What will drive pharma sector growth ?

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Growth Outlook of Pharmaceutical Sector ! Key Points to Know..

SHUCHI.P.NAHAR

The Indian market is impossible to
ignore, given its economic prospects.
Foreign companies view India as a
potential significant contributor of
future sales and are ramping up their
investments in the country accordingly.
India’s domestic market looks promising
for global pharma looking to launch
new products. 

The country’s growing
capabilities in contract manufacturing,
R&D and clinical trials also make it a
preferred outsourcing partner for global
pharma at every stage of the value
chain. So what strategy should foreign
pharmaceutical companies eager
to enter the country or expand their
existing operations adopt?

 The growth trajectory for the Indian pharmaceutical industry is likely to remain at 10-13 percent in 2020-21 despite challenges, according to rating agency ICRA. The expected growth in the next financial year is on the back of healthy demand from the domestic market given increasing spend on healthcare along with improving access, ICRA said in a statement.

India’s strong position as a pharma supplier rests on its ability to provide high quality medicines backed
by strong innovation capabilities and a structural cost advantage. The cost of manufacturing formulations in India remains 30 to 40 % lower than other comparative
manufacturing hubs such as China and Eastern Europe, notwithstanding low productivity levels. This
is driven by lower labour costs vis‐à‐vis other geographies. 

Despite inflationary trends, India’s labour
cost advantage will sustain in the medium to long term, especially if Indian companies can improve
productivity through operational excellence and digital initiatives.
   

The supply of local talent into the pharma industry (e.g., B.Pharm, M.Pharm, B.Sc.) is stronger than in
countries such as China. Indian pharma companies are foraying into complex products (e.g.,
microspheres, liposomes, emulsions), building capabilities in R&D and the manufacturing of these
products while still ensuring the required quality.   

However, the industry is also facing several challenges in supplying to export markets, which must be
addressed going forward.
  

■ The increasing pricing pressure in the regulated market is squeezing margins and profitability. Key
drivers include customer consolidation, greater competition in commoditized, easy‐to‐
manufacture products with increased ANDA approvals, and a slowdown in new launches.    

■ Another key challenge stems from compliance issues affecting the reliability of supply. While many
Indian companies have fared well in regulatory audits over the last year and seem to be emerging
out of remediation, others continue to face challenges.   

■ India continues to rely on imports of key starting materials, intermediates and API’s for, China with
the share of dependence increasing over time. This potentially exposes us to raw material supply
disruptions and pricing volatility. 

This along with abatement in pricing pressure for the U.S. market, new launches and market share gains for existing products and consolidation benefits will drive growth in 2020-21, it added. 

“The Indian pharmaceutical industry’s growth remained stable at 12.2 % per during H1FY2020 led by rebound in domestic growth in Q2FY20 to 14.2%  supported by seasonal factors and stable growth in chronic therapies.

During second quarter of current fiscal, India witnessed outbreak of many diseases in many parts, aiding the growth of the anti-infective segment, he added. Though margins remain healthy, pricing pressures for the U.S. base generics business (albeit moderating), lack of limited competition products and manufacturing quality issues will continue to put margin pressure, ICRA said. 

Higher share of domestic business and operational efficiencies will provide overall cushion to margins, it added. The key sensitivities to growth and profitability estimated of the Indian pharma industry will be regulatory interventions such as price controls and compulsory genericisation for domestic market and continued regulatory overhang with respect to manufacturing quality deficiencies during U.S. FDA audit says.

There is an opportunity for India Pharma to drive growth by building on the cost advantage, and
improving reliability of supply—major buying criteria for customers. Three priority areas thus emerge
for Indian pharmaceutical companies:   

■ Build stronger quality systems and achieve full compliance   

■ Refocus efforts on operational excellence   

■ Alternate sourcing and self sufficiency in APIs / intermediates.

 These imperatives are inter related operational excellence is a strong enabler of quality and supply
reliability. 
Unlike in the past, when several Indian pharma companies ramped up their R&D spend targeting pipeline of specialty drugs, niche molecules and complex therapies, this time around companies are optimising their R&D spend. 

The credit metrics of leading pharma companies are expected to remain stable in view of future growth prospects in regulated markets and relatively strong balance sheets

Global Pharma’s evolving
business models and
options in India.
The global pharmaceutical industry is
changing. Challenging business models,
we describe how the pharmaceutical
business model is witnessing a
paradigm shift from a fully integrated
company structure towards a future
where companies use a wide range
of outsourcing, partnership initiatives
and other contractual and relationship
arrangements to create networks of
collaboration and discovery.

This evolution in pharma business
models has enormous repercussions
for the Indian pharmaceutical sector,
and related sectors like biotechnology.
Indian companies now have an
unprecedented opportunity to
partner with global players across
a wide range of activities, from
contract manufacturing and licensing
arrangements, to franchising and
joint venture opportunities. 

