INVESTMENT BANK OF KOZHIKODE

INDIAN HEALTHCARE SECTOR

SURYA GUNIN KAMALIKA GANGOLY RINKESH SHAH

EXECUTIVE SUMMARY
Ministry of Statistics and Programme Implementation, the Indian economy has registered a growth of 7.4 per cent in 2009-10 and tuned to post a growth rate of 8.2% for 2010-11 The healthcare industry has registered a growth of 9.3 per cent in 20002009. It is projected to grow at a CAGR of 23% by 2012 The public sector contributes to the tune of only 15-20% and a huge business potential exists for corporate India. Combined sales of prescription drugs and over-the-counter (OTC) medicines are forecast to increase from INR 739.3bn in 2009 to INR 837.7bn in 2010. This equates to year-on-year (y-o-y) growth of 13.3%. The Indian pharmaceutical market is 14th largest in terms of value, but the third largest in terms of volume. It has the fourth largest pharmaceutical market in terms of value in the Asia Pacific region, behind Japan, China and South Korea.

Top 14 Pharmaceutical Markets

India Turkey South Korea Brazil

Mexico
China Canada Spain UK Italy Germany France Japan US 0 50 100 150 200 2015 (US$ Bn) 250 300 350 400 450 500

2005 (US$ Bn)

THE DIFFERENT SECTORAL ANALYSIS

PHARMACEUTICALS
The Indian Pharmaceutical grew from INR 862.48bn (US$18.81bn) in 2010 to INR 1,008bn (US$21.72bn) in 2011

HEALTH CARE
The Indian Healthcare grew from INR 2,699bn (US$58.85bn) in 2010 to INR 2,956bn (US$63.70bn) in 2011

MEDICAL
The Indian Medical Devices grew from INR 132.43bn (US$2.89bn) in 2010 to INR 152.31bn (US$3.28bn) in 2011

Prescription Drug Market Forecast

Indias prescription drug market represents one of the most significant growth opportunities in the global pharmaceutical industry. Prescription drugs account for the majority of Indias pharmaceutical market, which we define as sales of OTC medicines plus prescription drugs. A key driver of prescription drug sales in India is the modernization and expansion of the healthcare sector.

60

PRESCRIPTION DRUG MARKET FORECAST 2005 - 2019

52 48

50

44
40 40 35

30 30 25 22 20 15 11 12 13

18

10

10

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Prescription Drugs Sales (US$ Bn)

Patented Drug Market Forecast

Patented medicines will remain a marginal player in the overall market. International players will remain the leading suppliers of novel and hi-tech drugs, but some larger local companies will increasingly invest in their own R&D activities. Sales of more advanced medicines, such as those to treat cardiovascular diseases, diabetes and cancer-related conditions will be key drivers.

PATENTED DRUG MARKET FORECAST 2005 - 2019

5 5

5.3

4.4
4 4

3.3 3 2.7

2.2 2 2 1.6 1.2 1 1 0.75 0.85 1.3

1.8

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Patented Drug Sales (US$Bn)

Generic Drug Market Forecast

Indias INR592.9bn (US$12.55bn) generic drug market is characterized by healthy growth, low pack prices, medicines that would be termed patented in most other countries, and very few foreign players. The major driver of the countrys generic drug market is the patent regime, which does not meet international standards. One of the most promising sales outlets are part of the Jan Aushadhi scheme.

60

50 45 41 40 37

48

31 30 27 22 20 16 11 12 14 19

13

10 10 8

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Generic Drug Sales (US% Bn)

Key Trends & Developments

GlaxoSmithKline (GSK) hopes to outpace the market in 2011 after underperforming in 2010, according to Mehernosh Kapadia, senior executive director, in February 2011. To achieve this goal, GSK will launch new patented and branded generic drugs and expand its sales and marketing network. Despite growing domestic resistance to acquisitions of local pharmaceutical companies by foreign firms, UKbased household products giant Reckitt Benckiser said it would acquire India' s Paras Pharmaceuticals for INR32.6bn (US$724mn) in December 2010.

SWOT ANALYSIS OF PHARMACEUTICAL INDUSTRY

STRENGTH
Massive pharmaceutical market growth potential Strong local manufacturing sector with leading domestic players Low-cost but skilled English-speaking labour force. Swift market approval times.

WEAKNESSES
Among the least-developed pharma markets in Asia with extremely low per capita consumption. Underdeveloped healthcare infrastructure. Vast regional disparities in healthcare coverage Many multinationals already selling their products at reduced prices

 OPPORTUNITIES
Robust generic and OTC drug market growth Large and growing population boosting pharmaceutical and medical demand Underdeveloped market for chronic illnesses and diagnostics Increasing research and development (R&D) activity by domestic firms Global expansion of larger local companies

THREATS
Failure to properly enforce World Trade Organization (WTO)compliant patent legislation for drugs. Considerable counterfeit drug industry Government failure to revise its opaque and discriminatory pricing and reimbursement policy. Need for overhaul of healthcare delivery structures hampering better access to medicines

PESTLE
POLITICAL LANDSCAPE The country is led by the UPA govt. with the Indian National Congress (INC) party at the front. India continues to rank high on corruption Lacks the political will to implement tough policies. ECONOMIC LANDSCAPE According to Data monitor estimates, Indian economy is expected to grow at more than 8% during 201013. The fiscal deficit is believed to have been around 6.9% during 200910, the highest in 16 years.

