Sector Update
19 Apr 2013

Pharmaceuticals

     
 
 
Despite tight regulatory framework Pharma Sector to remain on its growth trajectory…

One of the most significant industries, Pharmaceutical Industry in India is third largest in the world in terms of volume and positioned tenth in terms of value with the registration of over 20,000 highly fragmented units. The industry has been growing consistently in the past two decades with over 250 pharmaceutical large units and about 8000 Small Scale Units. The units produced have the complete range of medicines, which are ready for consumption by patients. The Indian Pharma Industry caters approximately 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. The Indian Pharma sector produces 600 Generic brands, 600 therapeutic categories, and manufactures more than 500 different APIs. While, Generics continue to dominate the market; patent-protected products are expected to constitute 10% of the pie till 2015.

 

Pharma sector could touch $74 billion by 2020...
The pharma sector of India is incessantly gaining its position as a global leader and is poised to grow from $21.7 currently, to $36.7 billion by 2015, it could even touch $74 billion by 2020. This is in line with Indian Government's Pharma Vision 2020, which aims at making India a global leader in end-to-end manufacturer by 2020, and is planning to set up $640 million VC to boost drug discovery and strengthen the pharmaceutical sector. Several multinationals are already set to launch patented drugs across India. The demand for high-end drugs in rural India is estimated to grow to $8 million by 2015, wherein 70% of India's population resides. Efforts are being made to reach chemists and OTC drugs to the rural population through expanding networks.


 
CURRENT SCENARIO
 

Demand of generic medicines & penetration in rural markets would be a growth driver in FY13…
The pharma sector in India is likely to strike a sale of $74 billion by 2020 from the current $21.7 billion. The industry has been projected to grow at a CAGR of 14-17% over 2012-16. Currently India is now among the top five emerging pharmaceutical markets with domestic formulation market standing at $10.88 billion or approximately Rs 58,300 crore. While in the short-term, on the back of increasing sales of generic medicines, continued growth in chronic therapies and a greater penetration in rural markets, the domestic pharmaceutical market is expected to register a strong double-digit growth of 13-14% in 2013. The year 2012 closed with a growth of 12%. The cumulative drugs and pharmaceuticals sector attracted FDI worth $9.78 billion from April 2000 to November 2012 and further with the Govt's favorable FDI policy the investment in Pharma sector likely to increase in up coming years.

 
 

Export of Pharma Products
Indian pharmaceutical industry growth has been fuelled by exports and its products are exported to a large number of countries with a sizeable share in the advanced regulated markets of the US and Western Europe. India currently exports drug intermediates, Active Pharmaceutical Ingredients (APIs), Finished Dosage Formulations (FDFs), Bio-Pharmaceuticals, Clinical Services to various parts of the world. India had targeted to export pharmaceutical products worth $15.5 billion in 2012-13 fiscal, higher by about 17% compared to $13.22 billion in 2011-12. However, owing to a slowdown in the economy the target of $25 billion for pharma exports in 2013-14 would be a challenging task for the industry.

 

European & American markets accounted for 55% of pharma products export…
The European and American markets accounted for 55% of the Indian pharmaceutical product exports, reflecting that most of these products were made to the highest specification of the US Food and Drug Administration (USFDA). The export volumes to the European and US markets speak volume about the high quality of Indian pharmaceutical products. The Indian pharmaceutical industry reported business growth of about 15% on compounded aggregated growth rate between 2006-07 and 2011-12. Further, market initiatives were underway to promote exports, especially the International Exhibition for Pharma and Healthcare (IPHEX). Over 600 Indian companies are expected to participate in IPHEX, being organised by the Pharmaceuticals Export Promotion Council of India, set up by the Ministry of Commerce and Industry. Considering that the pharmaceutical industry involves sophisticated technology and stringent Good Manufacturing Practice (GMP) requirements, major share of Indian Pharma exports going to highly developed western countries bears testimony to not only the excellent quality of Indian pharmaceuticals but also its price competitiveness. More than 50% share of exports is by way of dosage forms.

APPROVALS IN GLOBAL PHARMA MARKETS
The pharma companies of India have the largest number of US Food & Drug Administration (USFDA)-approved plants for generic as well as patent drugs across the world. The pharma manufactures and the number of Indian pharmaceutical companies who are getting international regulatory approvals for their plants are increasing day-by-day. Indian companies are now seeking more Abbreviated New Drug Approvals (ANDAs) in USA in specialized segments like anti-infective, cardiovascular and central nervous system groups.

