Key takeaways for the Indian pharma sector
The need for the hour is to realign strategy, drug pipelines and market segments to stay competitive.
What are the key trends and expectations for the Indian pharmaceutical sector this year? Radhika Rao, India Economist, DBS Group Research, and Dr Eugene Hong, Executive Director, Group Head for the Healthcare and Pharmaceutical Group, DBS, spoke at a webinar in Mumbai held by the Indian Drug Manufacturers Association (IDMA) to discuss the future growth opportunities for India’s pharmaceutical industry. This latest insight article outlines key takeaways for the Indian pharma industry to grow market share and stay competitive.
Emboldened by a vaccine roll-out, the world is slowly moving to recoup lost growth. Sure, hitches remain, including production and logistical challenges, the vaccines' efficacy as the virus mutates, and the ability of lesser developed countries to get the vaccines - but green shoots of optimism are slowly appearing.
Asia is expected to be on a relatively more robust road to economic recovery compared to the West. Enclosed in the optimism bubbling in Asia, DBS’s view is that India’s pharma sector is a strong performer. Projections by the Indian government indicate that the pharma industry will grow at a CAGR of 12.5 per cent to USD 130 billion by 20301.
Here, we outline four key takeaways for the Indian pharma sector in 2021, the third-largest in the world in terms of volume and valued at USD 40 billion2.
- India’s economy is poised for a robust recovery, along with healthcare and the pharma sector
The Indian Budget for the financial year 2021-22 increases capital expenditure, which is expected to have a multiplier effect on the economy3. More recently, India is in the midst of a second Covid-19 wave which has seen the daily caseload surge by unprecedented levels, with the country overtaking Brazil as the second worst-hit country, with the most cumulative cases behind the U.S. We retain our projections for double-digit growth as India’s Covid resurgence begins to take an economic bite, partly due to base effects. We also note that the pandemic-related developments are fluid at this juncture and likewise considerable uncertainty bands around the economic projections.
“The second Covid wave and its economic impact will be crucial to monitor in the coming weeks. While overall growth might still stay high due to base effects, there are downside risks emanating due to the state-level restrictions,” added Radhika.
What does this mean for sectoral growth? In February 2021, the Indian government cleared a Rs 15,000 crore Production-Linked Incentivise plan meant to enhance India’s manufacturing capabilities, drive production capacity to high-value products and create ‘global champions’ in the pharma sector4. The Indian government focuses consciously on healthcare investments such as infrastructure (hospital beds), the larger sanitation ecosystem, and making sure the population at large has potable water, explains Radhika.
- The positive impact of President Joe Biden’s win for Indian pharma, but U.S. margins will be under pressure
The U.S. is one of the largest export markets for Indian pharma companies. On average, 38 per cent of the revenue of the top 10 Indian pharma companies (in terms of market capitalisation) is from the U.S. markets5.
Here are some reasons that the Joe Biden win is good news for the Indian pharma sector.
Dilution of ‘America First’ policy. Economic policies crafted by Biden’s presidency will have a less hawkish tone, implying that foreign investment is more welcome than in President Donald Trump’s era.
Strengthening the CREATES Act. Biden’s administration will strengthen the Creates Act enacted in December 2019. The changes address anti-competitive tactics by branded manufacturers to limit the import of generic products.
“This (obtaining samples of brand products) was not allowed in the past, and this was how the branded manufacturers, the big pharma companies in the U.S., were stopping generics from entering the country,” explains Dr Hong. “What this now means is the Indian generic products can continue to be exported to the U.S. market.”
Dr Hong’s optimism comes with a warning. The U.S. market will be challenging to grow as market growth slows down due to price erosion. According to DBS industry research, at two per cent, the CAGR for North America lags behind the rest of the world, which is growing at six per cent.
Dr Hong cautions,” It is pretty clear that the growth of the generic market in the U.S. is slowing down. A lot of policies, be it this administration or the previous administration, are all focused on lowering the price, which will be limiting the U.S. market growth.”
As India’s biggest pharmaceutical export market slows down, the sector must build partnerships and expand its customer base to regional markets.
