013-14 to 39% in 2016-17 due to the
price regulations imposed by the Government. Therefore, segments such as cardiac,
respiratory and anti-diabetic grew at a slower pace as compared to acute segment during the
last three years. However, going forward, the growth for the chronic segment is expected to
normalise and grow at 11-11.5% CAGR driven by the volume growth. Further growth
would be restricted, as the Government is expected to keep a hold on the pricing.

1.5.1.3. CRAMS (Contract Research and Manufacturing Services)

CRAMS include outsourcing of drug manufacturing and research and development
activities by big pharmaceutical companies to low cost providers with required quality
standards.
1.5.1.3.1. Custom Research

Contract Research is basically the outsourcing of R&D and related activities by
large pharmaceutical companies to smaller companies specializing in such activities to cut
down their R&D expenses.
Indian Contract Research Organizations (CRO) provide two kind of services:
Services for new drug development - When research is carried out to discover a new
molecular entity which can be used against diseases or pathogenic viruses, it falls under
the umbrella of new drug development
Services provided to assess the bioequivalence/bioavailability (BE/BA) of generic drugs
A slew of new regulations addressing ethical considerations and deaths have sent the
industry into a tailspin. Revenue has declined from $358 billion in 2010-11 to $140
billion in 2015-16. The new norms - proposed changes in Drugs and Cosmetics
Amendment Bill, 2013 advocate imprisonment for trial deviations - have engendered
caution at both ends: while trial sponsors are biding their time on outsourcing to India,
clinical researchers at home are cautiously filing for new trials.

The Central Drugs Standard Control Organization (CDSCO) granted only 117
approvals in 2014-15 compared with 152 in 2013-14. Even in calendar year 2015,
CDSCO is estimated to have approved just 108 clinical trials up to December 2015.
Considering this against 500 approvals granted in 2010, the sluggishness is clear.
Global pharmaceutical majors are flocking to rival destinations such as China and South
Korea. Even as India remains more cost-competitive, these destinations are becoming
attractive as regulatory uncertainties are clouding opportunities.
The story with bio-availability (BA)/ bio-equivalent (BE) studies and clinical trials
is no different. Revenue growth has stagnated as some newer molecules have been
launched ever since the effect of massive patent expiry in 2012 faded away. Competition
is also intensifying. This sorry state is a far cry from pre-2011 years, when a strong
cost advantage had made India attractive for clinical trials, especially phase 3 clinical
trials. Amid the rising research & development costs abroad, India also offered other
advantages such as a large patient pool, shorter approval timelines and faster market access.
• Bioequivalence (BE) studies are carried out with the aim of synthesizing biosimilar
drugs such that their impact is similar to the drug based on which they were
formulated. Two drugs are said to be bioequivalent if there is no significant clinical
difference between them
• Bioavailability (BA) is a measurement of the extent of a therapeutically active
medicine that reaches the systemic circulation and is therefore available at
the site of action. Bioavailability is one parameter in measuring the level of
bioequivalence between two or more drugs. If two medicines are to be
bioequivalent, there should be no significant difference in their bioavailability.

However, recently the GOI has moved to revive clinical research and tests of newly
invented drugs. In early august, the health ministry notified that an investigator handle as
many clinical trials as approved by the ethics committee—a reversal from an earlier order
that capped the number at three per investigator.
Also, over the past two years regulators have focussed on shortening the approval cycle to
5-6 months from 8-9 months earlier. Given this background a moderate recovery is
expected in 2017. Revenue growth is likely to post high recovery over the low base of 2016-
17 leading to an overall growth of nearly 10-12% to $101-106 million in 2019-20. This
growth is likely to be supported by some traction in global clinical trials and clinical
research meant to gain marketing approvals for drugs. Income from BA/BE studies is also
expected to grow to $79 million, at a 3-
5% CAGR.

1.5.1.3.2. Contract Manufacturing

Contract manufacturing segment is expected to grow due to increasing patent expiry and
good positioning of Indian manufacturers. The growth drivers and industry outlook would
be like that discussed for the API market.
List of Major CRAMS Players
1.5.1.4. Biopharma
Biopharmaceuticals refer to drugs developed through the application of biotechnology on
living organisms/biologics for the treatment of diseases. Traditional chemical
pharmaceuticals are used to treat a disease or indication, while biologics are used to
prevent the occurrence of a particular disease as well as for therapeutic purposes

Indian biopharmaceutical companies have increasingly started focusing on

therapeutic biosimilar in both domestic and semi-regulated export markets. Companies
are also moving towards complex recombinant vaccines apart from the traditional
preventive vaccines.
In 2016-17, the biopharmaceutical industry's revenue is estimated to have grown 10%

against 12% in 2015-16. Improvement in performance was powered by high growth
in sales of pentavalent vaccines and. Realising the opportunity offered by
biopharmaceuticals, companies have increased their focused on biosimilars (generic
versions of innovator biopharmaceuticals) and new pentavalent vaccines. Industry
revenue rose to almost Rs 135 billion over 2012-13 to 2016-17 at a 11% CAGR.

The Indian biopharmaceuticals manufacturers revenue is expected to rise to Rs 195-220

Billion by 2019-2020, at a CAGR of 13-15% as they launch price competitive
biotherapeutics and recombinant vaccines (pentavalent and hepatitis). Such a move
marks a steady shift from traditional vaccines. The significant cost advantage will
help Indian players score over multinationals' drugs in both the segments.
Growth is expected to be driven by bio-therapeutic drugs such as insulin and monoclonal

antibodies, besides products treating critical ailments such as:
• Diabetes
• Rheumatoid arthritis
• Cancer
• Anaemia
• Female fertility
• Hepatitis
On the other hand, demand for vaccines is likely to be driven by the launch of
complex recombinant and pentavalent vaccines.
Regulated markets offer a huge growth opportunity for Indian companies, with biosimilars
worth around $60 Billion going off patent in next 4 years. However, stringent regulatory
requirements have slowed approvals for biosimilars in recent years. The need to conduct
clinical trials to prove bio similarity to the original product and a nascent regulatory
framework have necessitated higher investments and longer gestation periods.
1.5.2. Based on Patent Status
1.5.2.1 Patented Drugs
These are the drugs which are protected by patents by the companies who have
discovered the drugs. Patents offer the discoverer exclusive rights to sell these drugs at
any desired price and make huge profits. Although the success rate in coming up with a
new drug is quite low in the pharmaceutical industry but once a company launches a new
drug it charges huge premium on it and recovers the R&D cost and makes substantial
profit. The companies which focus on discovering new drugs spend a substantial part,
roughly 15%, of their revenue on R&D and are known as Innovator. Some of the major
inventor pharmaceutical companies in the world are Pfizer, GSK and Merck.
There are multiple Indian companies that have drugs in the pipeline, with a greater
focus on R&D, but estimates suggest that it would be at least 7 to 10 years before these
begin to have a serious impact on the industry.

In India, patented products will also drive growth in select therapeutic areas. The
launch of patented products in India has been slow as innovators are taking their time,
to seek clarity on data protection, patenting of derivatives and pre- and post-grant
opposition. While not much has changed on this front, MNCs' approach towards the
domestic market is slowly changing.
1.5.2.2. Generic Drugs
Generics are the low cost version of the drugs whose patents have expired. They have the
same qualitative and quantitative composition in active substances as the reference product,
and whose bioequivalence with the reference product has been verified. Most of
the Indian drug manufacturers generate their revenue by selling generic drugs. In fact
roughly 71% of the Indian pharma market, in terms of revenue, comprises generic drugs.
Major Indian players include Sun Pharma, Cipla, Ranbaxy and Dr. Reddys.
The potential for the Generics market to grow globally is immense considering patent
expiries, cuts in healthcare spending and increasing importance of pharma emerging
economies. Generic Share Generics market will continue the momentum across the
world and particularly in the USA. The Shift from Branded to Generics will gather
further pace as total Global sales of generics has increased from $ 168 Billion in 2013
to $235 Billion by 2016, a large component of which will be outside USA. The Generics
market growth will be way ahead of the growth curve of the overall growth.
1.5.3. Based on Mechanism the drug is prescribed and bought
These are classified into 2 main categories on the basis of prescription.
1.5.3.1. Branded markets

In developing countries like India, Brazil, Russia, Mexico etc. the doctors prescribe
the medicines which are usually a brand name of a drug for the concerned disease. People
prefer to buy the same brand from the medical store and not some other brand or version
of the same API. The markets where such mechanism is followed are known as branded
markets.
In India, branded market is preferred due to reluctance of doctors to prescribe molecule

due to non – uniformity in quality across various brands.

1.5.3.2. Unbranded markets
Developed countries follow an entirely different mechanism. In developed countries like

USA, UK and some European countries the doctors prescribe the molecule or API (with
dosage) rather than a brand. Since these countries have greater health insurance
coverage it is the health insurance companies which decide which drugs, comprising
the prescribed APIs, should the patients consume.
There is a global shift towards use of low cost drugs as governments world-wide are
keen to bring down their healthcare costs. Most developed markets continue to move away
from branded generics to commoditized un-branded generics and lower margin tender
based business.
1.5.4. Based on legislated requirement to buy a drug
Broadly classified into 2 categories:
1.5.4.1. Prescription drugs

These are the drugs that require a medical prescription by an authorized medical
practitioner before it can be bought.
According to a report by Business Monitor International, sales of prescription drugs in

India are expected to increase to $ 14.1bn in 2016
1.5.4.2. Over-the-counter (OTC) drugs

‘OTC Drugs’ means drugs legally allowed to be sold ‘Over The Counter’ by pharmacists,
i.e. without the prescription of a Registered Medical Practitioner.
The OTC segment has been identified as one of the potential growth drivers for the
Indian Pharma industry, as the sale of OTC drugs in India has been increasing over the
years. The OTC market was worth about $3 billion in 2016 and PwC estimates that by
2020, it will grow to $11 billion - a CAGR of 18%, with the potential to reach $13 billion
– at an aggressive CAGR of 20%.
Although the phrase ‘OTC’ has no legal recognition in India, all the drugs not included in
the list of ‘prescription-only drugs’ are considered to be non- prescription drugs (or OTC
drugs). The inclusion of various other drugs and cosmetics under the OTC market may
provide a further boost to this sector.

Cipla, Ranbaxy and Zydus Cadila are examples of Indian companies that have done well
in the OTC segment. The attractiveness of the Indian OTC market has extended to
MNCs as well.
Novartis, Pfizer and Johnson & Johnson are examples of MNCs that have a strong presence
in the Indian OTC segment
The benefits for OTCs are:
• The government allows public advertising of these products, giving drug makers
greater freedom to use more creative methods while marketing their products.
Magic Remedies (Objectionable Advertisements) act prescribes a negative list
of diseases for which medication cannot be publicly advertised.
• Companies can sell their products outside of pharmacies, for example in post-
offices and department stores
• There is an increased reliance on self-medication as public awareness of
common ailments goes up
1.5.5. Based on therapeutic areas
Classified into acute and chronic segments based on therapeutic areas:
1.5.5.1. Acute Segment

Acute diseases are characterized by sudden, severe exposure (usually a single, large
exposure) and rapid onset of the disease. The patient shows intense symptoms for a
brief duration (not longer than 30 days). Infectious diseases such as common cold, fever,
etc are some examples of acute ailments and require therapies like anti- infective, pain-
killers and analgesics etc.
In the acute therapy segments, sales of gynecology and dermatology drugs will grow the
fastest over the next 5 years. Their strong performance, on par with chronic segments,
will be led by a healthy growth in sales volumes and prices. The anti-infectives segment
will continue to occupy a major share in the total domestic market and expect it to grow by
9-11% over the next 5 years.
Poor hygiene and sanitary conditions in India are likely to keep demand for anti-infective
steady, while rising rural penetration will supplement the growth in sales volumes.

1.5.5.2. Chronic Segment

It is characterized by prolonged or repeated exposures over many days, months or years.
Chronic diseases can only be alleviated through treatments, but not fully cured. Unlike
acute ailments, they do not usually resolve on their own accord e.g. heart disease,
stroke, cancer etc. They include therapies like cardiovascular treatment, anti-diabetics
etc. Among therapeutic drug categories, growth was driven by chronic drug segments
such as anti-diabetic, cardiovascular, neurology/ central nervous system (CNS).
One can infer from table above that most of the high growth categories belong to the
chronic segment. As per ISI emerging markets report, India has one of the largest
cases of non -communicable diseases like heart disease, hypertension, diabetes, cancer
and other such diseases. India is increasingly being termed the ‘diabetes capital of the
world’.
Major companies manufacturing chronic care drugs:

1.6. Drug Discovery and Development Process
Drug discovery is the process by which new medications are discovered. It is a very
complex process and takes around 10-15 years to develop one new medicine from
the time it is conceptualized to when it is available for treating patients. The cost
of researching and developing a new drug is extremely high - around$800 million to
$1 billion. For every 5,000-10,000 compounds that enter the research and development
(R&D) pipeline, ultimately only one receives approval.
1.6.1. Discovery Process
The entire process of discovering a new drug can be split into several phases. During
each of these process, scientists attempt to find enough evidence for the drug to be useful
as a medical treatment. It starts with Pre-Discovery, Drug Discovery process followed
by preclinical and clinical trials.
1.6.1.1. Pre-discovery
Before any potential new medicine can be discovered, scientists work to understand the
disease to be treated as well as possible, and to unravel the underlying cause of the
condition. They try to understand how the genes are altered, how those affected cells
change the specific tissue they are in and finally how the disease affects the entire patient.
This knowledge is the basis for treating the problem.