Indian Pharma companies competent to grab major chunk of USFDA approvals...
The USFDA granted total 476 ANDAs approvals during the year 2012 as against 431 approvals in the previous year, of these total USFDA approvals, Indian companies grabbed 37.4% approvals in 2012, as against 33.4% in the last year. The number of approvals by Indian companies of USFDA increased to 178 ANDAs during 2012, as compared to 144 in the previous year despite stringent approval norms. However, the total number of tentative approvals stood at 94 during 2012, lower as compared to 117 in the previous year of which, Indian companies got 42 tentative approvals during 2012 as compared to 49 in the preceding year.

 
 
IMPACT OF BUDGET 2013 ON THE PHARMA INDUSTRY
 

In Budget 2013, the Govt has allocated considerable amount of fund to pharma & healthcare sector and in near future the disbursement of fund to healthcare sector looked to be the only positive factor for the industry. Govt has announced Rs 37,330 crore for the Ministry of Health and Family Welfare of which, Rs 21,239 crore has been allocated to new National Health Mission (NHM); 24.3% increase over the Revised Estimate (RE) of last year.

Higher Tax burden, but increase in depreciation rate would be beneficial...
On the fiscal policy side, not much has been seen for the tax proposals for pharma industry in FY14 budget. Rather, the pharma companies have to bear the brunt of Steep rise in surcharge rate from 5% to 10%. The rise in tax withholding rates while making payments to non-resident companies in the nature of royalty or fees for technical services from 10% to 25% is likely to increase the tax burden further. Though, additional deduction of 15% for investment in plant & machinery (exceeding Rs 100 crore) could be called a welcome step for manufacturing sector in general, though, a number of pharmaceutical companies benefiting from this would be limited.

MRP based assessment will help to address valuation related issues...
In the proposed Budget, branded Ayurvedic medicines and medicines of Unani, Siddha, Homeopathy or Bio-Chemic system have been brought under MRP based assessment with an abatement of 35% from the MRP. This change has come into force with immediate effect, which should help to address valuation related issues that exist currently and thus align with the larger pharma industry. Rates of customs, excise and service tax rates remain untouched. The roadmap and allocation towards the first installment for CST compensation seems to be a positive foot forward in the implementation of GST.


 
 

SWOT ANALYSIS

Strength

  • The Indian Pharma Market has potential of growth with the highly reliant on modernization and reforms in the sectors.
  • India has filed a number of non-infringing process patents.
  • India has long-term trade establishment with western European and US.
  • With the quality products, Indian Pharma companies are capable to get the approvals easily & timely.

 

Weakness

  • The infrastructure of Healthcare sector of India is still underdeveloped.
  • Lack of Comprehensive drug reimbursement.
  • The policy of Indian Govt is relatively ambiguous and biased.
  • Multinational Companies are selling the same products at lower price.

 

Opportunities

  • Growing number of large population generate the demand of pharma & medical products.
  • Undersized chronic disease market.
  • The APIs produced in India are highly in demand worldwide.
  • Domestic companies increasing the R&D facilities.
  • Disease Eradication Programmes are getting public funding.

 

Weakness

  • Disappointed Govt policy to revise its opaque and discriminatory pricing & reimbursement.
  • Due to manufacturing impediment, the export of generic drugs highly affected, especially to US.
  • Considerable counterfeit drug industry damaging the organized sector.
  • Need for overhaul of healthcare delivery structures hampering better access to medicines.

 

The New Pharma Policy likely to hurt the Bottom line of MNC companies...
The decision of Govt to implement the Drug Price Control Order, 2013 in which National Pharmaceutical Pricing Authority (NPPA) has slapped overcharging notices to over 900 companies for overcharging of medicine prices, involving a penalty of nearly Rs.2,600 crore. The cases specifically pertain to drugs such as Combiflam, Doxyl, I-V fluid, Gentamicin, Becosules Capsules and Paracetamol whose prices are controlled under the government's drug price control order, and where companies were not adhering to the price specified by the NPPA. More over this, the drug watchdog has also increased the frequency with which it makes suo motu purchase of drug samples, in a bid to keep prices under check, so that pharma manufactures cannot violate the NPPA rules.

New order will adversely affect mostly MNC Pharma companies...
However, the government's decision to implement this Order likely to impact multinational pharmaceutical companies adversely. MNC pharma players are the market leaders in most of the segments where price control will be implemented. Further, companies catering to medicines that fall under the purview of price control, and selling their products at prices lower than the ceiling price, will have to freeze their prices, as per the recent changes made in the policy. Ceiling prices will be fixed at the prevailing price on May 2012, six months before the policy was notified. The move will result in the prices of medicines under the control reducing by 50 to 70%, which will help the patients largely. Further, the new policy will cap prices of 348 essential medicine formulations at the arithmetic average of all drugs in a particular segment with a minimum of 1% market share. At present, the government has been fixing the prices of 74 bulk drugs on a cost-plus basis. As a result, around 30% of the Rs 1 trillion of domestic revenues will be affected as against only 17% presently.

