Industry Analysis Primer

The Indian Pharmaceutical Industry A Domestic Business Perspective

Ashish Jagyasi President, Healthcare Club (PGP -2015)

Mail me at: ashish_jagyasi2015@isb.edu

Product Identification Product DevelopmentEstablish

Chemical EquivalenceEstablish

Bioequivalence

The Industry Value Chain

R&D* Regulatory Approval Manufacturing* Marketing , Sales

and Distribution

Post Market Surveillance and

Pharmacovigilance

Target Identification Drug DiscoveryPre-Clinical

Development

Clinical Development

(Phases – I, II & III)

Product to Market

R&D – New Drugs

R&D – Generics

The value chain can fundamentally be divided into two aspects with respect to the product development:1) Branded Drugs – this involves a full scale product development involving the expensive and time consuming clinical trials ( overall product development takes ~10 years and upwards of

U$ 1 billion. Typically in markets like US innovative drugs are allowed a BRAND2) Generic Drugs - Development of chemical and biologically equivalent copies of innovative products. Generally launched after the patent expires. In markets like US, these kind of product

are not allowed to brand and hence are called GENERICS. Emerging markets generally allow brands to copy-cat drugs too in which case such drugs take the definition ‘ BRANDED GENERICS’

Business Verticals

API

•Active pharmaceutical ingredient•The biologically active component of a finished drug product

Formulations

•APIs are combined with several inactive agents to make the product available to the body in an optimal way

•e.g. of formulations – Tablets, Capsules, Injections, Depots, Implants

Biologics

•This area deals with product that are derived from biotechnology through genetically engineered cells lines or live attenuated cells

•e.g Vaccines, Insulin, Monoclonal Antibodies

Clinical Resear

ch

•This areas deals with the clinical development of products through clinical trials and pharmacokinetic studies

•Typically this is a vertical managed by specialized Contract Research Organizations (CROs)

Preclinical

Research

•Involves assessment of biological safety and efficacy of drug entities in in-vitro and animal models

•Typically this too is dominated by CROs and is a heavily outsourced process

Domestic Business – Size and Therapeutic Segments- Indian domestic pharmaceutical market is the third largest by volume and tenth by value, globally- Valued at 72,069 crore INR in 2013 as against 65,654 crore INR in 2012 the industry has exhibited a strong CAGR of ~15% (2010 -12)

- Market classification based on Therapeutic Category:

India Formulations Market

Chronic Therapies

e.g. CardiovascularDiabetesNeurologyGastrointestinal

2010 contribution – 27%2013 Contribution – 30%(CAGR – 14%)

Acute Therapies

e.g. Infectious DisordersRespiratoryPainGynaecology

2010 contribution – 73%2013 contribution – 27%(CAGR – 9.6%)

-The Indian population is experiencing a shift in disease profiles (see chart).-Traditionally, the acute disease segment held a significant share of the Indian pharmaceutical market. This segmentwill continue to grow at a steady rate, due to issues relating to public hygiene and sanitation.- Chronic will grow faster, however, due to the following factors such as rising

incomes, rise in life expectancy and the onset of lifestyle related conditions- Amongst chronic diseases, India has the largest pool of diabetic patients in the world,(> 41 million people suffering from the disease; ex. 73.5 million in 2025)

Shifting Disease Profiles Shifting Expenditure Patterns

Domestic Business – Distribution Model and Key Players

The Distribution Model

Key concern Areas:- High logistics cost rangingfrom 4.72 to 6.22% of sales as against 0.5% in the US and 2% in Europe- Ineffective control over channel inventory: 46 days for a pharmaceutical company as against 26 days for an FMCG company- Porous supply chain facilitating easy entry of counterfeits- Sub-optimal penetration of the rural market - Inadequate access to secondary and tertiary sales information critical to planning processes

Key Players(Ranked by India Business – IMS 2012)