1.6.1.2. Drug Discovery
It begins with identifying the “target” – the naturally existing cellular or molecular
structure (for example protein or nucleic acid) of the pathogen (bacteria or virus) that
the potential drug is meant to act on. Then scientists screen different compounds for
their ability to counteract or inhibit the target. Discovering a perfect molecule to
counteract the target is unlikely and several compounds are found to have some degree of
activity. A lead compound series is then established with sufficient target potency and
selectivity. One or two compounds are proposed for drug development with the better
one called as “lead compound”.
This is followed by tests for Absorption, Distribution, Metabolism, Excretion and

Toxicological properties. Once a compound fulfils all these requirements it moves to the
next stage of product development i.e. pre-clinical trials. About 250 compounds move to
the stage of pre-clinical trials. Despite advances in technology and understanding of
biological systems, drug discovery is still a lengthy, "expensive, difficult, and inefficient
process" with low rate of new therapeutic discovery.
1.6.1.3. Pre-clinical Trials
Before clinical trials begin, the pharma company conducts extensive pre-clinical trials.
There are two kinds of experiments conducted:
1. In vitro – the experiment is conducted in a test tube or cell culture

2. Vivo – the experiment is conducted on an animal
The experiment looks to determine the drug’s preliminary efficacy, toxicity etc. These tests
help the pharma company decide if the drug candidate has scientific merit for further
development.
1.6.2. Drug Development Process
Once it has been reasonably established that the drug does not have negative effects on the animal, the
pharma company proceeds to conduct trials on humans. But for that, it needs an approval from the
FDA (Food and Drug Administration) that the compound is reasonably safe for initial use and it
justifies commercial development. For this, the researchers must file an Investigational New Drug
(IND) application with the FDA. The IND provides detailed clinical trial plan that outlines how, where
and by whom the studies will be performed and FDA reviews it to ensure that people will not be
exposed to any risks.

1.6.2.1. Clinical Trials
1.6.2.1.1. Phase 1 Trials
Phase 1 trials are the first stage of testing in human subjects. A small group of health humans, usually
around 20-100 are selected to assess the safety, tolerability and dynamics of the drug inside the body.
If the drug is found to satisfy the criteria, it is sent for next phase of trials.
1.6.2.1.2. Phase 2 Trials
Phase 2 trials begin once the dose or range of doses is determined for the drug. In Phase 2 trials
researchers evaluate the candidate drug’s effectiveness in about 100 to 300 patients with the disease or
condition under study, and examine the possible short-term side effects (adverse events) and risks
associated with the drug. Only 18% of drugs pass the Phase 2 trials to Phase 3.
1.6.2.1.3. Phase 3 Trials:
This phase is designed to assess the effectiveness of the new intervention and, thereby, its value in
clinical practice. In Phase 3 trials researchers study the drug candidate in a larger number (about 1,000-
5,000) of patients to generate statistically significant data about safety, efficacy and the overall benefit-
risk relationship of the drug.
Once all three phases of the clinical trials are complete, the company files a New Drug Application
(NDA) with the FDA requesting approval to market the drug. FDA experts review the NDA to
determine if medicine is safe and effective enough to be approved.
1.6.3. Drug Manufacturing
It is the process of industrial-scale synthesis of drugs by pharmaceutical companies. In many cases,

companies must build a new manufacturing facility or reconstruct an old one. Each facility must meet
strict FDA guidelines for Good Manufacturing Practices (GMP).
1.6.3.1. Phase 4 Trials

Even after the drug gets approved by the FDA and hits the market, it continues to be monitored by the
Research on a new medicine continues even after approval. Companies must continue to monitor the
drug.

1.7. Approval Process

1.7.1. ANDA Process
ANDA or Abbreviated New Drug Application is submitted to the FDA for approval. Once it’s
approved, an applicant may manufacture and market the generic drug product to provide a safe,
effective, low cost alternative. A generic drug product is one that is comparable to an innovator drug
product in dosage form, strength, route of administration, quality, performance characteristics and
intended use. Generic drug applications are termed "abbreviated" because they are generally not
required to include preclinical (animal) and clinical (human) data to establish safety and effectiveness.
New Drug Application or NDA vehicle through which drug sponsors formally
propose that the FDA approve a new pharmaceutical for sale and marketing in the
United States. The purpose of NDA is:
• Check whether the drug is safe and effective

• Methods used in the drug’s manufacturing and the controls used in ensuring its quality
Instead, generic applicants must scientifically demonstrate that their product is

bioequivalent (i.e., performs in the same manner as the innovator drug). The generic
version must deliver the same amount of active ingredients into a patient's bloodstream in
the same amount of time as the innovator drug.
There are 4 kinds of ANDA filings:
• Para I: A Para I filing for the launch of generic drug is made when there is no
patent information on the drug that is the subject of the ANDA that has been
submitted to FDA.
• Para II: A Para II filing is made when the drug is already off patent.
• Para III: A Para III filing is made when the applicant does not have any plans to
sell the generic drug until the original drug is off patent.
• Para IV: A Para IV filing for the launch of generic drug is made when the
applicant believes its product or the use of its product does not infringe on the
innovator's patents or where the applicant believes such patents are not valid or
enforceable.
In all the generic filings, FDA has 180 days to deem the generic application complete
and approve for review, or incomplete and reject the filing.

In case of Para I and Para II filing, once the application is deemed complete, it is
simply processed for approval. In case of Para III filing the application is processed
for approval, however its approval depends upon the patent expiry of the original drug.
The application may be approved effective on the date of expiration.
In case of Para IV filing generic drugs can be sold during the term of the innovator’s
patent protection. The patents are legally circumvented in Para IV filings.
As soon as a company files an ANDA with a Para IV the branded company is notified.
Within 45 days from the date of ANDA filing the branded company can file a patent
infringement action against the generic company.
If the generic company is ‘first to file’ (FTF) its ANDA with a Para IV certification
and successfully prevails the entire process the generic company is granted a period
of market exclusivity of 180 days. In this exclusivity period, no one other than ANDA
applicant can market the product for 180 days. Thus, in these 180 days the generic
company can make a huge amount of profit by pricing its generic version slightly lower
than the innovator’s drug.
However, the litigation cost in a single Para IV filing can cost the generic company roughly
$ 15-18 million and if the filing fails then the litigation money would be a sunk cost.
So, there are some risks involved with Para IV filing. But major Indian companies are
going for them and Para IV/FTFs forming are increasingly forming a major share of their
pipeline.
1.7.1.1. Impact on Indian Players
The Para IV filing is giving Indian pharma companies a great opportunity to boost their
revenues in a short duration. The 180-day exclusivity means that no other generics can
be sold in the market during this period and hence, the gains are much bigger than the
normal ANDA filings. Many of the major companies like Sun Pharma, Lupin, Glenmark
and Dr.Reddy’s have nearly half of their topline contribution from Para IV filings.
India, with the most number of USFDA compliant manufacturing plants outside US,
holds a great share of ANDA approvals. It is second, only behind US, in the number of
ANDA approvals and is far ahead of its other rivals. Thus it is better equipped to take
advantage of the huge generic opportunity in the US.


1.7.2. Drug Master File
Drug Master File (DMF) is a document containing complete information on an

Active Pharmaceutical Ingredient (API) or finished drug dosage form. The DMF contains
factual and complete information on a drug product's chemistry, manufacture, stability,
purity, impurity profile, packaging, and the cGMP status of any human drug product.
In the United States, DMFs are submitted to the Food and Drug Administration (FDA).
The Main Objective of the DMF is to support regulatory requirements and to prove the
quality, safety and efficacy of the medicinal product for obtaining an Investigational
New Drug Application (IND), a New Drug Application (NDA), an Abbreviated New
Drug Application (ANDA), another DMF, or an Export Application
A drug master file comprises two parts: the Applicant’s Part (USA: Open Part), which
contains all the information that the license-holder needs to assess the quality and
submit a license or amendment application; and the Restricted Part (USA: Closed Part),
which contains confidential information about the manufacturing procedure that only needs
to be disclosed to the authorities.

1.8. Evolution of Pharma Industry in India
The evolution on Indian pharmaceutical industry can be majorly divided into 2 parts. Pre
2005 and Post 2005. Pre 2005 India only recognised process patents while post 2005 India
has aligned itself to the global approach of product patent.
Pre Product Patent Regime (Before 2005)
• Post-Independence the need to lessen the dependence on foreign import of

medicines was realized by the political leadership
• Hindustan Antibiotics Limited (1954) and Indian Drugs and Pharmaceutical
Limited (1961) were set up
• Though they were able to establish themselves as major producers of Penicillin and
other antibiotics, MNC’s continue to dominate the market until 1970
• Indian Patent Act 1970 – Process based patents were granted, thereby enabling
multiple companies to manufacture drugs using the same bulk drug but different
processes, helped Indian companies master process chemistry skills which has
helped them stand in good stead till date
• Drug Price Control Order(DPCO) 1970 – Governed prices of all bulk drugs
and formulations to ensure widespread availability of medicines at reasonable costs
• Post the enactment of these two acts MNC’s shifted their focus towards Vitamins,
cough preparations, NSAID’s (pain killers) and built up a brand equity in these

• Foreign Exchange Regulation Act (FERA), 1974 was introduced, which

required all multinationals to dilute their equity holdings , these factors led to a
dramatic reduction in MNCs' share in total industry production
• While MNC’s left, SSI’s came up as the barriers to entry were low (Formulations
unit could be set up for Rs 120-150 mn) and there was a huge market for their
products
• Abundant availability of bulk drugs and government incentives helped them grow further
• In 1979, the number of drugs under DPCO was lowered to 163 from 347,
also government permitted a higher markup on the cost of production, from 40-
60% in 1970 to 75-100% in 1979, export demand also surged
• Private players such as Cipla, Ranbaxy, Torrent along with government
research institutes like Central Drug Research Institute (CDRI) and Council of
Scientific and Industrial Research(CSIR) contributed to research work by using
their process chemistry skills to develop new and innovative molecules
• Indian initiated steps to capitalise on their technical skills of reverse engineering
and their low-cost structure, to tap overseas markets. Consequently, the share of
exports in total bulk drug production soared to 19 per cent in 1986-87, from 5 per
cent in 1980-81
• During 1987-1994 domestic formulations market grew at a CAGR of 18% as
compared to a CAGR of 10% during 1980-1987. Rising per capita income was a
key growth driver
• In the same period bulk drugs grew at a CAGR of 16%, bulk drug exports at
40%. By 1994 bulk drug exports accounted for 50% of total bulk drugs production
• LPG reforms of 1991 relaxed FERA regulations and also reduced tariff barriers
thereby making Indian market an attractive proposition for foreign players
• DPCO 1995 lowered the number of drugs under price control to 74 to 146.
According to CRISIL Research's estimates, the market share of drugs covered by
price control norms, declined from 70 per cent in 1987-88 to 52 per cent in 1997,
and further, to 40 per cent in 2001

After 2005
• GOI passed an ordinance to introduce product patents in 2005, in line with

commitments made to WTO.This aided the integration of India into the global
pharmaceutical market and rendered duplicating of post-1995 patented drugs illegal
• 2005 also saw the implementation of VAT,shift from excise duty levy to an MRP-
based levy system and Schedule M implementation to recognise the product
patent regime. While implementation of the VAT and shift in the excise duty
regime had short-term implications, the implementation of Schedule M
(compliance with tenets of cGMP) and adherence to the product patent regime
will have medium and long-term implications, respectively
• While the pre 2005 era helped Indian companies develop a world class generics
industry, the product patent regime is aimed at discovery of new drugs
• However, innovation has been slow. Since 2005 India has only seen a handful of
patented product launches. Pfizer has launched 3, Roche 2 and GSK – 1
Patent Litigations
Two Intellectual property clauses have remained a point of contention between foreign
drug makers and their Indian counterparts
• Ever greening does not result in a patent

• Government reserves the authority to grant compulsory licenses for already
patented essential drugs
Pradhan Mantri Swasthya Suraksha Yojana (PMSSY)
The Pradhan Mantri Swasthya Suraksha Yojana (PMSSY) was announced in 2003
with objectives of correcting regional imbalances in the availability of affordable/
reliable tertiary healthcare services and also to augment facilities for quality medical
education in the country. PMSSY has two components:
1. Setting up of AIIMS like Institutions

2. Upgradation of Government Medical College Institutions

First Phase
The first phase in the PMSSY has two components - setting up of six institutions in the
line of AIIMS; and upgradation of 13 existing Government medical college
institutions.It has been decided to set up 6 AIIMS-like institutions, one each in the States
of Bihar (Patna), Chattisgarh (Raipur), Madhya Pradesh (Bhopal), Orissa (Bhubaneswar),
Rajasthan (Jodhpur) and Uttaranchal (Rishikesh) at an estimated cost of Rs 840 crores per
institution
In addition to this, 13 existing medical institutions spread over 10 States will also be
upgraded, with an outlay of Rs. 120 crores (Rs. 100 crores from Central Government
and Rs. 20 crores from State Government) for each institution
Second Phase
In the second phase of PMSSY, the Government has approved the setting up of two
more AIIMS-like institutions, one each in the States of West Bengal and Uttar
Pradesh and upgradation of six medical college institutions.
The estimated cost for each AIIMS-like institution is Rs. 823 crore. For upgradation of
medical college institutions, Central Government will contribute Rs. 125 crore each.
Third Phase
In the third phase of PMSSY, it is proposed to upgrade seven existing medical

college institutions. The project cost for upgradation of each medical college
institution has been estimated at Rs. 150 crores per institution, out of which Central
Government will contribute Rs. 125 crores and the remaining Rs. 25 crore will be borne by
the respective State Governments.
Ever greening is a process by which pharmaceutical companies introduce new drugs
that are just slightly modified formulations of older drugs in order to effectively
maintain patent protection
Fourth Phase
4 New AIIMS announced in Budget Speech 2014-2015.

Fifth Phase
6 new AIIMS have been announced during Budget Speech 2015-16 one each in
Assam, Himachal Pradesh, Jammu & Kashmir, Punjab, Tamil Nadu and Bihar.
Hon’ble PM has announced setting up of total two AIIMS in capital cities of J&K
a part of Prime Minister Development Package for J&K
1.9. Budget 2017
Major Announcements
• Reduction in weighted research and development (R&D) deduction to 150% from 2017-
18 is likely to increase the industry’s tax outgo in the long run but not immediately.
Companies will continue to spend on R&D as they focus on tapping lucrative export
opportunity in regulated markets such as the US
• The proposed setup of 3,000 aushadhi stores to sell generic medicines is likely to improve
access to affordable medicines for poor patients. However, supply issues, which impacted
earlier schemes, would need to be addressed
• New health insurance scheme will provide expense cover of up to 1 lakh for a patient and
up to 1.3 lakh for an elderly patient for hospitalised treatment cost. This is likely to increase
insurance penetration (3.3% in 2014), which will support demand for health services such
as hospital care and diagnostic services as well as consumables such as medicines.

