The market research report Indian Pharma Sector Analysis by RNCOS is detailed study of the Indian pharmaceutical market.

It does an exhaustive investigation on the structure of the domestic pharmaceutical market and gives a thorough analysis of the driving and restraining forces operating against it. India has one of the fastest growing pharmaceutical markets in the world. In 2006-07, this market was valued at over US$ 7 Billion. Driven by a huge patient base, increasing incomes, improving healthcare infrastructure and strong penetration of health insurance, the pharmaceutical market is expected to grow more than double its size in the next five years. Drugs for acute diseases presently dominate this market; however, the increasing penetration of lifestyle-related diseases is expected to fuel the growth of drugs targeting chronic diseases. The Indian pharmaceutical market at present is highly fragmented, with the top three companies having a market share of around 5% each. However, introduction of the product patent regime is likely to result in heavy consolidation in future. Key Findings - The domestic pharmaceutical market in India has grown at a CAGR of nearly 12% in the last five years. - At present, drugs for mass therapies dominate, however, driven by an increasing prevalence of lifestyle-associated diseases, drugs for specialty therapies are expected to remain buoyant in future. - Around 67 Million Indians are expected to be above 67 years of age by 2011. This age group spends around 3 to 4 times more on drugs than those in younger age groups, thus fuelling the market growth. - Patented drugs, which had no share in the pharmaceutical market, are expected to have a 10% market share in 2010. - Around 64% Indians are not covered under by health insurance and pay expenses for pharmaceuticals out of pocket. - Driven by factors such as rising rural incomes and a strong distribution network, India s rural pharmaceutical market is experiencing a strong growth. - The product patent regime will encourage the Indian companies to invest more in Research and Development. Key Issues & Facts Analyzed - Evaluation of past, current and future market trends. - Evaluation of the market by segment. - Discussion about the major drivers of the pharmaceutical market. - Analysis of the opportunities created by the market. - Review on the government regulations on the market. - Analysis of the major challenges faced by the market. - Competitive landscape of the market.

Key Players Analyzed This section provides the overview, key facts and financial information of prominent players in the Indian pharmaceutical market Like Ranbaxy Laboratories Limited, Cipla Limited, GlaxoSmithKline Pharmaceuticals Limited, Nicholas Piramal India Limited and Zydus Cadila. Research Methodology Used Information Sources Information has been sourced from books, newspapers, trade journals, and white papers, industry portals, government agencies, trade associations, monitoring industry news and developments, and through access to more than 3000 paid databases. Analysis Methods The analysis methods include ratio analysis, historical trend analysis, linear regression analysis using software tools, judgmental forecasting, and cause and effect analysis.

2. The Pharmaceutical sector in India is highly fragmented with more than 10,000 listed and
unlisted companies. India is one of the fastest-growing pharmaceutical markets in the world, and its market size has nearly doubled since 2005. The total turnover of the Indian Pharma sector is estimated to be close to US$ 21 bn of which around US$ 9 bn comes from exports while the rest comes from domestic sales. US is the topmost destination for Indian Pharma exports followed by Russia, Germany and Austria. A region-wise segregation of Indian exports has been shown below.

The domestic pharma market is currently US $ 10 bn in size and is expected to reach ~US$ 20 billion by 2015 and establish its presence amongst the worlds leading 10 markets. Currently, India is the 4th largest market in the world in terms of volume and 12th in terms of value. Based on the different therapeutic areas, the Pharmaceutical market can be broadly divided into 2 categories Acute and Chronic. 1. Acute Segment It includes diseases that usually last for a short duration and includes therapies like anti-infectives, pain-killers or analgesics etc. 2. Chronic segment It includes diseases that are recurring in nature and include lifestyle diseases. This includes therapies like anti-diabetics, cardiovascular (CVS), cancer etc. In most cases, ailments in the chronic segment ensure regular consumption of medicines for the lifetime of the patient. Thus, chronic segment is expected to grow much faster than the acute segment going forward. Currently, the Indian Pharmaceutical Market is more than 60% acute with the rest being chronic. The share of chronic is expected to increase going forward. Anti-infectives is the largest contributor (17%) to the domestic sales followed by Cardiovascular and Gastrointestinal. The highest growth has been shown by Anti-diabetics followed by Neurology (CNS) and Cardiovascular.