- Handling the China equation - possibilities and competitive threats
The Indian pharma sector is pushing for self-sufficiency on API manufacturing (Active Pharmaceutical Ingredient) but matching the Chinese on price will be no easy task. China produces APIs at a 20 to 30 per cent lower price than the West, and India is heavily dependent on Chinese-manufactured APIs - the Indian pharma sector relies solely on Chinese imports for 8 out of 68 APIs.
Another hindrance to shifting manufacturing from China to India is that drugs like penicillin, and many other biosimilars used by Indian companies, need to be manufactured in cooler climates such as Xindong. Moving manufacturing to warmer Indian cities such as Hyderabad is not feasible.
Dr Hong alludes to a love-hate relationship between China and India, where the competitive threats are worrying, yet untapped profitable market opportunities are there for the taking. Of the ten listed Indian pharma companies, eight have an explicit China strategy, asserts Dr Hong.
China has untapped potential for certain drugs. Rituximab is one such example. The estimated penetration in targeted patients for Rituximab, used in the treatment for a specific kind of cancer, is 15 per cent in China and over 60 per cent in the U.S. Another drug, Trastuzumab, clocks in at around 80 per cent targeted penetration in the U.S. but 28 per cent in China6.
Foreign clinical trials are now accepted for drugs in national tenders in China. “These national tenders are winner takes all national tenders, and the volume is tremendous,” adds Dr Hong. "I would argue that China is still a long game but worth pursuing.”
Evaluate opportunities with Asian counterparts and countries
Radhika and Dr Hong advise that Indian companies evaluate specific geographies in the region to expand to. The penetration rates of targeted therapies are 3 to 5 per cent in Southeast Asia7: these low rates imply a significant opportunity. Two countries, Indonesia and Vietnam, show promise.
Indonesia, which has roughly half of Southeast Asia's population, has overhauled its healthcare system. Treatment of non-communicable diseases is driving the growth of prescription drugs at a CAGR of 11.2 per cent8.
In a switch in policy, the Indonesian government now allows foreign specialists to work in the country. This change will increase the number of specialist doctors, which could turn into a viable market opportunity in time for certain drugs.
Likewise, referencing the example of Vietnam, Dr Hong explains, “Due to the huge middle class in Vietnam, the country has one of Asia's highest growth rates. The government is unfolding specific policies which can be beneficial for foreign investment into the pharma sector.”
Vietnam imports 55 per cent of medicines annually9- a market opportunity for Indian companies. Plus, the government is aiming for 80 per cent local production. A new law incentivises investment in a healthcare enterprise by reducing land lease fees and credit support.
A manufacturing plant in Vietnam gives Indian companies access to the larger Indochine region. The government is passing laws to incentivise some of these healthcare investments, with income tax, to encourage more local manufacturing. The country’s biggest telco has recently, because of Covid-19, launched a telemedicine programme. Dr Hong explains that 70 per cent of the population, which lives in rural Vietnam, will benefit from this initiative. Still, moves such as these also are opportunities for Indian companies to get involved in the sector.
Such policy changes send out ripple effects in the economy, which Indian pharma companies can capitalise on.
Realigning to the new normal
Where does the industry go next? The need of the hour is to realign strategy and drug pipeline priorities as needed. Over 70 per cent of the Indian pharma sector’s raw materials are supplied by China10- the sector must diversify its supply chain to reduce overdependence on one country. Although, Dr Hong warns that this is easier said than done.
Companies must also pay close attention to alternate geographies to expand into. As mentioned earlier, Indonesia and Vietnam are potential markets due to their large populations. The investments could be in the form of joint ventures with local companies.
Payors and governments are sharply focused on managing costs while improving patient outcomes, and the pressure is on the pharma sector to match these expectations. The industry will benefit hugely from a move to digitalisation. Disruptive technologies such as the cloud, advanced analytics, and the Internet of Things (IoT) can drive huge value in the pharma sector.
Continuous monitoring and automation in packaging with IoT have the potential to improve processes. Quality assurance in manufacturing also improves if it’s easier to look at the wealth of process data and rectify problems.
But it’s not always easy to determine where the focus should be at the beginning of the digitalisation journey. Dr Hong advises that the sector make clear strategic choices for using digital technologies across sales and marketing and patient support.
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