1.10. Recent Mergers and Acquisitions
One of the most common features of the pharma industry in the recent past has been Mergers and
Acquisitions (M&A). Drying product pipelines, wide spread patent expiry and low returns on R&D
are some of the factors that have resulted in significant consolidation in the pharma market. Some
firms have sold off their entire business units to other firms as they were no longer able to innovate
in that domain; such deals are called as Portfolio Deals. In 2015, the pharma and biotech industry
was diagnosed with merger fever. Industry analysts revealed that the first half of 2015 soared past
the previous year’s grand total, with $221 billion of pharma M&As occurring just in the first two
quarters of 2015. Cheap interest rates fuelled the M&A buzz, with acquisitions providing pharma
firms with the growth to match investor expectations.
2016, however, was a much quieter year seeing the potentially record breaking Pfizer-Allergan
merger scrapped due to legislation changes and a lower amount of M&A deals take place across
the industry. The highlight of the year was the completion of Teva’s acquisition of the generic arm
of Allergan for $33 billion after an year worth of proceedings. Similarly, Bayer completed the
acquisition of Chemical-Drug giant Monsanto for $66 billion.
American pharma major Abbot acquired a medical device firm St. Jude Medical to strengthen its
non-drug portfolio for $30.5 billion making it 14th most valued acquisition in the history of
pharmaceutical deals.
In the biopharma side, Gilead Sciences acquired niche biopharma company Kite for $11.9 billion
that specializes in developing novel cancer immunotherapy products. The acquisition of Kite
establishes Gilead as a leader in cellular therapy and provides a foundation from which to drive
continued innovation for people with advanced cancers
Irish drug company Shire Pharma completed its $32 billion merger with Baxalta of US with the
goal of becoming the global market leader in rare diseases and other specialized disorders. Shire
projected that the combined company would generate approximately 65% of its total annual
revenues from rare disease products.
Janssen Holding, a Swiss subsidiary of Johnson & Johnson (JNJ), announced the completion of
the acquisition of Actelion, a biopharmaceutical company. The deal was worth ~$30 billion.

Things have been moving apace even in the Indian market. Sun Pharma’s blockbuster acquisition
of Ranbaxy for $4 billion was the biggest change in the industry. The motive behind the deal was
to achieve greater synergies and streamline operations. Apart from this, there have been a number
of acquisitions in the Indian market this decade. A few of the important and impactful ones have
been listed below:
US drug firm Baxter announced the acquiring of the injectables’ business of Indian firm Claris
Life Sciences for $625 million. The deal which is still pending regulatory approval would prove
another game changer for small Indian firms after deals such as merger of Strides with Shasun
pharma.
Another Indian drug company Gland Pharma has been the target of Chinese firm Fosun Pharma
for quite sometime but the deal is yet to go through and may not get completed after the recent
standoff between the two nations at Doklam and Indian government’s constant push towards
indigenisation of drug production.

1.11. Porter’s 5 Forces Analysis
Porter’s 5 Forces analysis is a very useful framework for understanding the various
factors at work in a particular industry.
1.11.1. Competitive Rivalry
➢ As mentioned previously in the report, the pharma industry is highly fragmented

with a number of small players who produce low cost generics.
➢ The decent growth expected in the Indian generic market in the next few
years is expected to attract further competition.
➢ Many big international firms are eyeing the Indian market as it offers a great
scope for growth and penetration

1.11.2. Barriers to Entry
➢ Developing an innovator drug is extremely costly and thus only huge players can
afford to spend a lot of money into developing patented drugs. This is a big barrier
to entry.
➢ Developing cheap generics is quite easy and less capital intensive; in this regard,
there are low barriers to entry
➢ Increasing raids by USFDA is causing firms to set up compliant plants which
results in greater costs and longer gestation duration. This is yet another barrier to
entry
1.11.3. Threat of Substitutes
➢ Medicines as a whole have very few substitutes. Pharmaceutical products have

high inelasticity of demand. Thus, firms have a good bargaining power with
respect to the drug’s price.
➢ Biotechnology has the potential to challenge synthetic pharma products in the near future
1.11.4. Power of Buyers
➢ In case of generics, given the high fragmentation and a plethora of companies

offering generic products, buyers have a good amount of purchasing power.
➢ In case of patented drugs, with a particular drug having a very specific therapeutic
effect, buyers have low purchasing power.
1.11.5. Power of Suppliers
➢ Compounds that require complicated APIs like steroids, sex hormones and
peptides give a good bargaining power to suppliers. However, generic APIs do
not have much of that power

1.12. Strategies Adopted
With pharma being one of the most dynamic sectors currently in the Indian market,
companies need to constantly adapt and evolve themselves. Several strategies are being
used in this regard:
1. Cost Leadership: Several companies are trying to bring down their operational
costs to keep their margins up. One of the intents behind Sun Pharma’s acquisition
of Ranbaxy is to bring about more operational efficiency. Firms are also involved
in vertical integration - Complex API, which require special skills and technology,
are developed and scaled up for both API and dosage forms.
2. Differentiation: Pharma companies have upped their R&D expenses with an
intent to differentiate their drugs from competitors. Some of the strategies that have
been followed in the recent past are:
a. Lupin opened a research and development centre for inhalation products
in Florida, US in 2015,
b. Sun Pharma is trying to develop technically complex APIs, such as
steroids, sex hormones, peptides, carbohydrates and taxanes, which require
special skills and technology
c. Dr Reddy’s is investing in technology platforms. It acquired OctoPlus
N.V, a Netherlands-based company, to get access to the Poly Lactic-Co-
Glycolic Acid (PLGA) technology for the formulation of complex
injectable.

1.13. Balance Sheet analysis of Pharma Companies
Pharmaceutical companies do not have any special items in their accounting. However, a
closer look at their balance sheet indicates certain characteristics.
Reserves and Surplus: Many pharma companies operate at significant levels of Operating
Profit Margin (20-22%) and Net Profit Margin (~8-10%). This leads to a chunk of liabilities
and Equity in the Reserves and Surplus head of the balance sheet. For example, in 2016,
Sun Pharma had only 0.44% of its total assets under Share Capital while a whopping
57.48% of the total assets lay under Reserves and Surplus.
Liabilities: In the liabilities section, companies have more current liabilities as

compared to long-term liabilities. In the case of Sun Pharma,the current liabilities are
24.43% of the total assets while the Non-current liabilities are 10.11% of the total assets.
Fixed Assets: Another unique feature of pharma companies is the high proportion of
Intangible assets due to the costly plant, equipment, licenses, trademarks, designs and
patents that they hold. In Sun Pharma, Non-current assets account for 43.07% of the total
assets with Intangibles accounting for 7.5% of the total assets.
Current Assets: One of the abiding features of pharma companies is the amount of
cash they hold. Due to high reserves and high margins,they have high liquidity with high
current and quick ratios and are cash rich. Cash & cash equivalents form a major chunk
of the pharmaceutical company. In Sun Pharma, cash and cash equivalents are a whopping
25.8% of the total assets.
Other than cash and cash equivalents, since formulation companies, which are a
majority in the pharmaceutical industry, are in the consumer goods sector therefore
they maintain high inventory and high receivables. For Sun these account 11.8% and
12.5% of the total assets respectively.

1.14. Key Players
1.14.1. SUN Pharmaceuticals
Sun Pharmaceutical Industries Ltd is an international specialty pharmaceutical company

selling drugs in more than 100 countries including US, Europe, India and emerging
markets. It was formed as a partnership firm in 1982.
SPIL primarily manufactures generic formulations for the domestic and exports markets.
The company's formulations are mainly sold in the United States and India, which
together contributed close to 71% of its revenues in 2016-17. In the US markets,
dermatology (Skin), central nervous system (CNS), cardiovascular system (CVS), pain
management, and oncology have been the major therapy areas for the company. Similarly,
the company has gained a strong position in the chronic care drugs segment in the domestic
market.
The company has a well-diversified manufacturing base amongst its peers with 47
manufacturing facilities across India, America, Asia, Africa, Australia and Europe.
While 20 manufacturing plants are set up in India, the rest are spread across continents.Sun
Pharma also has four research centres - 3 in India and 1 in Israel with over 900 scientists.
Post the merger with Ranbaxy, SPIL is the largest pharmaceutical company in the
domestic formulations market with a market share of 8.6% as of June 2017. The company
has a leadership position in some key domestic therapeutic segments (psychiatry,
neurology, cardiology, orthopedics, ophthalmology nephrology and gastroenterology).
The company’s leadership position in segments such as anti-diabetics, dermatology,
oncology and urology improved due to the merger.
Domestic Market Share: Company Report

1.14.2. Aurobindo Pharma
Aurobindo Pharma Ltd was set up in 1986 in Hyderabad as a private limited company,
which went public in 1995. It is the largest manufacturer of bulk drugs in the country and
manufactures all major API categories.
The company has focused its strategy towards forward integrating into formulations,
especially targeted at the regulated markets. On account of this, the company's regulatory
filings have been steadily increasing globally. The company's major formulation
products are the beta lactam antibiotics, cephalosporin anti-biotics, anti-retroviral, and
cardiovascular drugs and central nervous system drugs. The company has presence in
about 125 countries, with manufacturing majorly concentrated in Andhra Pradesh, India.
Aurobindo develops, manufactures and sells active pharmaceuticals ingredients (APIs),

peptides and generic formulations. The company's revenue mix, which was dominated by
bulk drugs, has been shifting rapidly towards the international generics market over the
last couple of years, as formulations yield better margins. Formulations accounted for
close to 80% of the company's gross revenues in FY-2017 as against ~58% in FY-
2011. Within the formulations segment, Aurobindo Pharma has primarily focused on
the regulated markets, with the US and Europe accounting for around 67% of the
revenues.
Aurobindo Pharma's revenues recorded a growth of about 8% in 2016-17 against 14%

in 2015-16 due to the following reasons:
• US market (contributes to ~44% of overall revenue) grew by 12.3% (v/s 27% in
FY16) due to new launches in the oral and injectable segment and growth from the
acquired Natrol Inc business
• The European market (22%) witnessed 5% growth against de-growth of ~2%
in FY2016 after growing by 375% in FY2015 due to the acquisition of West
European operation of Actavis witnessed a
• The API business (21%) registered a growth of 5.5% whereas the emerging markets
(5%) grew by 17% y-o-y

1.14.3. Dr. Reddy’s Labs
Dr. Reddy's Laboratories (DRL) was founded by Dr. Anji Reddy in 1984. The company is
one of India's largest pharmaceutical companies, in terms of revenues. DRL commenced
operations as a supplier to Indian drug manufacturers and subsequently started
exporting products to semi-regulated markets. By the early 1990s, the company shifted
focus towards acquiring approvals for its formulations and bulk drugs in regulated markets,
such as the US and Europe.
DRL is present across the pharmaceutical value chain. It produces generic formulations,
active pharmaceutical ingredients (APIs), offers pharmaceuticals services and bio-similar
products. At present, it also has a New Chemical Entities (NCEs) programme, which
focusses on neurology, dermatology, pain management and anti-infectives. In generic
formulations, the company manufactures products across the major therapeutic
segments of gastrointestinal ailments, cardiovascular diseases, pain management,
oncology, anti-infective, pediatrics and dermatology.
In pharma services, it provides customised services and solutions for starting

materials, intermediates, active ingredients and finished dosage forms. In bio-similars,
the company has products such as Grafeel, Reditux, Cresp and Peg-grafeel. DRL sells
its products world-wide, with the US, UK , Germany, South Africa, Venezuela, Romania,
New Zealand, Russia and CIS and India being its major markets.
DRL is the 15th largest player in the domestic market, with a 2.1% share, as of June 2017.
The company's top brands include Omez (acute gastritis) and Nise (pain management) in
the domestic pharmaceutical market. The company mainly derives revenues through
exports and has a strong pipeline of ANDAs (cumulative 262 ANDAs and 3 NDAs filed
with the US FDA, as of March 2017, of these 164 are approved).
In 2016-17, DRL's revenues de-grew by ~9% led by a 10% y-o-y decline in its global
generics business. The company's operating margins contracted by ~820 bps on-year to
19.6% on account of pricing erosion in the US market coupled with increase in R&D
expense. Net margins fell at a relatively slower pace at ~450 bps due to lower tax outgo
and extraordinary expenses.

1.15. Key Trends
1.15.1. Distribution Channel Consolidation in Us

The consolidation of pharmaceutical supply chains in the US, by which wholesale and retail drug
suppliers have teamed up to procure generic medicines, is hurting revenues of Indian generics
players, whose sales come mainly from the US market.
In the US, drug distributors, also referred to as pharmacy benefit managers (PBMs) – CVS
Caremark, Cardinal Health and AmerisourceBergen – purchase drugs from manufacturers, and sell
them to retail drugstore chains like Walgreen, Alliance Boots, Rite Aid and Shoppers Drug Mart.
Since 2012, there has been extensive consolidation between pharmacy managers and retail chains
–16 mergers and acquisitions were reported in 2012 and 10 in the following year. U.S. distribution
companies AmerisourceBergen, Cardinal Health and McKesson account for more than 85% of the
market share, with estimated combined drug distribution revenues of $378 billion in 2015.
While the number of players in the wholesale and retail space has fallen, their bargaining power
has risen. In reports issued by HSBC and JPMorgan, analysts indicated such deals could squeeze
margins for makers of generic drugs. In a report in May 2017, Credit Suisse has projected a 10-
12% of price erosion due to channel consolidation in the US.