So, how does the Pharma sector work? Here is the analysis
The working of the Pharma sector has been explained pictorially below:

Inputs: The major inputs required for the Pharma sector are basic chemicals, labours and Research and Development (R&D). The sector is a research-driven industry with the focus being on discovering and launching new and innovative drugs. Companies spend millions of dollars/rupees on research and get the competitive advantage of patents if they are successful in launching drugs. In India, R&D costs as a % of revenues are around 5-8% on an average. This is very low compared to the companies in developed countries like US, UK etc. where the average R&D spend is close to 17-20% of the revenues. Products/Services: The Pharmaceutical products/services can be broadly divided into 3 segments
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Active Pharmaceutical Ingredients (APIs) These are substances which are responsible for medicinal activity. For e.g. Paracetamol is an API which is present in drugs like Crocin, Anacin etc. and is responsible for relieving the pain. APIs (also called as bulk drugs) are the raw material for the final drug that we consume. Well known API manufacturers include Orchid Chemicals, Elder Pharma etc. Formulations While APIs are responsible for the medicinal effect of a drug, we cannot directly consume an API due to different reasons like stability, taste, odour etc. Hence APIs are combined with certain substances called excipients to form the final drugs or

formulations which are suitable for human consumption. Continuing the example given above, Crocin is a formulation. Companies like Sun Pharma, Cipla, Dr. Reddys etc. are examples of companies manufacturing formulations. Contract Research and Manufacturing Services (CRAMS) Just like IT, major Pharma companies outsource their manufacturing work to low-cost centres like India to reduce cost while focusing on drug-discovery and marketing themselves. Further, they also outsource part of their research activities to some of the Indian pharma companies. Over the last few years CRAMS has emerged as a major focus area for many of the Indian Pharma companies. Examples include companies like Divis Labs, Jubilant Life Sciences etc.

As mentioned above, companies from developed countries spend a large amount on R&D and are responsible for discovering and launching a number of innovative drugs/formulations. Companies like Pfizer, Merck, Novartis, Roche etc are some of the biggest innovator companies globally. Compared to this, Indian companies have established their presence in the generics segment. So, what are generics? Generics are low-cost versions of branded drugs and have the same medicinal effect as the branded or original drug. Once the patent period for a drug expires, companies can come in with generic versions of a drug which provides affordable medicines for consumers. Indian companies have developed an expertise in reverse-engineering and developing generics. Users: Pharmaceutical products reach the end users through different mechanisms. There have emerged 2 different types of markets globally: 1. Branded Markets: Countries like India, Brazil, Russia, Mexico, etc. are branded in nature. Consider the mechanism in India. In India, our doctor prescribes us the medicine for a particular disease. The prescription is usually a brand name of a drug for that disease. We also tend to purchase the exact brand prescribed by the doctor even if the chemist offers a different/generic version available at a low cost. 2. Unbranded Markets: Developed countries like US, UK and some European countries are known as unbranded markets. Here, instead of prescribing the brand, the doctors prescribe the molecule or API (with the dosage) for a particular disease. In these countries, a large percentage of the population (~95%) has medical insurance. Hence, the insurance companies decide which generic drugs will be covered by the insurance; understandably these will be the ones which are sold at the lowest costs. When consumers approach the chemist, they are given the drug as per the prescription and their insurer.