SOCIAL LANDSCAPE Indias progress on the social front continues to be slow despite focus on sustained improvement in quality of life. The gender ratio in India is improving.It is at 936 females per 1,000 males as per the 2001 census. TECHNOLOGICAL LANDSCAPE In the prevailing education system, most science and engineering graduates require further training before they can begin work. The 11th five-year plan prioritizes R&D by increasing opportunities in science and expanding R&D in universities. The Indian internet access market generated total revenues of $3 billion in 2009

LEGAL LANDSCAPE
The expansion of the tax base has improved the availability of resources to the central government and individual states. The lack of a single regulator for the financial sector has resulted in limited growth in this area, as inter-linkages have not been fully exploited.

ENVIRONMENTAL LANDSCAPE
India is a poor performer on the Environmental Performance Index (EPI). In an EPI study carried out in 2010, India was ranked in the 123rd position out of 163 countries. Indias dependence on thermal energy, mainly coal-based, has resulted in a host of environmental problems.

INDIA MARKET SUMMARY

India is the fourth largest market in the Asia Pacific region, behind Japan, China and South Korea. However, US$14 per capita spending is among the lowest in the world, similar to the levels of Pakistan and Vietnam. Generic drugs will continue to account for the vast majority of drug consumption in India (at around 75% of total spending), largely owing to the low cost and limited purchasing power of most of the population.

A substantial amount of the Indian generic drug market comprises illicit products, due to the countrys lax patent laws. However, conditions are quickly changing for the better. Traditional and ayurvedic medicines are very popular India accounts for almost 10% of global drug production by volume and is increasingly focusing on indigenous R&D.

Pharmaceutical Market (by sub-section in US$ bn) 2009-10

1813
1288

OTC Medicine Patented Drugs 12551 Generic Drugs

HEALTHCARE SECTOR
Healthcare services are provided by public and private sectors, the latter having developed in the latest decades when India embraced privatization. Private healthcare boasts of superior quality and facilities. It accounts for more than 65% of primary care and more than 40% of hospitals, resulting in personnel shortages in the public sector. The large geographical size and growing population numbers traditionally have hampered adequate access to medicines and medical services in the sub-continent. As per The Federation of Indian Chambers of Commerce and Industry (FICCI) it would cost approximately US$200bn over the next five years to solve the crisis in Indian healthcare. To address the funding shortfall, the federation has proposed a five-pronged public-private-partnership (PPP) model.

COMPANY ANALYSIS
RANBAXY LABORATORIES
STRENGTHS Largest domestic pharmaceutical company and a leading global generic drugs player. Exports accounting for majority of sales, thereby insulating the company from fluctuating domestic market conditions. Considerable overseas presence. WEAKNESSES Harsh government pricing policy with the state keen to keep a downward pressure on prices. Considerable legal costs relating to numerous cases with multinationals, and most recently with US drug major Pfizer. Authorized generic drugs will affect anticipated sales from first-to-file opportunities in the US.

OPPORTUNITIES
Development of generic drugs market presence in Europe and other markets following key acquisitions and the establishment of wholly owned subsidiaries. Increasing focus on the high-growth area of generic pharmaceuticals by divesting its non core businesses. Growing research-based product pipeline. Rising local demand for generic drugs, especially in rural areas. Synergies expected from the involvement of Japanese major Daiichi Sankyo.

THREATS
Increasingly competitive nature of both the domestic and global generic drugs market. Share price continues to fluctuate under pressure from alleged manufacturing wrongdoings. Increasing foreign competition in the domestic market. Governments failure to revise its opaque and harsh pricing policy. Governments plan to impose price controls on all essential medicines.

PIRAMAL HEALTHCARE LIMITED

STRENGTHS
Indias second-largest generic drugg manufacturer with a strong product portfolio. Strong and numerous alliances with international drug distributors and research-based manufacturers such as AstraZeneca. Tradition of expansion through acquisition of facilities abroad.

WEAKNESSES
Significant reliance on the tough Indian market. Lack of R&D division prevents company from enjoying the high margins that patented drugs bring.

OPPORTUNITIES
Strength in drug-delivery systems implies potential in Asian drug markets, where demand for hospital-use products is positive. Rising regional and global demand for cardiovascular products. Development of new therapeutic strengths, including antidiabetes products.

THREATS
Failure by the Indian government to revise its harsh price controls policy. Continued threat from counterfeit industry. Competition from larger local rivals. Piramal Healthcare, formerly known as Nicholas Piramal India (NPIL), is one of Indias leading healthcare companies. It is the flagship company of the INR25bn (US$550mn) Piramal Enterprises (PEL), one of Indias largest diversified business organizations.

DR. REDDYS LABORATORIES

STRENGTHS
Leading Indian generic drugs manufacturer. Diverse and prominent global presence, including the developed Western markets. A significant number of recent product launches.
WEAKNESSES Exposed to increasingly tough generic competition in the US in the key product lines. Undergoing costly restructuring in an attempt to boost R&D and increase generic filings with the US FDA. Authorized generic drugs will affect anticipated sales from first-to-file opportunities in the US.

OPPORTUNITIES
New ANDA financing potentially boosting development pipeline. Authorized generic drugs likely to deliver new opportunities in the US. Heavy R&D spending potentially yielding new drug discoveries. Rising regional demand for cheaper generic products amid costcontainment pressures. Focus on fast-growing diabetes segment and partnership with Novo Nordisk likely to boost revenues in the medium to longer term. The acquisition of Betapharm in Germany to boost short-term revenue growth.

THREATS
Limited room for expansion in mature European generic drugs markets threatening this high-growth area. Unstable environments in Russia and Latin America threatening development in those parts of the world. Governments failure to revise its opaque and harsh pricing policy. Governments plan to impose price controls on all essential medicines. Anticipated price cuts on some 8% of all medicines sold in the country.