1.15.2. USFDA Warning Issues

The tight regulatory vigil by the US Food and Drug Administration (USFDA) has become a major
concern for the pharmaceutical industry. Of late, there has been a spurt in the negative observations
during plant inspections for approvals as well as issue of warning letters for the major companies.
Just to give a perspective, three top pharma majors based out of Hyderabad, Dr Reddy’s
Laboratories, Aurobindo Pharma and Divis Laboratories have been facing one issue after another
in the plant inspections/approvals from the US regulator.
For Dr Reddy’s , which has a turnover of over Rs 14,000 crore with a lion’s share of it coming
from the US market, the USFDA has been a constant source of trouble from 2015 when it received
warning letters for three of its plants, including two API units and one cancer products facility.
Even after recent re-inspection by the US regulator, Dr Reddy’s still faces ‘significant
observations’ on its Duvvada plant. A fresh addition to the list of units with observations is
Bachupally unit which had got 11 observations from the USFDA after its inspection last month.
For Aurobindo too, the sailing has been tough. Its unit III at Bachupally which makes oral
formulations attracted six observations on procedural aspects last month. This was followed by
another seven observations on its Unit IV (for injectables & ophthalmic products). Both are Form
483 type of observations.
The US FDA issues a form 483 to drug companies if it spots any condition that in their judgment
may constitute violations of the US Food Drug and Cosmetic Act and related Acts during
inspections.
Another firm, Divis Laboratories has received an import alert and warning letter on one of its units
in Vizag on some products being made from the facility. The company has been addressing the
issue and the USFDA, however, has later exempted several products from the alert.
Lupin has also been issued some observations on its facilities in Goa and Aurangabad by the US
watchdog recently.
The impact of these developments on a company’s business has been diversified and involves cost
of remediation. For obvious reasons, industry players have been maintaining that there is nothing
‘abnormal’ and Indian companies have always been focussing on quality. As per pharmexcil data,
pharmaceutical exports decreased to an estimated $16.4 billion during the financial year ended
March 31, 2017, against $16.89 billion in 2015-16.
The warnings highlight the risks involved in the generics business in the US, where Indian
companies have to negotiate regulatory and legal challenges to succeed. They also have to focus
on their own manufacturing and drug development processes—from complex issues such as
documentation of data to seemingly trivial ones such as workplace hygiene.
1.15.3. Spurt of Inorganic Growth

The M&A strategy of Indian Pharma companies is drifting toward manufacturing sites outside
India in view of the growing protectionism, especially in the areas such as injectables, and filling
gaps in R&D.
Inorganic growth is helping Indian companies by
1) Faster adaptation of new technology and reduction in efficiency

2) Improvement of new production methods
3) Gain of tactical knowledge
4) Increased access to International markets.
Apart from M&A, Indian pharma companies are turning their attention to in-licensing, where they
develop and market products from other drugmakers. These deals benefit them by reducing risks,
and providing them new capabilities and a fresh revenue stream. Indian companies mostly in-
license drugs in therapeutic areas of oncology, diabetes, respiratory, dermatology, ophthalmology,
neurology and cardiovascular diseases considering high unmet needs and limited competition in
these segments.
In-licensing deals help companies get quick access to challenging products with limited
competition, acquire strong technical capabilities to develop and manufacture complex or specialty
products, and enter new markets or strengthen product portfolio.
Among leading Indian companies that have signed such in-licensing deals are Sun Pharmaceutical
Industries Ltd, Lupin Ltd, Dr. Reddy’s Laboratories Ltd and Glenmark Pharmaceuticals Ltd.
1.15.4. Pharma Policy Draft

India’s proposed pharmaceutical policy, if implemented in the current form, may have a negative
impact on growth and profitability of the industry due to continued emphasis on price control, cap
on trade margins and discontinuation of loan licensing or third-party manufacturing. Some of its
recommendations are as follows
1) It encourages higher manufacturing standards with the domestic manufacturing of APIs

2) It encourages sales of drugs by their generic names. Through the policy, the government
aims to implement the principle of one company-one drug-one brand name. The DOP
believes that giving brand names to generic drugs hampers real innovation, and that it
should be discouraged. Sun Pharmaceuticals Ltd. will be impacted the most as it markets
drugs for both itself and its subsidiary Ranbaxy.
3) Trade margin cap: There is also a provision for the control of “unreasonable” trade margins
by distributors and retailers. The trade margin cap will be effectively put in place for 95
percent of the industry.

1.15.5. Increasing R&D Expenditure

Indian pharmaceutical companies have increased research and development (R&D) investments
in lucrative specialty drugs and complex generics, as greater competition and lower margins eat
into their generics business. In the past six years, R&D spending at top Indian pharma companies
rose 3-6 times, while sales grew 2-4 times.
Since such products cost far more to develop, investments are mostly made by top drug makers
such as Sun Pharmaceutical Industries Ltd, Dr Reddy’s Laboratories Ltd and Lupin Ltd. R&D
spending at all these companies has risen over the past three years.
Benefits from a so-called patent cliff (when patents on many drugs expired, creating opportunities
for Indian generic-drug firms in the US) petered out in 2014, while pricing pressure and
compliance issues have risen since then, creating a sense of urgency.
Specialty drugs and complex generics are high-value products used to treat complex, chronic
conditions like cancer, rheumatoid arthritis and multiple sclerosis. Nearly half of the medical
spending in the US currently goes towards specialty therapies, particularly oncology, multiple
sclerosis, auto-immune and hemophilia. New product launches in specialty therapies have been
higher than in traditional therapies.

Companies are investing in complex injectables, complex oral solids, new drug delivery systems,
new chemical entities and biosimilars. They are looking to increase their presence in the
therapeutic areas of oncology, dermatology, ophthalmology and respiratory, among others.
1.16. Miscellaneous Notes
1.16.1. Brexit
Brexit has been arguably the biggest macroeconomic event in the recent past. Britain is yet to
invoke Article 50, after which it will get 2 years of time negotiate its contracts with the rest of EU
within the 2 years. There are a lot of possible courses of action that can be taken by Britain at this
juncture and a lot of uncertainty exists.
The current exposure of Indian pharma exports to European market is 10-13% (FICCI Report,
2016) with UK’s share in exports being just 3-4%. This is good news as the Indian pharma industry
has less exposure to UK. It is one of the few sectors that has been relatively unaffected due to
Brexit. While Pound has depreciated significantly, most of the pharma companies have hedged
their exposure to Pound and Euro. In addition to this, the regulations in the UK market are quite
different from those of EU, thereby ruling out any adverse impact.

1.16.2. GST
Goods and Services Tax was passed finally, after a decade long saga, in the monsoon session of
the Parliament last month. It is the biggest tax reform post-Independence and promises to integrate
trade within India like nothing has ever before. Some of the key implications for pharma sector
are discussed below:
1. Supply Chain: Almost all pharma companies operate through Cost and Freight
mechanism with depots in most states. Under GST, they can consolidate existing
infrastructure to manage their inventory better, leading to lower costs overall. This will
impact the profit margins in a positive way.
2. Tax Rates: Pharma companies are currently taxed at an effective rate of 12-14%
(primarily consisting of 6% excise, 4-5% VAT and 2% CST). It is expected that GST for
pharma products will be at a concessional rate of ~12%. Thus, they will have the pricing
power to pass on the burden of additional taxes to customers.
3. Removal of Area-based exemption: Most pharma companies currently enjoy

area-based exemptions on indirect taxation. While the existing area-based exemptions are
likely to be grandfathered and may not have an impact in the near term, the future non-
availability of such exemption may have a slight adverse impact on the sector.
Following picture illustrates the impact of GST on the various pharma players and their business
functions:
Source: GST, Motilal Oswal Report, 2016


2.1 Healthcare - Sector Overview

Based on India's healthcare indicators released by the World Health Organisation (WHO), CRISIL
Research estimates the size of the Indian healthcare delivery industry at Rs 4.8 trillion in 2016-17.
With increasing healthcare coverage in India and growing awareness, the industry is expected to
grow at 14% compound annual growth rate (CAGR) to reach Rs 9.4 trillion in fiscal 2022.
Private investments have been skewed towards in-patient department (IPD) treatments. Hence, the
share of these treatments in the overall healthcare delivery market is expected to increase
marginally to 85% in fiscal 2022 from 84% this fiscal. Changing demographics, increasing income
levels, greater health awareness, conducive government policies, and expanding health insurance
coverage will drive growth in demand for healthcare delivery services.
While key listed players' aggregate revenue has continued to grow at 14-18% on-year, higher
overheads for new hospitals have been pulling down operating margins since fiscal 2010. CRISIL
Research believes it takes nearly 18-24 months for a newly opened hospital to stabilise
operationally. This period can be higher for standalone hospitals vis-a-vis chains due to differences
in operational efficiencies. While the aggregate revenues of these listed players rose at 15% CAGR
from fiscals 2010 to 2016, operating margins declined marginally on an on-year basis.
CRISIL Research's analysis indicates that standalone / small-scale players are not currently in the
pink of health. A closer look at these entities reveals weak debt protection metrics because of
liquidity pressure arising from high gearing. These entities typically have high gearing in the range
of two times and above, compared with sub-one gearing for established players such as Apollo
Hospitals (AHEL) and Fortis Hospitals Ltd (FHSL). We believe the aggressive, debt-funded
expansion plans of these entities, delays in receiving payments and tough competition from
national-level players are the main deterrents for the industry
Methodology for estimation of market size
The healthcare delivery market size is based on the World Health Organisation's statistics on
Health Adjusted Life Expectancy (HALE) - defined as the life expectancy of an individual adjusted
for the number of years spent in ill-health and Life Expectancy (LE) for males and females.
Methodology for estimation of healthcare delivery market size
Source: CRISIL Research

2.2 Classification of Hospitals

Hospitals can be broadly classified on the basis of:
i. Services offered
ii. Complexity of ailment
iii. Ownership patterns
iv. Clientele
v. Business Strategy
2.2.1. Classification of hospitals based on services offered

2.2.1.1. Primary care/dispensaries/clinics
Primary care facilities are mainly outpatient units that offer basic, point-of-contact medical and
preventive healthcare services. These units do not have any intensive care units (ICUs) or
operation theatres.
2.2.1.2. Secondary care
Secondary care facilities diagnose and treat ailments that cannot be treated in primary care
facilities. These act as second point of contact in the healthcare system. There are two types:
i. General secondary care hospitals
A general secondary care hospital is the first hospital a patient approaches for common ailments.
It typically attracts patients staying within a radius of 30 km. The essential medical specialties in
general secondary care hospitals include internal medicine, general surgery, obstetrics and
gynecology, pediatrics, ENT, orthopedics and ophthalmology. Such a hospital will have one
central laboratory, a radiology laboratory and an emergency care department. Generally,
secondary care hospitals have 50-100 in-patient beds, a tenth of which are in the ICU. The
remaining beds are equally distributed between the general ward, semi-private rooms and single
rooms.

ii. Specialty secondary care hospitals
These hospitals are typically located in district centres, treating patients living within a radius of
100-150 km. These hospitals usually have an in-patient bed strength of 100-300, 15 per cent of
which are reserved for critical care units. The balance is typically skewed towards private beds
rather than general ward beds. Apart from the medical facilities offered by a general secondary
care hospital, specialty secondary care hospitals treat ailments related to gastroenterology,
cardiology, neurology, dermatology, urology, dentistry and oncology. These hospitals may also
offer some surgical specialties, but these are optional, albeit desirable for such a hospital.
Diagnostic facilities in a specialty secondary care hospital include a radiology department, a
biochemistry laboratory, a hematology laboratory, a microbiology laboratory and a blood bank.
The hospital also has a separate physiotherapy department.
2.2.1.2. Tertiary care
Broadly classified into 2 sub categories
i. Single-specialty tertiary care hospitals
Tertiary care hospitals provide advanced diagnostic services and treatments. A single-specialty
tertiary care hospital mainly caters a particular ailment (such as cardiac ailments, cancers, etc).
Prominent facilities in India include the Escorts Heart Institute & Research Centre (New Delhi),
Tata Memorial Cancer Hospital (Mumbai), etc
ii. Multi-specialty tertiary care hospitals
Multi-specialty tertiary care hospitals offer all medical specialties under one roof and treat
complex cases such as multi-organ failure, high-risk and trauma cases. Most of these hospitals
derive a majority of their revenues through referrals.
Typically, such hospitals are located in state capitals or metropolitan cities and attract patients
staying within a 500 km radius. The hospitals have a minimum of 300 in-patient beds, which can
go up to 1,500 beds. About one-fourth of the total beds are reserved for patients in need for critical
care. The hospitals have a histopathology laboratory and an immunology laboratory as a part of
its diagnostic facilities. Prominent examples of such hospitals include Lilavati Hospital and
Hiranandani Hospital in Mumbai, and NIMS in Hyderabad.

2.2.1.3. Quaternary care
Quaternary care facilities are similar to tertiary care facilities and focus on super-specialty surgical
procedures (cardiac, neurological and joint-replacements). These facilities also have in-house
research departments, unlike tertiary care hospitals.
2.2.2. Classification of hospitals based on complexity of ailment

Healthcare delivery may also be classified on the basis of the complexity of ailment being treated.
For e.g., a hospital treating heart diseases may be classified as a primary facility if its addresses
conditions such as high cholesterol; as a secondary facility if it treats patients suffering strokes;
or as a tertiary facility if its deals with cases such as cardiac arrest or heart transplants.

2.2.3. Classification based on ownership

Hospitals can also be classified based on ownership patterns:
Government-owned: Public hospitals are owned and run by the Central Government or
State Governments or local bodies on non-commercial lines. These hospitals may be
general hospitals or specialised hospitals. Eg: Brihanmumbai Municipal Corporation
hospitals, KEM Hospital and the Cooper Hospital (Mumbai)
Corporate-owned: The latest concept is of corporate hospitals, which are public or private
limited companies, formed under Companies Act. They are normally run on commercial
basis. They can be either general or specialized. Eg: Asian Heart Institute, Apollo
Hospitals, Fortis, etc.
Trust-owned: Voluntary hospitals are those which are established or incorporated under
appropriate Act of the government. They are run with public or private fun on non-
commercial basis. A board of trustees, usually comprising of eminent people manages such
hospitals. Eg: Lilavati, Hinduja. There is a possibility of Trust-owned hospitals being
managed by a private party. Eg: Apollo Hospitals in Ahmedabad is owned by a trust but
managed by the Apollo Group.
Private Nursing homes: Private nursing homes are generally owned by an individual
doctor or a group of doctors. These nursing homes are run on a commercial basis. These
are run on commercial basis.