What does the Past say? Heres the review of the Pharma Sector

As seen in the above table, Dr. Reddys Laboratories Ltd. has clocked the highest Net Sales CAGR of ~31% over the last 6 years. Its Net Profit has also grown strongly with a 5 year CAGR of close to 84%. However, its Net Profit margin is quite low at 7%. In terms of volume, Cipla is the market leader with a 5.3% market share in India. Sun Pharma enjoys the highest Net Profit margins with a 6 year average of 36.5%. This is because of the strong brand it has created and its strong presence especially in the CNS therapy area.

Porters 5 forces Analysis

What are the growth drivers of the Pharma sector? Heres the analysis
1) Increasing incomes & healthcare spends to spur domestic growth With increasing affordability, shifting disease patterns and healthcare reforms, the total consumer spending on healthcare products and services in India has grown at a CAGR of more than 14% since 2000. According to a research report by the Mckinsey Global Institute, spending on healthcare in India will witness the highest growth rate among all spending categories over the next two decades. Healthcare spend is expected to grow to 13% of average household income by 2025 from 7% in 2005. This will be driven largely by increase in per capita disposable income which is expected to increase to US$765 in 2015 from US$463 in 2005. The domestic pharma market will thus continue to grow rapidly (~15% sales CAGR over 200913) buoyed further by stronger penetration of semi-urban/rural areas and rising share of chronic therapies. McKinsey estimates the domestic pharmaceutical market will more than double to achieve sales worth US$ 20bn by 2015. 2)Significant patent expiries in developed markets present good growth opportunities for Indian generic companies: A slew of patents will expire in the US and EU over 2011-15, including top-selling brands Lipitor, Nexium, Zyprexa and Plavix. Over this period, products with estimated annual sales of ~US$ 80 bn in the US alone will lose patent exclusivity, and this will translate into an estimated incremental generic sales opportunity of US$ 18 billion (~60% of current US generic drug market); a similar incremental opportunity in developed European markets exists as well. A big share of this revenue will go to companies that secure high-margin first-to-file (FTF) sales which offer marketing exclusivity for 180 days. It is estimated that Indian companies can take about 20% of this S18 bn new market 3) Emerging markets to become the next destinations for pharma companies Pharmerging markets, including the BRIC countries, South Africa, Mexico, Turkey, Poland, Indonesia and Romania, are growing faster than developed markets. According to IMS, a wellknown industry research firm, Pharmerging markets will increase their share in global pharma from 16% in 2009 to around 25% in 2014-15. Indian generics are replicating their domestic success in markets like Russia, Brazil and Mexico which like India are branded in nature. 4) M&A a potential catalyst With higher growth prospects in emerging markets, many multinational branded drug companies are trying to expand their presence in generic pharmaceuticals. This has increased their interest in generic companies with an established product portfolio and sales/distribution network in emerging countries including India. The acquisitions of Ranbaxy (by Daiichi Sankyo) and Piramal (by Abbott) are a case in point. This is expected to continue.

5) Biosimilars potentially a big long-term driver Biosimilars are reproductions of biotechnologically manufactured biopharmaceuticals that partially mimic proteins naturally present in the body. Biosimilars could potentially become an important long-term growth driver for the generic pharmaceuticals industry, with the global annual sales opportunity rising to as much as US$ 10bn by 2015 (once patents for several biologics expire). Indian generic companies still trail overseas rivals in biosimilars. Success will depend on building manufacturing capacity and the emergence of favourable regulatory reforms in the US and EU.

So, is there anything to be concerned about?