The profit margin of the pharma companies likely to reduce by up to 25%.
The policy has tried to deal the problems that existed earlier by making it applicable to imported medicines, provided they fall in the essential medicines list. The policy also does not allow alteration to the drug which would be used to take the drug out of the purview of price control. If a new ingredient is added, the company will have to seek permission from the pricing authority. However, the move will impact the earnings of multinationals and other top pharmaceutical companies that have a good product line of essential drugs. The profit margin of the companies will be reduced by up to 25% after implementation of the control order.

 
 
 

Consequently the, MNC pharma companies will not only be affected on the price front...
The recent addition of freezing the prices of those medicines that are being sold at prices lower than the ceiling price seems a bit unfair, as the companies were unaware of the ceiling price in May 2012. While those selling their products at prices higher than the ceiling price will be asked to reduce it, those selling at prices lower than the ceiling price will not get the option of increasing their selling price. Along with the price control what will impact the industry is the government's proposal of purchasing drugs worth Rs 15,000 crore through the tender process. These drugs will be used for free supply through government hospitals and dispensaries. MNC pharma players typically do not participate in these tenders and the government prefers to buy generics and not branded formulations that MNCs produces. As a result, post new pharma policy, MNC pharma companies will not only be affected on the price front, but also on the volume front.

 
 
 

Key Financials - Pharma Companies

 

A recent verdict of Apex court in India over a Patent of a MNC may negatively impact the foreign investment in the pharma sector...
Recently, the Supreme Court of India rejected multinational pharma major Novartis' patent for its cancer drug Glivec, terming it too similar to Novartis's earlier version, only an amended one of a known compound. The decision, which was a culmination of a high profile, seven-year legal battle, should help protect the availability of cheap generic drugs for poor patients. The move takes on global intellectual property (IP) regimes that allow big pharma business to use, and reuse, their patents, thereby keeping lifesaving drugs expensive and out of the reach of vast populations. However, the ruling opens the way for generic companies in India to manufacture and sell cheap copies of the drug in the developing world and has implications for HIV and other modern drugs too but in the long-term, this legal judgment may negatively impact the foreign investment in the pharma field in the company.

 
 

OUTLOOK
The Indian pharmaceutical industry is on a good growth path growing at a CAGR of more than 15% over the last five years and having significant growth opportunities. However, for the industry to sustain the growth pace till 2020, companies will have to rethink their business strategy. They will have to adopt new business models and think of innovative ideas to service their evolving customers faster and better. The regulatory interventions however will remain a big concern and now a careful consideration by Pharma Companies is required before they could plan their future strategies. The new pharma policy will have serious implication for the Indian pharmaceutical market where, large multinational pharmaceutical companies like GlaxoSmithKline (GSK), Abbott, Pfizer, Cipla, Ranbaxy and Cadila, which record high domestic sales, are likely to be hit the hardest because of the high presence of essential drugs in their portfolio.

However, Pharma companies will continue to grow both organically and inorganically through alliances and partnerships and focus on improving operational efficiency and productivity. Developments in the health insurance, medical technology and mobile telephony can help in the industry's growth by removing financial and physical barriers to healthcare access in India. The high burden of disease, good economic growth leading to higher disposable incomes, improvements in healthcare infrastructure and improved health care financing are driving growth in the domestic market. Moreover, emerging new business models as well as the key winning factors need to be kept in mind to attain sustainable long-term growth.


NAME
DESIGNATION
E-MAIL
Varun Gupta
Head - Research
Pashupati Nath Jha
Research Analyst
Vikram Singh
Research Analyst
 
For more copies or other information, please send your query at research@moneysukh.com
 
 
 
  Mansukh Securities and Finance Ltd
Office: 306, Pratap Bhavan, 5, Bahadur Shah Zafar Marg, New Delhi-110002
Phone: 011-30123450/1/3/5 Fax: 011-30117710 Email: research@moneysukh.com
Website: www.moneysukh.com
SEBI Reg.No: BSE: INB 010985834, F&O: INF 010985834 NSE: INB 230781431, F&O: INF 230781431, DP: IN-DP-CDSL-73-2000, IN-DP-NSDL-140-2000 MCX/TCM/CORP/0740 NCDEX/TCM/CORP/0293