2.2.4. Classification based on clientele

The client mix is critical for hospital’s profitability. The classification of hospitals on this basis
is given below:
2.2.4.1. Local vs Non Local
In India, hospitals are largely based in urban areas, which have only 30% of population. Initially,
new hospitals drive patients from areas in the immediate vicinity. However, once the hospital
develops a brand in the market, it then looks at demand from neighbouring cities and towns.
Hospitals specialising in complex ailments like oncology, cardiology, etc may see patient inflows
from the entire country. Mature tertiary care hospitals having an established brand image often
have a mix of clients from various locations.
2.2.4.2. Free Patients
In case of a few tertiary care hospitals, a small percentage of beds are provided free of charge to
below-poverty line patients. For e.g., Sankara Nethralaya and Arvind Eye Hospital organise
several eye camps for poor patients and offer free treatments.
2.2.4.3. Indian vs Foreign
In addition to domestic patients, there is an increasing incidence of foreign individuals traveling

to India for treatments (usually for high-end, complex surgeries or procedures) as they can avail
of high-quality healthcare services at lower costs as compared to their native countries.
2.2.5. Classification based on Business Strategy

The various models through which a healthcare chain operates are:
1. Standalone hospital:
a. Multi-specialty (e.g. Lilavati Hospital, Mumbai)
b. Single-specialty (e.g. Tata Medical Center, Kolkata)

2. Hospital chains:
a. Catering to only to one ailment, but present in all the three levels (primary,
secondary and tertiary), for instance Sankara Nethralaya
b. Catering to single as well as multiple ailments, and present in all three levels, e.g.
Apollo Hospitals
3. Integrated service providers
In addition to revenues from the main business, it is important to understand other revenue
streams that are synergistic to hospitals such as diagnostic centres, pharmacies, primary
healthcare clinics and hospital consultancy segments. These synergistic businesses may
act as feeders to the hospital's main business.
Further, it is vital to discern if the company has entered into any tie-ups with governments
internationally.
2.2.6. Emerging Business Model in Healthcare

Rising real estate prices across metros and tier-I cities, and the rising demand for quality healthcare
in tier-II and -III cities have led to private hospital chains adopting business models such as lease
and O&M contracts, instead of a pure ownership model for expansion. Private hospitals are also
venturing into building medicities that offer all treatments under one roof. \
2.2.6.1. Lease Contracts
In the hospitals sector, the ownership model has become a costly affair because of the sharp
increase in land prices, especially in metros and tier-I cities, over the past few years. This has
compelled private players to look for other models such as lease contract. In a lease contract, the
land owner develops the hospital building as per specifications given by the private player, and
then the private player enters into a long-term lease agreement with the land owner. For example,
Apollo Hospitals has acquired land and a building on lease from Orient Hospital, Madurai for a
period of 60 years.
2.2.6.2. Tier – 2 and Tier – 3 expansion:
Private players are now foraying into tier-II and III cities as income levels in these cities are fast
catching up with metros and tier-I cities. This will increase the demand for quality healthcare

services. Apollo Hospitals is looking at expanding into tier-II cities such as Nellore and Nashik
through its 'REACH' initiative as well as open a super speciality hospital in Vizag. Fortis
Healthcare is also expanding into Ludhiana.
2.2.6.3. Operation & Maintenance Contract
Under an operation and maintenance (O&M) contract model, a large private player (or a hospital
chain) undertakes a contract for managing a standalone hospital and overseeing functions like
marketing, operations, finance and administration. In return, the private player (Target Hospital)
receives a fixed annual management fee and a share in revenues or profits. Apollo and Fortis have
entered into such contracts to expand their base in India. For e.g., Fortis has entered into an O&M
contract with Cauvery Hospital at Mysore. Apollo has 14 hospitals under the O&M model mostly
across the northern states.

2.2.6.4. Medicities (one-stop shops):
Medicities are an integrated township of super-specialty hospitals, diagnostic centers, medical

colleges, R&D, ancillary and subservient facilities. The concept of medicity is based on models
already operating in countries such as Scotland, the US, France, Algeria, etc. Prominent medicities
in India are Medanta, Narayana Hrudalaya and Chettinad Health City, which are located in
Gurgaon, Bengaluru and Chennai, respectively. However, the success of a medicity would depend
on its location and the ability to attract more in-patients. Due to large land requirements, health
cities are often situated in the outskirts of a city, and hence attracting patients could be a challenge.
2.2.6.5. Franchise Arrangements
In this model, the franchisees obtain the premises (owned or leased) and bring in the capital (both
fixed and working) while the franchisor lends the brand name to the healthcare facility for a fee.
The franchisor has to ensure that the service quality is maintained across all healthcare centres
that use its brand name. The franchisor may also help the franchisee in training and recruiting
staff, procuring equipment, designing the facility, etc. In India, a prominent example is Apollo
Hospitals which franchises its primary clinics.

2.3. Industry Characteristics
The hospitals sector is capital-intensive. Capital expenditure is mainly incurred on land and
equipment. Hospitals are also labour-intensive. Skilled manpower required are doctors, nurses and
para-medical staff comprising lab-technicians, radiographers and therapists. While India has a
large medical workforce, there are only seven physicians per 10,000 persons as against a global
median of 14 physicians.
The hospitals sector is capital-intensive due to the high per bed costs. Hospitals mainly incur
capital expenditure on land and equipment. The capital cost to build a hospital is typically around
Rs 5-15 million per bed (for a typical 200 bed multispecialty hospital in a Tier-I city); while costs
for secondary-care hospitals is lower, high technology and equipment costs keep total capital costs
for super-specialty tertiary care hospitals at the higher end. Use of imported equipment can further
drive up equipment costs. The ratio of beds to individuals in India is thus still a meager seven per
10,000 persons.
Hospitals are also highly labour-intensive. Skilled manpower required are doctors, nurses and
para-medical staff comprising lab-technicians, radiographers and therapists. While India has a
large medical workforce, the country's has just 7 physicians per 10,000 persons (as against a global
median of 14) and 17 nurses and midwives per 10,000 (as against the global median value of 25).
2.3.1. Revenue and Cost Structure
2.3.1.1. Revenue Structure
The main revenue streams for hospitals are the in-patient department (IPD) and out-patient
department (OPD). In most hospitals, the OPD contributes three-fourths of total volumes.
However, in revenue terms, the IPD comprises as much as 81 per cent of overall revenues. This
ratio could vary across hospitals, depending on the type of services rendered and the ailment mix.

Surgeries and diagnostics account for the bulk of revenues for most hospitals. The share of these
verticals in total revenues differs across hospitals, depending on pricing strategies and the
emphasis on different specialties. In certain hospitals, facilities like diagnostic centres and
pharmacies are outsourced.
Other monitorables that may boost revenues include:
Occupancy levels: Given the high fixed costs (equipment, beds and other infrastructure),
occupancy levels need to be commensurate for a hospital to break-even. Most large hospitals
operate at over 65-70 per cent occupancy levels. The following factors can ensure high occupancy
levels:
• Good brand recognition

• Reputed doctors
• A strong referral network
Average length of stay: Large hospitals usually operate at high occupancy levels, but try to keep
the average length of stay (ALOS) short. This enables them to record higher utilisation levels and
ensure that more patients are treated at the same time.

Medical patients versus surgical patients: Having a higher number of surgical patients as
compared to medical patients helps hospitals boost revenues. This is because average revenues
per surgical patient is higher, given the extensive use of operation theatres and diagnostic facilities.
As per industry interactions, the OPD contributes almost one-third of in-patient volumes in most
hospitals. This phenomenon is especially evident during the initial years of operations of a
hospital. The OPD also acts as a feeder for a hospital's diagnostic/pathology centres within the
hospital premises.

2.3.1.2. Cost structure of hospital
Capital costs
The capital cost to build a hospital ranges from Rs. 5-15 million per bed; while costs would hover
around the lower end of this range for secondary-care hospitals, high technology and equipment
costs keep total capital costs for super-specialty tertiary care hospitals at the higher end. Use of
imported equipment can further drive up equipment costs. The two key capital cost components
are land and building development costs and equipment costs.
Land and building costs: These costs usually form 30-40 per cent of total project costs, as land
cost varies with location. In some cases, land is offered at a concessional rate by the
government. However, after obtaining land at cheaper rates hospitals have to treat a particular
percentage of patients free of charge and a particular percentage of patients at a subsidised rate
every year.
Equipment costs: Equipment costs comprise 25-30 per cent of total project costs, depending
on the sophistication of the equipment purchased. MRI, linear accelerators and CT scan machines
are some of the expensive equipment, costing Rs. 50-100 million. As these equipment rapidly
become obsolete, hospitals need to set aside resources periodically for technology upgradation.
Moreover, the maintenance cost for high-end equipment is typically around 5 per cent of capital
costs. In the case of tertiary carehospitals, most high-end diagnostic and surgical equipment is
imported. Equipment costs vary across hospitals, depending on the type of ailment the hospital
specialises in.
Operating costs
Hospitals must manage operating costs effectively to be able to service their debt obligations and
remain profitable:
Raw material costs/ consumables: Typically, raw material costs (including drugs, medical
consumables, diagnostic consumables and other items such as linen, etc.) account for 40-
50 per cent of sales. These costs can be managed through effective inventory management
and effective sourcing of lower-cost raw material.
Wages and salaries: These form 15-20 per cent of revenues. While salaries are fixed costs,
consultants' fees can be linked to operations, making it a variable expense. The bed-to-
staff ratio also varies from 1:3 to 1:5, with multi-specialty and super-specialty hospitals
having a higher ratio. The employee cost for a hospital is also dependent on its doctor-
engagement model (described below).

Operational overheads: Overheads account for 5-7 per cent of sales, the highest
component being power and fuel (energy) consumption (2-3 per cent).
Doctor engagement model
Hospitals generally operate on two models:
Model I - Under this model, hospitals have 100 per cent doctors on its pay roles (Resident
doctors).
Model II - Hospitals generally follow a mix of resident and visiting/consulting doctors.

Under Model 2 the consulting or visiting doctors share the revenue earned by the hospital.
Large hospitals in the country typically follow Model II. The visiting doctor/consultant typically
shares a percentage of his consulting fee and the IPD income (for surgeries done on the hospital
premises) with the hospital. Even the mid-sized hospitals in the India (100-400 beds) have visiting
doctors and consultants. There are alternative ways of referral too, where doctors refer patients to
specific doctors and demand compensation for the same.
2.4. Operating Efficiency

A hospital typically earns revenues from two streams: In-patient department (IPD) where patients
occupy a bed and stay admitted for more than one night, and outpatient department (OPD) where
patients are provided primary healthcare services such as consultancy and diagnostics, without the
need to stay overnight.
Further, within these departments, revenues are generated from beds/ICUs, operation theatres,
consultancy, diagnostic/pathology laboratories and pharmacy centres. However, in-patient
admissions and surgeries account for bulk of a hospital's operating revenues.
While analysing revenues from the IPD department, it is important to consider data such as the
number of inpatients/outpatients, bed occupancy rate (BOR), average length of stay (ALOS),
ailment mix and surgery/medical mix.

Hospitals strive to achieve high BORs and aim to minimize their average length of stay.
Ailment/case mix: For a multi-specialty hospital, this denotes the mix of treatments related
to cardiac, orthopedics, neurology, oncology and ophthalmology. A higher share of
complex treatments in the case mix helps to increase revenues.
Surgery/medical mix: This ratio denotes the number of surgery patients to medical
patients. Having a higher number of surgical patients means that the average billing per
inpatient is higher.
To maintain high margins, it is important for a hospital chain (or a standalone hospital) to monitor
its ailment mix, surgery mix, and to maintain a combination of high BOR coupled with a low
ALOS.
Further, hospitals may have other revenue streams, based on the extent to which they manage
and/or franchise properties. For this, one should look at factors such as fees generated from current
management contracts and the prospect of adding more hospitals to the system.
2.5. Allied Industries

Healthcare comprises of several fields that require support from each other. All these fields
usually support hospitals and are very specialized. These include pharmacies, diagnostic centres,
preventive care centers and third-party insurance administrators. Hospitals usually have heavy
costs and continually seek to outsource non-core activities which is why these fields have gained
prominence.
There are 4 major allied sectors in Indian healthcare industry:
1. Curative Services
2. Preventive Care Services
3. Manufacturing
4. Services to Care Providers

Following diagram illustrates the various subsectors that fall under each of these sectors:
2.5.1. Curative Services

These services form the spine of healthcare industry. It includes primary, secondary and tertiary
care hospitals. Curative services are provided various categories of health institutions like General
and Specialist hospitals, Teaching hospitals, Region/State hospitals etc. Rural Health Centres and
Sub‐Rural Health Centres are serving rural people by providing comprehensive health care
services including public health services with available diagnostic facilities.Alternative systems
of medicine such as Ayurveda and Homeopathy also come under the curative services.
2.5.2. Manufacturing
Manufacturing of medical equipment, devices and consumables is a large allied sector in the
healthcare industry. New hospitals have been established which is fueling the growth of this
sector. Some of the major Indian players in this sector are Medived Innovations, L&T Medical

Equipment and Systems, Philips and GE. The pharmaceuticals industry is another major allied
industry, which operates alongside the healthcare sector.
2.5.3. Preventive care

There is a lot of scope for offering standardized preventive care through fitness centres, given the
increasing incidence of life diseases like cardiac ailments in India. Rising health consciousness
and higher disposable incomes will fuel the growth of fitness centers. Such centers typically offer
indoor sports like squash and badminton, running tracks (indoor in some cases) and gymnasium,
and other services like aerobics, yoga and meditation.
Various forms of health counselling, including nutrition consultancy, exercising, and non-
medicinal cure for certain diseases could also be potential revenue streams for such set-ups.
Rejuvenation centres offering services based on naturopathy and yoga also come under this
segment.
The incidence of regular health check-ups in hospitals as a preventive measure has risen as well.
Various health check-up packages include a combination of blood sugar, cholesterol, urine, stool,
digital chest X-Ray, ECG, general examination and renal profile. This trend has opened newer
avenues for companies involved in carrying out diagnostic tests.
2.5.4. Support services

These are the services which support curative services. Diagnostic centres and pharmacies are
major allied sectors which complement hospitals. Other services include management services for
hospitals like food and beverages (F&B), housekeeping, waste management systems, etc. which
are outsourced. In addition, foreign healthcare providers outsource medical transcription and claim
processing to Indian companies; this sector has boomed over the past few years.
2.5.5. Diagnostic Centres

Diagnostic centers (consisting of independent laboratories, hospital-based centers and diagnostic
chain companies) form an integral part of the healthcare industry. They offer services ranging
from routine examinations to complicated hormonal assays and immunological investigations, in
case of pathology, and from basic x-rays to MRIs, in case of radiology.