1) Product pipeline drying up Innovative drugs by Big Pharma companies which is the lifeblood of generic drug makers, has been on the decline for the past several years. Some branded drug companies are also cutting R&D budgets. This trend may pressure growth in generics (over time) as competition for a dwindling number of new molecules intensifies. Besides, Big Pharma is focusing more on biologics and difficult-to-make niche products, which in turn is compelling generic drug makers to also focus in that direction. 2) Patent expiries could cannibalise other generic molecules in India There is a risk that some of the growth from new generic drugs will come at the expense of lower sales from existing generic products. As some of the largest brands in the industry come off patent in coming years, their generic uptake will be at the expense of other generic molecules in similar therapeutic categories. 3) Big Pharma moving into generics Recent deals in emerging markets and an increasing number of tie-ups with generic firms indicate that branded pharma companies are moving into the generic space. Companies like Pfizer, GSK, Sanofi, AstraZeneca and Abbott have already made moves in this direction and this could result in increased pricing pressure. 4) FDA delays, compliance issues The US Food and Drug Administration (FDA) approval timelines have lengthened from an average of 16 months during 2006-07 to 26 months in 2009-10. This is negative for the whole industry and can have painful consequences for individual companies. In addition, ongoing FDA issues related to current good manufacturing practice (cGMP) compliance have been a concern for companies like Ranbaxy and Sun Pharma (via US subsidiary Caraco). 5) National Pharmaceuticals Policy 2006

Currently the Government controls prices of 74 bulk drugs which are mainly life savers under cost- based price control and effective monitoring of the National List of Essential Medicines (NLEM). But the new National Pharmaceuticals Policy 2006, which is still in draft stage, proposes to increase the price control to 354 drugs. This regressive policy threatens the growth of the industry. With 100% FDI and a proposed policy like NPP creates confusions about the future of the industry.

What is the future Outlook for the Pharma sector in India?

The Pharma sector in India is expected to show robust growth in the next few years driven by growth in all 3 segments viz. 1. Domestic Formulations which are expected to grow at ~15% 2. Exports which will see huge growth due to the patent cliff in 2012 and emerging markets like Brazil, Mexico, South Africa driving growth 3. CRAMS which is expected to grow at a rate of around 13% globally. Indian companies have the largest number of US FDA (Food and Drug Administration) approved facilities outside US. They have made regulatory filings for around 70% of the drugs that are going off patent in 2012. Besides many companies have sizable US exposure in their overall revenue. The big pharma companies also seem to have acknowledged capability of Indian companies with many tie-ups, acquisitions and product specific deals happening over the last 2 years. The companies that will benefit the most are those which have a robust pipeline of products in the regulated markets, a favourable geographic mix (strong presence in India and US with some presence in emerging markets) and potential in biosimilars/niche products. These companies will be best positioned for sustainable growth. Thus, considering all these factors, we can say that in the long term the Indian Pharma sector is poised for robust growth and is shifting from a defensive to a growth sector. It is very important that while investing in a company, an investor selects an industry, where the long-term future prospects are bright. We have seen that in the long run the Indian Pharma sector is expected to have good growth. Also, it is equally important that the company has an excellent financial track record( i.e. Green 10 Year X-Ray) and its long-term future prospects are Green (Very Good). *The 10 YEAR X-RAY facilitates analysis of the financial performance of the company considering the five most important parameters. A 10 Year period will normally encompass an entire business cycle. Analysing the performance over this time frame is essential to understand how a company has fared during the good as well as bad times. The five most important parameters that one needs to look at are Net Sales Growth Rate, EPS Growth Rate, Book Value Per Share (BVPS) Growth Rate, Return on Invested Capital (ROIC) and Debt to Net Profit Ratio.

Given below is the business model and the MoneyWorks4me assessment for a few Pharma companies: At MoneyWorks4me we have assigned colour codes to the 10 YEAR X-RAY and Future Prospects of the companies, as Green (Very Good), Orange (Somewhat Good) and Red (Not Good).