RANK Company Origin Remarks1 ABBOTT MNC Combined entity after acquisition of Piramal's India business2 CIPLA Indian Strong presence in Acute, Respiratory3 SUN Indian Leadership position in at least seven chronic segments4 GLAXOSMITHKLINE MNC Strong in Anti-biotics, vaccines, Respiratory5 RANBAXY Indian Strong in Anti-biotics, Cardiovascular, Vitamins6 ZYDUS CADILA Indian Strong inCardiovascular, Gayanecology, Respiratory

7 MANKIND IndianOTC, and Consumer Health, Acute segments are strength areas

8 ALKEM Indian Strong in Cephalosporin Antibiotics

9 PFIZER MNCStrong in Gastroenterology, Pain Management, Anti-biotics, OTC

10 SANOFI MNC Strong presence in Cardiovascular, Diabetes

Top Brands

Rank Brand Company Market Share1 Corex Pfizer 0.52 Phensedyl Piramal Healthcare 0.43 Voveran Novartis 0.44 Human Mixtard Abbott 0.45 Augmentin Glaxosmithkline 0.46 Revital Ranbaxy 0.47 ZIFI FDC 0.38 Monocef Aristo Pharma 0.39 Dexorange Franco Indian 0.310 Taxim Alkem 0.3

Domestic Business – SWOT ANALYSIS

STRENGTHS• Higher GDP growth leading to increased disposableincome in the hands of general public and theirpositive attitude towards spending on healthcare• Cost Competitiveness• Low-cost, highly skilled set of English speakinglabour force• Growing treatment naive patient population

WEKANESSES• Poor all-round infrastructure is a major challenge• Stringent price controls• Lack of data protection• Poor health insurance coverage

OPPORTUNITIES• Rapid OTC and generic market growth• Increased penetration in the non - metro markets• Large demand for quality diagnostic services• Increase in healthcare insurance coverage• Significant investment from MNCs• Public-Private Partnerships for strengtheninginfrastructure

THREATS• Labour shortage• Wage inflation• Government expanding the umbrella of the DrugsPrice Control Order (DPCO)• Considerable counterfeiting threat• Competition from other emerging economies

Indian Pharmaceutical

Market

Domestic Business – Alliances, M&A

Alliances are the order of the day for MNCs to reap value from the Indian Market allowing them limited investments with higher probability of success

Bayer - ZydusLilly- LupinNovartis -USV

Sanofi - GlenmarkMerck& Co. - Sun Endo - JubiliantGSK - DRLPfizer - Aurobindo

Abbott - PriamalFresinius - DaburReckitt Benckiser -ParasDanone - Wockhardt

Sanofi - ShanthaHospira – OrchidMylan – Matrix Labs

Domestic Market Global Market

Alliance & Partnerships

M&ASuccess Factors

Sources

1) India in Business, Ministry of External Affairs, Govt. of India, ITP Division, Pharmaceuticals (as accessed on 23-Oct-14)2) Pharmaceuticals Sector Analysis report, Equitymaster.com (as accessed on 23-Oct-14)3) Indian Pharma Inc., Enhancing value through alliances and partnerships, CII, Pharma Summit 2011, Pricewaterhouse Coopers4) Indian Pharma Inc., Changing landscape of Indian pharma industry, CII, Pharma Summit 2013, Pricewaterhouse Coopers5) Indian Pharmaceutical Sector, Industry Update, ICRA, March 20126) Indian Pharma Inc., Capitalizing on Indian Pharma’s Growth Potential, CII, Pharma Summit 2010, Pricewaterhouse Coopers7) Pharmaceutical Distribution Systems in India, Working Paper 1a, The Centre for International Health Public Policy, University

of Edinburgh, July 20078) IMS Health, India, 20129) An Overview of the Indian Pharmaceutical Sector, Ch.2, Performance of Pharmaceutical Companies in India, A Critical Analysis

of Industry Structure, Firm Specific Resources and Emerging Strategies, Mazumdar M., Springer 201310) Pfizer India, India Equity Series, Anand Rathi, September 2012