Although global economic recovery still remains fragile and the road back to normalcy is a long and difficult one, the fortunes of India’s pharmaceutical industry remain upbeat. Whereas the financial year gone by has been a dismal one for companies in most sectors, domestic pharmaceutical companies have not only bucked the trend but have seen huge growth in their market capitalisation. In 2012-13, the BSE Healthcare Index returned 21 per cent compared to the modest 8 per cent rise in the Sensex, and the stocks of 6 of the top 10 pharmaceutical companies (by market cap) outperformed the broader index.
This strong performance was underpinned by an amalgam of strong exports to the U.S. and the depreciation of the rupee against the dollar. In fact, the growth story of the industry is a more long-term phenomenon; it has grown consistently at a compounded annual growth rate (CAGR) in excess of 15 per cent over the last five years. This robust growth not only indicates the industry’s inherent strengths in the global landscape, but is also a reflection of improving healthcare standards in the country. The constant demand for reduction in manufacturing costs globally has presented Indian companies with ample growth opportunities, specifically in developed markets.
Exports have been the cornerstone of growth of the Indian pharma industry, with the global pharmaceuticals market offering strong opportunities to Indian players. This upbeat trend in formulation exports is expected to continue in future too, with 14-16 per cent CAGR envisaged between 2012-13 and 2017-18. Over the next five years, drugs with sales of more than $100 billion are expected to lose patent exclusivity and open up to generic competition. Healthcare expenditure is also spiralling the world over, and the steepest rise is seen in the developed markets of the U.S. and Europe, which traditionally contribute the largest share to global medicine sales. With India’s key strengths of cost-competitiveness and advanced process chemistry skills, Indian players are well-placed to tap into this opportunity and increase their presence in the generics market.
The most critical export market continues to be the U.S. For instance, Wockhardt earns more than 75 per cent of its revenues from global markets, with U.S. operations contributing 40 per cent. Sun Pharma and Lupin, similarly, have a strong presence in the U.S. market, earning 35-40 per cent of revenues from there.
Healthcare reforms initiated by the U.S. government, aimed primarily at reducing healthcare spending and extending public healthcare to a larger proportion of the population, are expected to continue driving growth in the generics market.
The picture in Europe, the other major pharmaceutical market, is not quite as rosy. With the worsening debt crisis in the eurozone, many European governments are under pressure to cut spending. However, austerity measures could act as a double-edged sword for Indian players.
Although incentives for substituting costly, patented drugs with low-cost alternatives will boost the demand for generic drugs, price cuts are becoming increasingly prevalent in the region, impacting innovator and generic drugs.
Some of the downsides in the developed markets are obviated by the strong presence that India’s pharma companies have established in some of the other fast-growing semi-regulated markets such as Russia, South Africa, select Latin American countries (Brazil and Mexico) and Southeast Asia. These emerging markets offer strong growth prospects for Indian players given that some of them are branded generics markets, with high out-of-pocket expenditure on healthcare (unlike developed markets). Indian companies have also been partnering multi-national corporations (MNCs) in some of these emerging markets. Such alliances benefit from the development and manufacturing capabilities of the Indian partners and the extensive marketing and distribution footprint of the MNCs in those markets.
Although exports will continue to be the focus for most Indian players, growth will also be supported by the domestic business. Domestic formulations sales are set to grow at a CAGR of 13-15 per cent between 2012-13 and 2017-18, crossing Rs.1 lakh crore in market size. An increase in launches of drugs for lifestyle-related ailments is expected to drive this growth. Changing lifestyles of the working population, higher stress levels and unhealthy eating habits will continue to lead to a higher incidence of lifestyle-related ailments such as diabetes, obesity and cardiovascular diseases, especially in urban areas, fuelling the sales for drugs catering to these segments.
Within acute therapy segments, sales of gynaecology and dermatology drugs will grow the fastest over the next five years. We believe that the anti-infectives segment will continue to occupy a major share in the total domestic market and estimate that it will grow by 10-12 per cent over the next five years. Poor hygiene and sanitary conditions in India are likely to keep the demand for anti-infectives steady, while rural penetration will supplement the growth in sales volumes. Despite strong volume growth, there could be certain challenges on the pricing front. In the domestic market, the National Pharmaceutical Pricing Policy would limit growth in sales and profitability of pharmaceutical companies. But this will only be a small blip in the otherwise buoyant long-term growth trajectory of Indian pharma.
The author is Director, Crisil Research, a division of Crisil.