While investing, one must always invest in the stocks of a company that operates in an industry with bright long-term prospects. Further, the companys 10 YEAR X-RAY and future prospects should also be Green. The table given above gives you a list of few companies from the Pharma Industry that you could consider investing in. But, you need to invest in these stocks at the right price (i.e. when the market offers an attractive discount). To find out the right price to invest in these companies, become a member of MoneyWorks4me.com. Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions

3. SWOT Analysis of Pharma Sector

Strengths
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Cost effective technology Strong and well-developed manufacturing base Clinical research and trials Knowledge based, low- cost manpower in science & technology Proficiency in path-breaking research High-quality formulations and drugs High standards of purity Non-infringing processes of Active Pharmaceutical Ingredients (APIs) Future growth driver World-class process development labs Excellent clinical trial centers Chemical and process development competencies

Weaknesses
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Low Indian share in world pharmaceutical market (about 2%) Lack of strategic planning Fragmented capacities Low R&D investments Absence of association between institutes and industry Low healthcare expenditure Production of duplicate drugs

Opportunities
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Incredible export potential Increasing health consciousness New innovative therapeutic products Globalization Drug delivery system management Increased incomes Production of generic drugs Contract manufacturing Clinical trials & research Drug molecules

Threats
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Small number of discoveries Competition from MNCs Transformation of process patent to product patent (TRIPS)

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Outdated Sales and marketing methods Non-tariff barriers imposed by developed countries

4. Indian pharma industry has always been a leading industrial sector of the country, with a paralleled dominance of both domestic and foreign pharma companies. As a result of the vast potential held by the domestic industry, it was estimated to have generated revenue worth INR 655.5 Billion (US$ 13.1 Billion) in FY 2011. Growth of the industry can be attributed to prominent factors, such as growing middle class population, rapid urbanization, increase in lifestyle-related diseases, and increasing issuance of health insurance. Besides, the product patent regime has provided ample support to the industry to sustain its growth pace, despite the global economic downturn. Further, generic is emerging as one of the leading segments to be benefited by many drugs going off patent in due course of time. According to our new research report Indian Pharma Sector Forecast 2014, Indian pharmaceutical industry is projected to show double-digit growth in near future owing to a rise in pharmaceutical outsourcing and rising investments by multinational companies. A large percentage of pharma products produced in India are exported, which has led the leading players to expand their reach into the Western nations. Due to the investments in R&D and the quest for more and more ANDA filings, the clinical trials market is expected to grow at blistering pace in coming years. For comprehensive outlook of the industry, we have done extensive research on various segments of the Indian pharma industry, such as the domestic & export market, branded & generics drugs, formulations & bulk drugs, etc. The baseline for optimistic future outlook of the pharmaceutical market is improvement in the access to medicines to the Indian population. The focus of the industry will shift towards capitalizing the potential of tier-III and rural areas. Emerging sectors, such as bio-generics and pharma packaging will also pave way for the pharmaceutical market to continue its upward trend during the forecast period (FY 2012- FY 2014). The report provides thorough statistical and analytical overview of the Indian pharmaceutical market. It contains information about past, present, and future trends, with focus on entire structure, composition, and working of the pharmaceutical market. The report extensively discusses opportunities and challenges expected to arise within and outside the pharmaceutical market. The report also analyzes emerging sectors, regulatory environment, and distribution system to identify strengths and weaknesses of the pharmaceutical market. It has thoroughly examined current market trends, industrial developments, and competitive landscape to enable clients understand the market structure and its progress in coming years. It also presents a brief overview of the demographics and healthcare profile to adjudge the pharmaceutical market in terms of demand, expenditure, and possible future direction

5. Indian Pharmaceutical Industry

Domestic & External Trade Future Prospects Research & Development

The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent. Richard Gerster

The Indian Pharmaceutical Industry today is in the front rank of India s science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world.

