Drug and Pharmaceutical sector

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The Indian pharma companies are marred by the price regulation. Over a period of time, this regulation has reduced the pricing ability of companies. The NPPA (National Pharma Pricing Authority), which is the authority to decide the various pricing parameters, sets prices of different drugs, which leads to lower profitability for the companies. The companies, which are lowest cost producers, are at advantage while those who cannot produce have to either stop production or bear losses.

Indian pharma sector has been marred by lack of product patent, which prevents global pharma companies to introduce new drugs in the country and discourages innovation and drug discovery. But this has provided an upper hand to the Indian pharma companies. Indian pharma market is one of the least penetrated in the world. However, growth has been slow to come by. As a result, Indian majors are relying on exports for growth. To put things in to perspective, India accounts for almost 16% of the world population while the total size of industry is just 1% of the global pharma industry.

Due to very low barriers to entry, Indian pharma industry is highly fragmented with about 300 large manufacturing units and about 18,000 small units spread across the country. This makes Indian pharma market increasingly competitive. The industry witnesses price competition, which reduces the growth of the industry in value term. To put things in perspective, in the year 2003, the industry actually grew by 10.4% but due to price competition, the growth in value terms was 8.2% (prices actually declined by 2.2 percent points).

Opportunities: The migration into a product patent based regime is likely to transform industry fortunes in the long term. The new patent product regime will bring with it new innovative drugs. This will increase the profitability of MNC pharma companies and will force domestic pharma companies to focus more on R&D. This migration could result in consolidation as well. Very small players may not be able to cope up with the challenging environment and may succumb to giants.

Large number of drugs going off-patent in Europe and in the US from 2005 to 2009 offers a big opportunity for the Indian companies to capture this market. Since generic drugs are commodities by nature, Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world. Opening up of health insurance sector and the expected growth in per capita income are key growth drivers from a long-term perspective. This leads to the expansion of healthcare industry of which pharma industry is an integral part.

Being the lowest cost producer combined with FDA (Food and drug authority) approved plants, Indian companies can become a global outsourcing hub for pharmaceutical products. Threats:  Threats from other low cost countries like China and Israel exist. However, on the quality front, India is better placed relative to China. So, differentiation in the contract manufacturing side may wane.

Counterfeit drugs: The extent of the problem of counterfeit drugs is unknown. Counterfeiting is difficult to detect, investigate, and quantify. So, it is hard to know or even estimate the true extent of the problem. 3. Allied facts concerned with profitability of pharma sector in India Around 67 Million Indians are expected to be above 67 years of age by 2011. This age group spends around 3 to 4 times more on drugs than those in younger age groups, thus fuelling the market growth. Patented drugs, which had no share in the pharmaceutical market, are expected to have a 10% market share in 2010.

Around 64% Indians are not covered by health insurance and pay expenses for pharmaceuticals out of pocket. Thus penetration if health insurance sector in the Indian market should be key driver for growth. The drug price control order (DPCO) continues to be a problem for the industry. This has made the profitability of the sector susceptible to the whims and fancies of the pricing authority. The new Pharmaceutical Policy 2006, which proposes to bring 354 essential drugs under price control has not been officially passed as yet and has been stiffly opposed by the pharmaceutical industry.

While the average R&D spending in India as a whole is only 2% of sales, the spending of the top five companies is about 5% to 10%. The ratio is still way below the global average of 15% to 20% of sales. However, despite the relatively low R&D spending, Indian companies are stepping up their research activities to make themselves more self sufficient in terms of product development, now that the product patent regime has come into force.

Classification of Indian Pharma Industry: On the basis of the product manufactured, the pharmaceutical industry can be classified into: Bulk drugs: They are the key ingredients that form the basic raw material for the manufacture of formulations. Formulation: Particular mixture of a bulk drug or a combination of different bulk drugs. Formulations constitute nearly 81% and bulk drugs account for the remaining 19%.

On the basis of formulations, the pharmaceutical industry can further be classified into: Prescription medicines: Also known as ethical formulations. They can be dispensed only on the prescription from a qualified medical practitioner. Over-the-counter medicines: Also known as OTC formulations. They can be dispensed even in the absence of prescription, e.g. analgesics, cough drug, etc.  the basis of formulations patent, pharmaceutical industry can be classified as Branded formulations: They are ethical formulations prepared using a bulk drug under product patent and are marketed by a single pharmaceutical company.  Generics: They are formulations that do not contain any patented bulk drug and can be manufactured by more than one company.

Characteristics of pharmaceutical business: New products drive revenue growth: In general, revenue growth of a pharmaceutical producer depends on new product introductions, which fulfill unmet therapeutic needs. Hence, a producer’s ability to innovate and develop new products is critical to its success.  Patent protection encourages new product development: Given that a drug is the intellectual property of a producer and is usually developed at a significant cost, most countries have a regulatory system of patents that protect the intellectual property rights of the producer, and enable the producer to recover the costs of development from the sales of the drug.

Selling effort is directed at doctors: Nearly 80 per cent of the pharmaceutical market comprises drugs that are sold by prescription (ethical drugs). The success of a drug depends on the medical fraternity’s perceptions about the superior properties of the drug. Hence, the selling effort of a pharmaceutical company is focused on providing information about the drug to the medical fraternity. Quality of product drives market share: Worldwide, regulators certify manufacturing facilities and drugs, in order to ensure the safety and quality of pharmaceuticals. A reputation for quality products and production facilities is a key determinant of the producer’s ability to build a market share and access the export markets.

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