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Is India an opportunity or a threat to big pharma?
On a recent trip to India, I was struck by the rate and scale of development I found there. The place has a vibrant and confident feel, which is not surprising given that it is one of the fastest growing economies in the world. The Indian pharmaceutical industry is seeing disproportionately high growth as it meets the needs of a rapidly expanding domestic market. But more than that, exports to both emerging economies and to so-called ‘regulated’ markets are also growing rapidly. This left me wondering whether India presents a net threat or a net opportunity to multinational pharmaceutical companies?
A large and growing market
According to PricewaterhouseCoopers, the domestic Indian pharma market is expected to grow at 15% to 20% CAGR (compound annual growth rate), reaching a value of between US$50 billion and US$74 billion by 2020. This is being fuelled by growth in the economy as a whole, an expanding population that is becoming more health-conscious, a government keen to promote health and wellbeing, and a rising standard of living. By 2040, India is predicted to be the most populated country on earth, overtaking China. India, however, remains a very price-sensitive market; 67% of the population is in poorer, rural areas without good access to healthcare yet, disproportionally, this large segment currently accounts for only 17% of India’s pharmaceutical market.
It is estimated that branded generics account for 90% of the domestic Indian market, with brand equity playing an important role in market share and pricing. As a consequence, a strong brand can still retain a reasonable market share and premium pricing, for some time at least. Conversely, newcomers to the market will struggle to compete against established brands and unless they can be cost competitive they will struggle in the market as a whole. We are therefore seeing more partnerships between multinationals and domestic businesses to mutual advantage, as Indian companies are in a strong position to exploit the domestic market either in their own right, or working with partners.
Exports are growing too
The India pharmaceutical industry has seen exports grow from almost zero in the mid-1990s to a value of about US$12bn today. This is mainly in generics and APIs destined for the US and European markets, and this growth will only continue as more drugs come off-patent and as western healthcare providers and insurers struggle to contain costs. Alongside these drugs, we will also see increasing exports of devices to be used in combination – particularly when devices come off patent. The Indian pharmaceutical industry also exports its services in the form of contract research and manufacturing, making use of a skilled and relatively low-cost work force and good facilities. As well as market-pull, the Indian government’s special economic zones (SEZs) – where companies will be given free water, low-cost land and tax benefits – will encourage Indian companies to export more.
However, the Indian pharmaceutical industry has been plagued by controversy and uncertainty in the area of IP law which, for years, has seemingly given an unfair advantage to the home team. India accepted the Trade Related Aspects of Intellectual Property Rights Agreement (TRIPS) in 1995, yet problems remain. For example, in March 2012 the Indian patent office gave domestic company Natco Pharma the right to make and sell a version of Bayer’s liver and kidney cancer drug Nexavar – despite the fact that Nexavar is still on patent. Whilst this sort of outcome is potentially good news for patients and domestic companies, the innovator companies stand to lose millions of dollars. As 90% of the market in India today is generics, growth in patented drugs is inevitable and will be needed in order to combat the rise in chronic conditions. Work is still required, therefore, to build confidence in patent laws among both domestic and global companies in order to see an increase in the number of new product launches.
By 2040 India is predicted to be the most populated country on earth, overtaking china
In addition, Indian pharmaceutical companies have to acknowledge that what is acceptable in terms of quality and process for the domestic Indian market is not acceptable in regulated markets. Domestic companies looking to export drugs and devices will need to both understand what is required for each target market and then follow through with development and manufacturing processes that meet the required standards. This is perhaps most challenging when developing combination products (involving both a device and a formulation) for the US market, and presents a potential barrier for new market entrants. The potential rewards, however, are large enough in many cases to make this investment worthwhile.
Although a potentially lucrative market, the growth in China is also a significant threat to the ambitions of the Indian pharmaceutical industry. It too is a major exporter of generics and APIs, offering similar services and benefits.
Perhaps the final challenge for India, and China for that matter, is that of sustaining current levels of growth and success. As their economies develop, the standard of living will also increase, as will the competition for talent. This will inevitably erode some of the cost advantages currently experienced, which is why many Indian companies are using today’s revenues from generics to fund investments in new formulation and device developments.
So is India a threat or an opportunity?
Arguably the Indian market is a good opportunity that has not yet been fully seized by big pharma. According to an IMAP Global Industry Report, published in 2011, most global drug companies remain underexposed, and are underperforming, in the emerging markets. In 2009, the world’s top 15 pharmaceutical manufacturers derived just 0.9% of their combined revenues from China, and 2.9% from the combined markets of Brazil, India and Russia – in many cases reflecting a continued focus on the premium section of the market rather than on the typically larger branded generics segment. Meanwhile the Indian pharmaceutical industry is ambitious, very much ‘on the up’ and looking over the shoulder of even the most established multinational.