Growth Scenario in 2010

India's pharmaceutical industry is now the third largest in the world in terms of volume. Its rank is 14th in terms of value. Between September 2008 and September 2009, the total turnover of India's pharmaceuticals industry was US$ 21.04 billion. The domestic market was worth US$ 12.26 billion. This was reported by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers. As per a report by IMS Health India, the Indian pharmaceutical market reached US$ 10.04 billion in size in July 2010. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. Know more out this in our article on Indian Pharmaceutical Industry- Future Trends Also check out Pharmaceutical Market Trends 2010

Leading Pharmaceutical Companies

In the domestic market, Cipla retained its leadership position with 5.27 per cent share. Ranbaxy followed next. The highest growth was for Mankind Pharma (37.2%). Other leading companies in the Indian pharma market in 2010 are
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Sun Pharma (25.7%) Abbott (25%) Zydus Cadila (24.1%)

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Alkem Laboratories (23.3%) Pfizer (23.6 %) GSK India (19%) Piramal Healthcare (18.6 %) Lupin (18.8 %)

For details check out List of Top 10 Pharmaceutical Companies in India

Future Prospects
The Indian pharmaceuticals market is expected to reach US$ 55 billion in 2020 from US$ 12.6 billion in 2009. This was stated in a report title "India Pharma 2020: Propelling access and acceptance, realising true potential" by McKinsey & Company. In the same report, it was also mentioned that in an aggressive growth scenario, the pharma market has the further potential to reach US$ 70 billion by 2020 Due to increase in the population of high income group, there is every likelihood that they will open a potential US$ 8 billion market for multinational companies selling costly drugs by 2015. This was estimated in a report by Ernst & Young. The domestic pharma market is estimated to touch US$ 20 billion by 2015. The healthcare market in India to reach US$ 31.59 billion by 2020. The sale of all types of pharmaceutical drugs and medicines in the country stands at US$ 9.61 billion, which is expected to reach around US$ 19.22 billion by 2012. Thus India would really become a lucrative destination for clinical trials for global giants. There was another report by RNCOS titled "Booming Pharma Sector in India" in which it was projectedt that the pharmaceutical formulations industry is expected to prosper in the same manner as the pharmaceutical industry. The domestic formulations market will grow at an annual rate of around 17% in 2010-11, owing to increasing middle class population and rapid urbanisation.

Characteristics of Indian Pharmaceutical Industry

The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It is an extremely fragmented market with severe price competition and government price control. The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations.

Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the drugs and pharmaceutical products has been done away with. Manufacturers are free to produce any drug duly approved by the Drug Control Authority. Technologically strong and totally self-reliant, the pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpower, strength of national laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and research capabilities, supported by Intellectual Property Protection regime is well set to take on the international market.

Why India?
Competent workforce: India has a pool of personnel with high managerial and technical competence as also skilled workforce. It has an educated work force and English is commonly used. Professional services are easily available. Cost-effective chemical synthesis: Its track record of development, particularly in the area of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs. Legal & Financial Framework: India has a 53 year old democracyand hence has a solid legal framework and strong financial markets. There is already an established international industry and business community. Information & Technology: It has a good network of world-class educational institutions and established strengths in Information Technology. Globalisation: The country is committed to a free market economy and globalization. Above all, it has a 70 million middle class market, which is continuously growing. Consolidation: For the first time in many years, the international pharmaceutical industry is finding great opportunities in India. The process of consolidation, which has become a generalized phenomenon in the world pharmaceutical industry, has started taking place in India.

Steps to strengthen the Industry

Indian companies need to attain the right product-mix for sustained future growth. Core competencies will play an important role in determining the future of many Indian pharmaceutical companies in the post product-patent regime after 2005. Indian companies, in an effort to consolidate their position, will have to increasingly look at merger and acquisition options of either companies or products. This would help them to offset loss of new product options, improve their R&D efforts and improve distribution to penetrate markets.

Research and development has always taken the back seat amongst Indian pharmaceutical companies. In order to stay competitive in the future, Indian companies will have to refocus and invest heavily in R&D. The Indian pharmaceutical industry also needs to take advantage of the recent advances in biotechnology and information technology. The future of the industry will be determined by how well it markets its products to several regions and distributes risks, its forward and backward integration capabilities, its R&D, its consolidation through mergers and acquisitions, co-marketing and licensing agreements.