The diagnostics industry can be broadly divided into pathology and radiology.
Pathology: Pathology involves tests from simple blood analysis to sophisticated

techniques like DNA tests that aid the diagnosis/prognosis of ailments and other medical
conditions.
Radiology: Radiology involves using minimally invasive techniques to generate film or

video images of the internal anatomy for quick and accurate diagnosis of diseases and
injuries.
2.5.6. Pharmacy store chains

As is the case with almost all verticals within the healthcare delivery industry, pharmacies are
highly fragmented and dominated by standalone units. In recent years, however, corporate
presence in this segment has increased. Corporate players have a presence in two types of
pharmacies - in-house pharmacies (within the hospital premises) and standalone pharmacies.
Hospital-based pharmacies have direct access to its patients and also require relatively low
investments. In addition, there is a healthy demand for high-margin surgical items at these
hospital-based pharmacies, which boosts their profitability as compared to standalone pharmacies.
2.5.7. Outsourcing non-core activities

Hospitals are increasingly outsourcing several non-core activities such as housekeeping, laundry,
F&B and security to third parties. There is a clear opportunity for third-party providers who add
value through economies of scale, specialized skills and better manpower capabilities. This
enables hospitals to reduce costs and improve efficiency.
2.5.8. Third party administrator

A third party administrator (TPA) functions as an intermediary between the insurer and the insured
and to facilitate cashless claims. TPAs are paid a fixed percentage of the insurance premium as
commission for their service. This business has developed recently on account of a growing need
for cost-effective healthcare financing options. For instance, Apollo, as an integrated healthcare
provider, offers its members a family health plan, which is a group policy supported by the New
India Insurance Company.

2.6. Market Trends

A combination of various factors, including changing demographics, increasing income levels,
greater awareness on health issues, growth in insurance coverage and medical tourism, are key
demand drivers for healthcare delivery services in India.
2.6.1. Current Scenario
Based on India's healthcare indicators released by the World Health Organisation (WHO), CRISIL
Research estimates the size of the Indian healthcare delivery industry at Rs 4.8 trillion in 2016-
17. With increasing healthcare coverage in India, strong fundamentals and improving
affordability, the industry is expected to grow at 13% CAGR to reach Rs 7.8 trillion in 2020-21.
With private investments skewed towards in-patient department (IPD) treatments, the share of
IPD treatments in the overall healthcare delivery market is expected to increase marginally to 85%
in 2020-21 from 83% in 2015-16. Changing demographics, increasing income levels, greater
health awareness and expanding health insurance coverage will drive growth in demand for
healthcare delivery services.
2.6.2. Lowering Operating Margins
While key listed players' aggregate revenue has continued to grow at more than 16% y-o-y, higher
overheads for new hospitals have been pulling down players' operating margins since 2009-10. It
takes nearly 18-24 months for a newly opened hospital to stabilize operationally (this period can
be higher for standalone hospitals vis-a-vis chains due to difference in operational efficiencies).
While aggregate revenues of these listed players rose by 16% in 2015-16, operating margins
declined marginally on a y-o-y basis. We foresee bed additions pushing up revenue growth
marginally to 18% in 2016-17.

2.6.3. Standalone/small-scale hospitals in ill-health
Analysis indicates that standalone / small-scale players are not currently in the pink of health. A
closer look at these entities reveals weak debt protection metrics because of liquidity pressure
arising from high gearing. These entities typically have high gearing in the range of two times and
above, compared with sub-one gearing for established players such as Apollo Hospitals (AHEL)
and Fortis Hospitals Ltd (FHSL). We believe the aggressive, debt-funded expansion plans of these
entities, delays in receiving payments and tough competition from national-level players are the
main deterrents for the industry.
2.6.4. Rising ARPOB levels
Aggregate revenue for key listed healthcare delivery players in India rose at a robust CAGR of
19% between 2009-10 and 2013-14, primarily driven by Apollo Hospitals Enterprises Ltd
(AHEL), which commands nearly 65% revenue share of the set. The company grew at a 20%
CAGR during this period. AHEL's average revenue per occupied bed (ARPOB) rose to Rs 23,684
from Rs 16,620 and it had steady occupancy levels of near 70% even after a 37% increase in
operational beds during the same period. However, revenue growth has tapered since 2010-11 due
to lower additions in operational beds by AHEL, postponement of elective surgeries owing to the
economic slowdown and the lower-than-expected ramp-up of the new Apollo hospitals (such as
the ones in Ayanambakkam (Chennai) and Jayanagar (Bengaluru)).
During 2015-16, aggregate revenues of the ley listed players grew by nearly 16% y-o-y, with
AHEL (standalone) growing nearly 18%. During the period, AHEL's ARPOB increased by 10%,
while patient volumes (In & Out) increased by 5% y-o-y. We foresee revenue growth picking up
marginally in 2016-17, driven by capacity additions (Apollo Hospitals expected to add more than
1,050 beds over the 2-3 years including 550 beds in 2016-17) and improvement in occupancy in
newly operational hospitals.

2.6.5. Painful aggressive expansion for Key Players
The key listed players' operating margin declined gradually between 2010-11 and 2013-14, largely
on account of higher overheads for new hospitals. It takes 18-24 months for a newly opened
hospital to stabilise operationally (this period can be higher for standalone hospitals vis-a-vis
chains due to difference in operational efficiencies). AHEL, which accounts for a dominant share
of the aggregate revenue of the aforementioned players, added nearly 1,000 beds over the past two
fiscals.
During 2015-16, the aggregate operating margin of key listed players declined marginally on
account of losses in new hospitals and due to the increasing share of the low-margin pharmacy
business in AHEL's revenues. In 2016-17, however, we expect the margin to increase marginally
as operations of some newly opened hospitals stabilise. An upswing in operating margin, will,
however, be constrained by the planned bed additions.

If their credit profile is examined, most of the listed companies maintain a healthy sub- or near 1
gearing, supported by regular equity infusions by the promoters. The aggregate gearing at 0.48 (as
on March 31, 2015), is heavily influenced by AHEL's conservative capital structure. With the
promotors pumping in as much as Rs 15 billion between 2005-06 and 2012-13, AHEL has been
able to maintain a low gearing over the medium term in spite of aggressive capacity additions. As
with gearing, the set's ROCE too is heavily influenced by AHEL's healthy returns, clocking a
robust 12-14% over the past 5-6 years.

2.6.6. Rating distribution of CRISIL-rated healthcare delivery entities
A closer look at the entities that are rated below ‘BBB’ (sub-investment grade) reveals weak debt
protection metrics owing to liquidity pressures arising from high gearing. They typically have a
high gearing in the range of 2 times and above compared with sub-1 gearing for established players
like Apollo Hospitals (AHEL), Fortis Hospitals Ltd (FHSL), etc. Some of these pain-points of
these entities can be attributed to:
Aggressive, debt-funded expansion: The debt-funded expansion strategy of these entities

has dragged down their financial performance. Most of the expansion is through
Greenfield projects (which typically take more time for completion and to break-even
compared with brownfield projects) and exposes them to liquidity pressures and to the risk
of defaulting on their debt servicing obligations should the projects fail to meet the
scheduled commissioning timelines. Cases where companies have defaulted owing to
delays in achieving timely completions of their newer hospitals are commonplace.
Issues concerning receivables management: Many of these hospitals are empanelled for
providing healthcare services under the government insurance schemes and often face
delays in receiving payments, thereby straining their cash flows.
Competition from national-level hospital chains: Smaller hospitals also face tough
competition from the national-level hospital chains setting up operations in their
geographies. These larger players attract patient inflows due to their established brand
names and proven track record in providing healthcare delivery.

2.7 Key challenges
The adequacy of a country's healthcare infrastructure and personnel is a barometer of its quality of
healthcare. This, in turn, can be assessed from bed density (bed count per 10,000 population) and
availability of physicians and nurses (per 10,000 population).
For India, that's where the concern begins. For a country accounting for nearly a fifth of the world's
population, India's overall bed density stands at 13, with the situation in rural areas being far worse
than urban areas. Not only is there a yawning gap between India's bed density and the global
median of 27 beds, but it also lags other developing nations, such as Brazil (22 beds), Malaysia
(19 beds) and Vietnam (20 beds).
Hospital bed density: India vs other countries
Source: WHO World Health Statistics 2014, CRISIL Research
The paucity of healthcare personnel compounds the problem. At seven physicians and 17 nursing
personnel per 10,000 population, India trails the global median of 14 physicians and 29 nursing
personnel. Even on this parameter, India lags behind Brazil (19 physicians, 76 nurses), Malaysia
(12 physicians, 33 nurses) and Vietnam (12 physicians).

Healthcare personnel: India vs other countries
Source: WHO World Health Statistics 2014
2.8. Growth drivers
Despite lagging behind global benchmarks in healthcare infrastructure, India's growth drivers are
fundamentally strong. CRISIL Research believes that a combination of demographic and
economic factors will spur growth in the healthcare delivery market as illustrated below:

2.8.1. Need for greater health coverage
India's population is expected to grow over 1.43 billion by 2025, from around 1.21 billion in 2011.
At seven beds per 10,000 persons, the number of beds in India significantly lags the global median
of 27 beds. Growth opportunity for the healthcare delivery market in India, therefore, is immense.
Growth in India's population
Source: Census, CRISIL Research
Demand for healthcare delivery services in India will also be augmented by factors such as
increasing life expectancy and declining infant mortality. As of 2011, nearly 8% of the Indian
population was of 60 years or more, and it is expected to surge 12.5% by 2026. However, the
availability of a documented knowledge base concerning the healthcare needs of the elderly (aged
60 years or more) continues to remain a challenge. Nevertheless, the higher vulnerability of this
age group to health-related issues is an accepted fact.

2.8.2. Trend in life expectancy
Note: LEB - Life expectancy at birth (years) ; IFR - Infant mortality rate (probability of dying by age 1 per 1000 live births)
Source: WHO World Health Statistics 2016
According to a report on the status of elderly in select Indian states, 2011, published by the United
Nations Population Fund (UNFPA) in November 2012, chronic ailments like arthritis,
hypertension, diabetes, asthma and heart diseases were commonplace among the elderly with
nearly 66% of the respective population reporting at least one of these.
In terms of gender-based tendencies, while men are more likely to suffer from heart, renal and skin
diseases, women showed higher tendencies of contracting arthritis, hypertension and osteoporosis.
We, therefore, believe that with more people being added to this age group, their demand for
healthcare infrastructure will only increase over the foreseeable future.
Break-up of population by age (%)
Source: Census, CRISIL Research

2.8.3. Rising income levels
Even though healthcare is considered a non-discretionary expense, considering that an

estimated 59% of households in India had an annual income of less than Rs 2 lakh in 2013-
14, affordability of quality healthcare facilities remains a major constraint.
Growth in household incomes, and consequently, disposable incomes, is, therefore, critical to the
overall growth in demand for healthcare delivery services in India. The share of households in Rs
2-5 lakh per annum income bracket is expected to go up to 38% in 2017-18, from 28% in 2013-
14, thereby providing immense growth opportunity for the industry.
Income demographics
2.8.4. Increasing health awareness
Factors such as increasing urbanisation (migration of population from rural to urban areas) and
rising literacy levels are expected to enhance awareness on preventive and curative healthcare and
in turn, boost demand for healthcare delivery services. CRISIL Research, therefore, believes that
hospitalisation rate (percentage of people who visit a hospital when unwell) for in-patient treatment
will improve with increased urbanisation.

Trend: Urban population in India as percentage of total population
Source: UN World Urbanisation Prospects: The 2011 revision
2.8.5. Government policies
The Pradhan Mantri Swasthya Suraksha Yojana (PMSSY) was announced in 2003 with the
objective of correcting regional imbalances in the availability of affordable/ reliable tertiary
healthcare services and to augment facilities for quality medical education in the country.
The scheme has two components:

1. Setting up of new AIIMS hospitals (to provide unbiased, affordable and quality
healthcare).
Six AIIMS hospitals, one each in Patna (Bihar); Raipur (Chhattisgarh); Bhopal (Madhya
Pradesh); Bhubaneshwar (Odisha); Jodhpur (Rajasthan) and Rishikesh (Uttaranchal), have been
setup under the PMSSY scheme. AIIMS Rae Bareli is under-construction and 11 more AIIMS
have been announced by the Ministry of which five have already been approved by the cabinet.
2. Upgradation of government medical colleges
The Ministry of AYUSH was also formed on November 9, 2014, to ensure optimal development
and propagation of AYUSH systems of healthcare. The Ministry of Health and Family Welfare
is also taking initiatives to eradicate communicable diseases such as tuberculosis, leprosy,
vector-borne diseases and is actively promoting programmes to raise awareness to prevent
HIV/AIDs.