The range
of option spans a wide spectrum
of levels of ownership and control,
from straightforward outsourcing
of manufacturing to licensing
arrangements to more involved joint
ventures and partially or wholly-owned
subsidiaries The amount
of investment risk varies accordingly.

The bottom line:
Global pharma
players can take
advantage of a
variety of options
to maximise
their investment
in India. As
many pharma
companies
turn to more
collaborative
business models,
Indian companies
are likely to play
an increasingly
important
partnering role. 

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Export-oriented business:
CRAMS 

Outsourcing has been the traditional
method of doing business with Indian
companies. Historically, the focus for
the pharmaceutical industry has been
on lower value add manufacturing activities such as APIs and generics,
and India continues to play an important
role in these segments.
In recent years, India’s pharma
companies have also begun to move
up the value chain.

Licensing 

Multinationals are also striking licensing
agreements to get a share of the
Indian pie. For example, Elder
Pharmaceuticals has entered into
an exclusive in-licensing deal
with Israel’s Enzymotec to sell the
latter’s cholesterol-reducing dietary
supplement, CardiaBeat, in India.

Most developmental costs are borne by
the licensor in licensing arrangements,
resulting in the licensee paying a high
unit cost and having little control over
manufacture. However, licensing can be
effectively used to establish a common
platform in order to gain rapid in-market
acceptance and create a complete
therapy range through arrangements
such as cross-licensing.

Franchising 

India’s retailing industry also offers huge
opportunities for foreign companies to
either set up their own retail franchisee
or enter into collaboration with existing
players. Medicine Shoppe India, the master franchisee of US-based
Medicine Shoppe International has
already forayed the market Franchising arrangements can
leverage on purchasing power from the
franchisor buying in large quantities and
passing down savings to franchisees. 

Continued business support from
the franchisor such as technology,
products, training and marketing is
an added advantage. However, there
are restrictions on how the business
must be managed in order to retain
consistency among franchises. All
franchisees are obligated to conform
accurately to the initial business model.

Joint Ventures 

Joint ventures (JVs) are becoming
a more prevalent option for
companies looking to capitalise on
the opportunities presented in India.
Foreign companies are increasingly
looking at local partners to work with
in order to increase their presence
in India. 

Domestic partners bring
together extensive local expertise due
to their familiarity with the business
environment, knowledge support and
the networked capabilities of other
local pharmaceutical companies.  

These
advantages, along with low production
costs, skilled labor and faster drug
development can be productively
utilised by western pharmaceutical
companies coming into India. As noted,
India is home to more then 100 US FDA
approved plants, so foreign companies
looking for local partners can access a
substantial manufacturing base.

Conclusion

The answer to all the above question can be sum up here , One approach is to call on India’s
increasing expertise in biotechnology,
bioinformatics and clinical testing.
Several overseas companies have
outsourced research and clinical trials
to Indian contractors, while others
have entered into collaborative R&D
arrangements to supplement their R&D
productivity. 

Many foreign companies
have also already initiated research on
neglected diseases. We believe that
many more will do so, as the patent
regime is strengthening. This will enable
them to capitalise on the cost savings to
be gained from shifting some research
activities to India, without jeopardising
their most valuable intellectual property.

Another approach is to tap into the
growing domestic market. Foreign
companies with a product portfolio
spanning across different therapeutics
segments can look at bringing newer
products in India by entering into
collaborative networks across the value
chain, from sourcing and manufacturing
to marketing and distribution. 

One way to build a presence in India
may be through an increased presence
in the OTC market. Promoting a range
of OTC products could serve as means
of building brand awareness and as a
source of new revenues. Indigenous
producers dominate the generics
business, and about 97% of all drugs
sold in India are already off patent. The
OTC market is, by contrast, relatively
undeveloped.

Nonetheless, India’s appeal is growing
rapidly in a number of respects. It
has long been a formidable player in
pharmaceutical manufacturing, but
its socio-economic strengths provide
even greater grounds for optimism. If
the economy outpaces that of every
other emerging country for the next
half century, as many commentators
expect, large portions of the population
will be able to afford modern medicines.
India’s increasing scientific expertise
will also equip it to play a significant
role in researching and developing
those drugs. 

It has a large pool of
highly educated, English speaking
scientists who can undertake research
and conduct trials more cheaply and in
some cases faster than their Western
peers. These are major advantages in
a world where drug development
costs are soaring and getting to
market fast is vital. 



Sources: McKinsey Research Report 
                 Ficci Website 
                 Bloomberg Quint
                 PwC Research Report 
                

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                                 Shuchi.P.Nahar

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Shuchi Nahar
Shuchi is NISM Certified Equity Research Analyst, CFA - Level 1, a student of Law and Finance, and an aspiring CS.
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