Non-communicable diseases: A silent killer

As opposed to the decreasing rate in communicable diseases, life-related illnesses or non-
communicable diseases (NCDs) have been increasing rapidly in India over the last few years.
Statistics show that these illnesses accounted for nearly 56% of all deaths in India in 2008.
CRISIL Research believes that these illnesses exhibit a tendency to increase in tandem with rising
income levels. The year 2015 witnessed a higher percentage of deaths (64%) due to NCDs,
specially cancer and cardiovascular diseases. WHO projects an increasing trend in NCDs by 2030,
following which CRISIL forecasts demand for healthcare services associated with life-related
diseases such as cardiac ailments, cancer and diabetes, to increase.
Causes of death in India
Source: WHO Global burden of disease, CRISIL Research

2.8.6. Growing health insurance penetration
Low health-insurance penetration is one of the major impediments to growth of the healthcare
delivery industry in India, as affordability of quality healthcare facilities by the lower income
groups continues to remain an issue.
CRISIL Research believes that while low penetration is a key concern, it also presents huge
opportunity for the growth of healthcare delivery industry in India. This is evident from the fact
that between 2011-12 and 2015-16, the total number of private sector general insurer's policies in
India increased at a CAGR of nearly 9%. The premium during the same period increased at nearly
17%.
Furthermore, with health insurance coverage in India set to increase, hospitalisation rates are likely
to go up. In addition, health check-ups, which form a mandatory part of health insurance coverage,
are also expected to increase, boosting the demand for a robust healthcare delivery platform.
Growth in insurance premiums and policies
Source: IRDA Annual report 2015-16
As per the Insurance Regulatory and Development Authority (IRDA), nearly 359 million people
have health insurance coverage in India (as of 2015-16), as against 288 million (in 2014-15).
Government or government-sponsored schemes like the Central Government Health Scheme

(CGHS); Employee State Insurance Scheme (ESIS); Rashtriya Swasthya Bima Yojana (RSBY);
Rajiv Arogyasri (Andhra Pradesh government); Kalaignar (Tamil Nadu government), etc account

for 76% of health insurance coverage provided. The remaining is through commercial insurance
providers, both government (Oriental Insurance, New India Assurance, etc.) and private (ICICI
Lombard, Bajaj Allianz, etc.).
Number of persons covered under health insurance
Source: IRDA Annual report 2015-16
2.8.7. Medical tourism in India
With healthcare costs soaring in developed economies, the relatively low cost of surgery and
critical care in India makes it an attractive destination for medical tourism, especially for patients
from South-East Asia and the Middle East. Yoga, meditation, ayurveda, allopathy and other
traditional methods of treatment are major service offerings that attract medical tourists from
European nations and the Middle East to India.
The fact that India offers advanced medical facilities for critical illnesses such as cardiology, joint
replacement, orthopaedics, ophthalmology, organ transplants and urology, sharpens its
competitive advantage. Hence, medical tourism is expected to be a growth driver for healthcare
delivery in India. According to the latest data available with the Ministry of Tourism, of the total
foreign tourist arrivals in India, the proportion of medical tourists has grown from 2.2% (0.11
million tourists) in 2009 to 2.4% (0.18 million tourists) in 2014.

Growth in medical tourists*
Note: * Proportion of medical tourists of the overall foreign tourist arrivals

Source: Ministry of Tourism
As per the Ministry of Tourism, Africa, South and West Asia together account for a majority
92% of all the medical tourists coming to India.
Country-wise cost of ailments
Source: Industry

2.8.8. Other Key Growth Areas

While the healthcare delivery sector in India faces several teething issues currently, it also presents
immense opportunities for the players involved. Factors like inadequate bed density and
insufficient personnel boldly highlight the gap between the availability of healthcare infrastructure
in India vis-a-vis the global levels on one hand, on the other, they reflect the size of the opportunity
for the healthcare delivery players operating in the country.
The potential of the healthcare delivery sector in India is further augmented with information and
communication technology-enabled services gaining widespread popularity (CRISIL Research
expects internet subscriber base to increase from 374 million in 2015-16 to 984 million in 2020-
21; the wireless subscriber base (mobile phone users) is expected to increase from 353 million in
2015-16 to 957 million in 2020-21). Not only do these technologies increase the reach of the
healthcare facilities to the hitherto remote locations, they also help the players achieve better
efficiencies.Some of the emerging business models and technologies will help increase the reach
and efficiency of this industry are:
2.8.8.1. Home healthcare
The primary objective of home healthcare services is to provide quality health care at the patient's
premises. These services typically cater to the elderly patients, patients with ambulatory
constraints, patients who are terminally ill and patients who need relatively simple but periodic
care like physiotherapy, dressing and injections, etc. Research expects the demand for home-based
healthcare services to remain robust due to factors such as increasing trend of nuclear families,
growing size of geriatric population (aged 60 years or more) and increasing use of information
technology in healthcare (through mobile phone or web-based applications), etc.
2.8.8.2. Day care Centres
The objective of day care centres is to reduce the need for overnight hospitalization. In this type
of setup, a patient is allowed to go home on the same day after being treated. These centres have
also given rise to the concept of outpatient surgeries. While this model is very popular in the eye
care segment, other segments such as arthroscopic surgery, general surgery, cosmetic surgery and
dental surgery have also been using this as a popular care delivery model. The advantage of day
care centre model is that patients can save on bed/room rentals associated with overnight
hospitalization. The healthcare units, on the other hand, can have a streamlined setup with
optimum equipment, staff and infrastructure which helps to bring down operational costs.

2.8.9. Investor Sentiments

The non-discretionary nature of healthcare expenditure and the attractive growth rates delivered
by leading players have resulted in increased focus on the healthcare industry as an investment
opportunity. While the healthcare industry is inherently capital intensive in nature with a long-
gestation period; steps to moderate capital intensity such as leasing of premises, franchising,
operating and maintenance contracts, etc. have helped to somewhat mitigate such concerns.
Further, high-volume specialisation and value added services have led to increased capital
efficiency and improved asset utilizations. As a result, there has been a notable increase in venture
capital and private equity investment into the industry.
2.8.10. M&A and PE investments

Like pharma, Healthcare has seen a lot of consolidation through Mergers and Acquisitions. In
2014, M&A deal value stood at $5.78 billion, an increase of 44.5% from 2013. There was an
increase in the total number of deals as well – from 44 in 2013 to 65 in 2014.
Healthcare sector has also been an attractive destination for PE firms because of the growing
hospital segment. According to a survey by global management consulting firm Bain & Company,
retail and consumer goods were the most preferred sectors by PE funds in India in 2012. However,
health care became the most preferred sector in 2013. Both in PE deal volume and value there is
a marked growth in health care. Given the opportunities, there will be sustained PE interest in
health care in the years ahead.
Out of all the deals in Q1 2015, 14% of them were accounted from pharma, healthcare and biotech
sector. In 2014, the pharma, healthcare and biotech sector witnessed $632 million of PE
investment, marking a continuous uptrend in deal activity. Some of the recent deals are:

2.8.11. FDI
Healthcare is a sector where the policies for FDI have been quite supportive. Some of the key
highlights are:
• Greenfield projects under the automatic route are allowed 100% FDI
• For Brownfield project investments, up to 100% FDI is allowed under the government
route. Burgeoning demand, unique cost advantages of India and decent policy support have
been instrumental in attracting FDI
• FDI inflows for drugs and pharmaceuticals between April 2000 to May 2015 stood at $13.8
billion. Inflows into hospitals and diagnostic centers, and medical appliances stood at
$3.11 billion and $0.96 billion, respectively, during the same period
2.9. Use of emerging technologies

Technology today is disrupting every field, healthcare being no exception. Developments in
information technology have helped create systems which ensure faster and reliable services.
While on one hand these systems help increase the reach and quality of healthcare delivery
systems across the country, on the other hand they also enable healthcare delivery providers to
improve efficiencies by helping them in resource planning, maintaining patient records, etc. Some
of these systems are:
2.9.1. Mobile-based Applications

Healthcare delivery is also seeing an influx of mobile-based applications (mobile apps) which
assist both doctors as well as patients. These apps typically provide features such as self-diagnosis,
drug references, hospital/doctor search and appointment assistance, electronic prescriptions etc.
While certain apps allow doctors to obtain information on drugs, dosage, contradictions, disease
and condition references and procedures, there are others which allow patients to locate doctors
and fix appointments and also to view video consultations. There also are apps that help patients
save their medical records and to keep them updated regularly.

2.9.2. Telemedicine
Telemedicine is a technology designed to increase the accessibility of healthcare services from
remote locations. Telemedicine makes extensive use of information technology to create a
connection between doctors at the main hospital and patient at the remote centre or the
telemedicine centre. The doctor analyses the patient through telephonic conversation or video
conferencing. The doctor is assisted by a junior doctor or health worker who is physically present
at the telemedicine centre. The junior doctors physically examine the patient and convey the
information to the doctor. The doctor communicates diagnosis and medication based on the inputs
provided by the junior doctors. In case the ailment is complicated the patient is advised to get
admitted at the main hospitals to avail intensive care.
2.9.3. Robotic Surgery

Robotic surgery (RAS) or robotic surgery is surgery conducted using a robotic arm. This arm is
controlled electronically using a control pad which may be located at local or remote location and
is also equipped with high definition cameras allow surgeons to take a closer look of the areas
being operated. Since robot assisted surgeries can be performed from remote locations, it allows
patients to avail treatment from the desired specialist surgeons across the world without having to
travel. Robot assisted surgeries have been used to conduct General Surgeries, Bypass surgeries,
Colorectal Surgeries, Gastrointestinal surgery, Neurosurgery, Orthopaedic surgeries, etc.
2.10. Government Policies & Budget Impact

2.10.1. PPP (Public Private Partnerships)
In order to provide quality healthcare free of cost to the poor patients (patients whose incomes fall
below the poverty line), government has also introduced the concept of public private participation
(PPP) in healthcare. One of the various models of PPP in healthcare in India is the infrastructure
model wherein the government enters into a partnership with private players to build hospitals,
wherein a certain percentage of beds are reserved for the poor patients. The beds are reserved with
an objective to provide healthcare services to the poor, free of cost.
As mentioned before, land cost is a major component of capital cost for constructing hospitals;
rising land prices have become detrimental for expansion. Therefore, private players are also
interested in an arrangement like the PPP, where the government either provides land at nominal
price or free of cost and the private party has to bear only the construction and equipment cost.

PPP models in healthcare in India are mainly segregated into
• Services
• Infrastructure
Services comprise of following types:
Contracting-in The contracting in model involves hiring a private agency to provide in-
house services, primarily diagnostics and pharmacy facilities, in a government hospital.
Contracting-in Sawai Man Singh Hospital, Rajasthan
The SMS hospital has established a Life Line Fluid Drug Store to contract out low cost high
quality medicine and surgical items on a 24-hour basis inside the hospital. The agency to operate
the drug store is selected through bidding. The successful bidder is a proprietary agency, and the
medical superintendent is the overall supervisor in charge of monitoring the store and it’s
functioning. The contractor appoints and manages the remuneration of the staff from the sales
receipts. The SMS hospital shares resources with the drug store such as electricity, water,
computers for daily operations; physical space; stationery and medicines. The contractor provides
all staff salaries; daily operations and distribution of medicine; maintenance of records and
monthly reports to SMS Hospital.
Contracting-out
In contracting out, government hires a private party to manage the entire healthcare unit. For
instance, in many cases the government has hired NGOs to manage primary health centres in rural
areas. Other form of contracting out includes management contract, which is commonly practiced
in tertiary healthcare. In management contract, the government hospital is managed and operated
by a private party for a fixed period of time. The private party gets a management fee for its
services, which is typically a share of revenues or profits.

Infrastructure comprises of following types:
Build-operate-transfer(BOT): This type of contract provides a private party to finance, build,

operate and maintain a facility for a given concession period. During the life of the concession,
fees collected from patients are used for covering costs of construction, debt servicing and
operations. Assets are transferred back to the public authority at the end of the concession period.
BOT Cardiac Care Unit (Fortis Escorts Hospital), DDU Hospital, Dehradun
Tertiary care services are largely concentrated with the private hospitals in a few cities across
Uttarakhand. Even large government hospitals do not have surgical specialties forcing people to
seek services either from private hospitals or travel to Delhi. Pandit Deen Dayal Upadhyay
Hospital (DDU), Dehradun, is one of the largest government hospitals in the state. But due to
shortage of specialist doctors, the hospital was unable to offer any super-specialty services. In
2011, the government decided to engage Fortis Hospitals to build and operate a 50-bed cardiac
care unit (CCU) within the premises of DDU. The initial contract would be for 10 years. Under
the contract, 25 in-patient beds (out of 50) would be reserved for BPL patients at government
stipulated rates. Services provided to the BPL patients are reimbursed by the government. The
government also agreed to pay Rs 99,200 per month per occupied bed as a grant. Each day, OPD
consultation is free of charge for all patients and at a specified time of the day. Services include
cath lab, cath recovery, heart command, intensive care unit (ICU) and advanced diagnostics. The
facility deployed 11 full-time doctors including specialists.
Build-own-operate-transfer (BOOT): Similar to the BOT concept, the project is handed over to
the government after the concession period. Here, ownership is with the private player during the
concession period, whereas, in the case of a BOT contract, the ownership stays with the
government and only the asset is leased out to the concessionaire.
Design-build-finance-operate-transfer (DBFOT): In this model, the private party designs the

entire project as per the specifications and requirements, it also undertakes financing and
construction. After the project is completed, the private player maintains and operates the facility
till the end of concession period. At the end of the concession period assets are transferred back
to the public authority.

2.10.2. Other Government Initiatives

The benefit of section 10 (23 G) of the IT Act has been extended to financial institutions that
provide long-term capital to hospitals with 100 beds or more
The benefit of section 80-IB has been extended to new hospitals with 100 beds or more that are
set up in rural areas; such hospitals are entitled to 100 % deduction on profits for five years
Customs duty on life-saving equipment has been reduced to 5 % and exempted from
countervailing duty
Import duty on medical equipment has been reduced to 7.5 %
Incentives and tax holidays are being offered to hospitals and dispensaries providing health travel
facilities
The major emphasis of Indian government over the last few years has been on rural health. The
fact that almost 70% of the government planned outlay was on its flagship programme NRHM
further substantiates this statement. Buoyed by the success of NRHM in raising the rural health
standards, the government grouped the National Urban Health
Mission with NRHM under one umbrella programme named as the ‘New National Health
Mission’ in FY14 budget. The central government also increased the budgeted allocation on
Ministry of Health from INR 305bn in FY13 to INR 327bn in FY14, an increase of 7%.
Fund allocation to provide accessible and affordable services to elderly under National
Programme for the Health Care of Elderly
Pradhan Mantri Swasthya Suraksha Yojana is being expanded to cover up gradation of seven more
Government medical colleges to increase access to tertiary care
Scope of ‘Accredited Social Health Activist’ (ASHA) has been widened along with increases in
their funding for rural infrastructure development. It is envisaged that this will go a long way to
strengthen access to healthcare for the people at the bottom of the pyramid
The government has announced Rs 5000 deduction for individuals who go for a preventive health
check-up. India has the largest pool of diabetic patients in the world, with more than 41 million
people suffering from the disease and is being referred to as the diabetes capital of the world
Full exception from the basic custom duty and CVD is provided to certain medical products like
steel tube and wire, cobalt chromium tube, Hayness alloy-25 and polypropylene mesh used for
coronary stent, artificial heart valve
Introduced a proposal to modernize existing vaccine units and set up a new integratedvaccine unit
in Chennai, moving towards achieving 100% immunization for its people

Import duty on certain products used in hospitals like Syringe, needles, catheter, blood glucose
monitoring systems (Gluco-meter), blood pressure monitor etc has been reduced from 5 % to 2.5
% while CVD has been increased from 4 % to 6 %
2.10.2.1. National Health Policy
The National Health Policy 2002 focuses on the need for enhanced funding and organizational
restructuring of national public health initiatives to facilitate more equitable access to healthcare
facilities
The policy focuses on diseases that mainly contribute to the disease burden — tuberculosis,
malaria and blindness from the category of historical diseases and HIV/AIDS from the category
of newly emerging diseases
This policy aims to achieve gradual convergence of health under a single field of administration
and lays emphasis on the implementation of programmes through local self-government
institutions
The policy also aims to identify specific programmes targeted at women‘s health and
strengthening of food and drug administration, in terms of laboratory facilities and technical
capabilities
Under this policy, a larger contribution is proposed from the central budget for the delivery of
public health services at the state level

2.11.Budget Impact
1. Focus on primary healthcare: In many ways the prime focus of this year’s budget has
been on rural India. Rural India faces a huge shortage of general physicians as well as
specialists. Some primary health centres and rural hospitals cater to disproportionately
large populations and availability of hospital beds remains heavily skewed in favor of urban
areas. In this light, the government’s announcement that 150,000 health subcentres will be
transformed into health and wellness centres is a welcome initiative for strengthening
primary health care. The increase in allocation for schemes related to women and child
welfare across all ministries to the tune of Rs 24,000 crore is also a positive measure that
will strengthen an underfinanced public healthcare.
2. Strengthening secondary and tertiary healthcare: Creating 5,000 new post graduate
seats per annum and rolling out new medical courses in major district hospitals will help
churn out more specialists as well as allied healthcare professionals. Given the paucity of
well-trained emergency medicine personnel, we hope the government would pay special
attention to starting dedicated EMT courses in several hospitals. Another notable
announcement has been that of setting up two news AIIMS in Gujarat and Jharkhand.
Given the need to expand availability of healthcare, strengthen the medical education
system and improving the doctor-patient ratio, we need at least one AIIMS in every state.
Fortunately, over the past 15 years, the government has taken note of this need and has
initiated measures to start a series of AIIMS across the country.
3. Ambitious targets on disease elimination: For the first time, Indian government has
stated that it has laid out concrete plans to eliminate tuberculosis from India by 2025. India
has the highest burden of tuberculosis, a disease which has been successfully eliminated
from a large part of the world. Other notable targets of elimination include kala-azar and
filariasis by 2017, leprosy by 2018, and measles by 2020. Though they seem ambitious
targets, it is highly imperative that all resources are spent towards achieving them to reduce
the burden of communicable diseases. We have also heard a new pledge by the government
to bring down the Maternal Mortality Rate (MMR) to 100 till 2020.

2.10. Key Players
2.10.1. Apollo Hospitals Enterprises Ltd.

Apollo Hospitals Enterprises Ltd (AHEL) was jointly promoted by Dr Prathap Reddy and Mr Obul
Reddy in 1979. The company commenced operations in 1983 with 'Apollo Chennai', the
firstcorporate hospital to be setup in India. Apollo is one of the largest healthcare service providers
in India with 9,554 beds across 69 hospitals. Apollo Hospitals has JCI (Joint Commission
International) accreditations for 8 hospitals and 10 hospitals have NABH (National Accreditation
Board for Hospitals) accreditation. While hospitals is the core business of the company, it is also
present in allied businesses such as pharmacies, clinics, hospital consultancy, health insurance,
education, research and telemedicine.
The company has planned an addition of 1,045 beds by 2019 involving an investment of over Rs
15 billion. Apart from expanding its presence in major cities, Apollo is also expanding into smaller
cities and towns through the Apollo 'Reach' initiative with a view to increase penetration in these
locations.
Apollo Hospitals Enterprise Limited (AHEL): Capex details as of June 2017

2.10.2. Fortis Hospitals
Fortis Healthcare Limited (FHL) was incorporated in February 1996 as Rancare Limited by the
promoters of Ranbaxy Laboratories Limited. The company’s first healthcare facility became
operational at Mohali, India in 2001. As a part of its expansion strategy, Fortis acquired Escorts
Heart Institute and Research Centre Limited in 2005 and 10 hospitals owned by Wockhardt
Hospitals Limited in 2009. In 2012, the company acquired Fortis Healthcare International Limited
from RHC Financial Services (Mauritius) Limited through which it gained access into various
international markets.
Currently, apart from India, the company currently operates hospitals in Singapore, Dubai,
Mauritius and Sri Lanka, has 65 healthcare facilities (including under development projects) and
a potential of over 10,000 beds. Although hospitals form the company’s core business, it also has
a presence in the diagnostic business as well.


3.1. Diagnostics in HealthCare

The diagnostic market is expected to grow to $12 Bn in 2020 from $6 bn in 2015 growing at the
rate of 16-17 % per annum. It is split between imaging and pathology with 30 percent and 70
percent respectively. Pathology testing being first line of diagnosis for majority of diseases is the
major factor that resulted in it attaining a dominant position in the market.
As is the case with most sectors, the diagnostic industry has a predominance of the unorganized
players in the absence of stringent regulations and low entry barriers. Diagnostic chains
command about 15% share. Within this pie large nationwide chains, such as Dr Lal PathLabs
enjoy a 35-40% share.
There are multiple formats in which diagnostic business can operate; firstly as ‘standalone
centres’ offering basic testing, ‘hospital based centres’ –where some of the work may yet get
outsourced to third-party laboratories and lastly ‘diagnostic chains’ – which have an all-India
network and offer a complete suite of services.
Diagnostic Centres gets broadly classified into imaging diagnostics or radiology – that identifies
anatomical and physiological changes in the body and pathology services – that involves testing
of samples of blood, urine, stools and other fluids etc. from the body. Typically, pathology
services account for the larger share within diagnostics, given it has gained prominence as the
preferred mode for testing a number of conditions. Within pathology it is the biochemistry
related tests that represent a greater share – these pertain to determination of changes in chemical
composition of body fluids in response to underlying disease. Given the rising prevalence of
chronic conditions like diabetes and cardio-vascular problems a far greater number of tests are
getting prescribed and consequently blood sugar and lipid profile tests have come to occupy a
dominant share within the diagnostics industry.
Revenue contribution of diagnostic centre models in

2016
15
48
37
Diagnostic chains Hospital based Diagnostics Standalone Diagnostic centers

Diagnostic chains prefer a hub-and-spoke approach to reach out to a wider audience. A typical
arrangement will have any combination of a Reference Laboratory, Satellite Laboratories and
Collection Centres or Patient Service Centres Diagnostics essay the role of an intermediary,
bearing information that can be used for correct diagnosis and treatment.
National reference lab: The national reference labs are located centrally, usually in a large
metropolitan area and typically serve as the corporate headquarters of diagnostic chain
companies. The national reference labs are equipped to conduct both routine and specialized
pathology and imaging tests. They may be spread over an area of 2,000-3,000 square feet,
usually divided into a work area, front office, back office and sample collection area
Regional reference lab: Regional reference labs are situated in large metropolitan cities and act
as regional hubs, which accumulate samples from satellite labs and collection centres across the
country. Like national reference labs, regional reference labs also offer comprehensive and
special testing facilities.
Satellite Labs: Satellite labs offer a limited range of services. They mainly act as feeders for
reference labs. Satellite labs may be either owned or franchised by a diagnostic chain company.
Collection centres: Collection centres are located in hospitals, nursing homes, pathology labs,
doctors’ clinics, prime commercial properties and retail spaces, among other places. Collection
centres may be company owned or franchised. A franchisee usually pays a franchise fee, around
30,000-50,000, to get the license to operate a collection centre for a satellite lab. Typically, the
collection centres are mainly involved in the collection and forwarding of patient samples to a
satellite or reference lab. However, the collection centres of certain chains may also be equipped
to conduct some basic tests. The centres usually have basic equipment in the form of a
refrigerator and a centrifuge, and employ minimal staff, such as a receptionist, lab technician,
attendants and delivery staff.

3.1.1. Dr Lal PathLabs

Dr Lal PathLabs (DLPL) is in the business of providing diagnostic & related healthcare tests and
services in India. With a cumulative offering of 3,495 diagnostic and related healthcare tests &
services, DLPL has proven capability in performing most diagnostic healthcare tests and services
currently prescribed by Indian physicians. Its customers include individual patients, hospitals and
other healthcare providers as well as corporate customers. DLCP has a pan-India presence with a
strong network of 172 clinical laboratories (including a National Reference Laboratory in New
Delhi), 1,554 patient service centres & over 7,000 pickup points.
Source: Company Reports

3.1.2. Thyrocare
Thyrocare Technologies (Thyrocare) is one of the leading pan-India diagnostic chains. The
company currently offers 198 tests and 59 profiles of tests to detect a number of disorders.
Thyrocare also offers patients and corporations a suite of wellness and preventive healthcare
tests under the brand Aarogyam. The company has a pan-India network of 1041 authorised
service providers across 466 cities and 24 states & union territories. In addition, through its
subsidiary, Nueclear Healthcare (NHL), Thyrocare has set up a network of molecular imaging
centres in New Delhi, Navi Mumbai and Hyderabad focusing on early and effective cancer
monitoring.
Source: Company Reports

4.1. Sectoral Comparison

4.1.1. BSE Healthcare v/s BSE Sensex
Index S&P BSE Healthcare S&P SENSEX
Open Price 13230.94 31769.34
High Price 13430.71 31944.10
Low Price 13230.94 31707.27
Current Price 13390.64 31892.23
Prev. Close Price 13149.26 31730.49
Absolute Change 241.38 161.74
Percent Change 1.84% 0.51%
Companies Count 40 31
PE Ratio 37.53 27.98
Focus Healthcare Market Cap & Liquidity
As On 01-Sep-2017 01-Sep-2017

4.1.2. NIFTY PHARMA v/s NIFTY 50
Index Nifty 50 Nifty Pharma
Open Price 9937.65 8936.85
High Price 9983.45 9088.90
Low Price 9909.85 8925.40
Current Price 9974.40 9071.70
Prev. Close Price 9917.90 8859.65
Absolute Change 56.50 212.05
Percent Change 0.57% 2.39%
Companies Count 51 10
PE Ratio 27.50 36.10
Focus Market Cap & Liquidity Pharmaceuticals
As On 01-Sep-2017 01-Sep-2017

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UNNATI INVESTMENT MANAGEMENT AND RESEARCH GROUP

SANCHIT AGARWAL SSA| ADITYA VINEET JSA | VISHAL K TIBADEWAL JSA

Unnati Sector Report 2017-18 | 1

1.5.4.1. Prescription drugs ............................................................................................................... 32

Unnati Sector Report 2017-18 | 2

1.14.2. Aurobindo Pharma ................................................................................................................. 54

Unnati Sector Report 2017-18 | 3

2.3. Industry Characteristics..................................................................................................................... 71

2.8.9. Investor Sentiments…….………………………………………………………………………………………………....97

2.8.10. M&A and Other PE Investments……….…………………………………………………………………………....97

Unnati Sector Report 2017-18 | 4

2.9. Use of Emerging Technologies……..…………………………………………………………………………………….……...…98

2.10. Government Policies and Budget Impact…………………………………………………………………..……………..….99

2.11. Key Players …………………………....…………………………………………………………………………………..……………..105

3.1. Diagnostics in Heathcare ................................................................................................................... 108

4.1. Sectoral Comparison ......................................................................................................................... .112

4.1.2. NIFTY PHARMA v/s NIFTY 50..……...………………..……………………………………………………………..…..113

Unnati Sector Report 2017-18 | 5

1.1 Pharma 101

1.1.1.Active Pharmaceutical Ingredient (API) or Bulk Drug

Unnati Sector Report 2017-18 | 6

1.1.3. Patented Drugs

1.1.4. Generic Drugs

1.1.5. Acute Ailments

1.1.6. Chronic Ailments

Unnati Sector Report 2017-18 | 7

1. Central Drugs Standard Control Organization (CDSCO): It is the national regulatory

1.1.8. Pharmaceutical Value Chain

Unnati Sector Report 2017-18 | 8

Pharma Value Chain

Unnati Sector Report 2017-18 | 9

1.2. Pharmaceutical Industry: A brief overview

1. Innovator pharmaceutical companies involved in developing patented drugs.

Generic pharmaceutical companies are involved in developing copies of patented drugs by

Unnati Sector Report 2017-18 | 10

1.3. Sector Overview – Pharmaceuticals

Indian Pharmaceutical Industry Sales in USD(Bn)

Unnati Sector Report 2017-18 | 11

1.3.1. Domestic Markets

Unnati Sector Report 2017-18 | 12

Domestic Pharmaceutical Market sales in INR billion from FY11- FY18

1.3.2 Breakup of Domestic Industry

Anti-effective Gastro-Intestinal Vitamins Cardio-Vascular Anti-Diabetic Respiratory

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1.3.3 International Markets

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Outlook on formulation exports

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1.3.4 Challenges in International Market

1.3.5 Patent Cliff

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1. Prevention Strategy: This strategy’s main motive is to temporarily prevent or distort

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1.4. Industry Characteristics

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1.5. Major Market Segments of the Industry

1.5.1. Based on Products/Services

1.5.1.1. Active Pharmaceutical Ingredients (API) or Bulk Drugs

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1.5.1.1.1. Growth Drivers

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