Do India’s growth opportunities now outweigh the market’s challenges?

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EY - Anuj Gupta

By Anuj Gupta
EY, India

India’s pharmaceutical market is set to grow at a CAGR of 12%–13% between 2015 and 2020. This trajectory stands in sharp contrast to the US and Europe, where payers’ budgetary belt-tightening continues to hit drug prices and sales growth.

Global pharma companies are aware of India’s attractive market dynamics. It is home to almost 20% of the world’s population, wealth levels are rising (annual GDP growth is more than 7%), manufacturing costs are 50%–60% lower than in developed markets, and India now houses several hundred FDA-approved manufacturing facilities. Generating US$37 billion in sales today, the Indian pharma market will reach US$55 billion by 2020.

But beneath these attractive headline figures lies considerable complexity. Most of the US$55 billion in sales will be of low-priced branded generics, made by domestic players. Health insurance coverage remains limited in India. Out-of-pocket expenditure on drugs is therefore high, and few can afford costly innovative drugs sold by international firms. The country’s health care infrastructure is highly fragmented, giving domestic manufacturers, with deep distribution networks and expertise, a considerable advantage over foreign players. The cultural and social diversity of the region further complicates market access for global pharma.

India’s market also presents some unique structural challenges. For instance, providers and pharmacists have near-equal influence on patients’ drug choices. In many regions of the country, especially rural or suburban areas with limited health care facilities, patients (to avoid prescription or doctor’s consultation) consult directly with a pharmacist either for the prescription (in cases of common infections) or for alternate brands, thereby making the pharmacist an important influencer. Despite a large patient population, the clinical research in the country has been largely restricted by low awareness.

The country’s regulatory system has also proved challenging for global companies. Weak intellectual property (IP) laws and the Government’s unwillingness to lower entry barriers for global players have further worsened global sentiment. Japanese pharma Daiichi Sankyo recently exited the Indian market because the Government lacked the appropriate legal framework to penalize malpractice by Indian pharma companies. Novartis recently lost its battle to prevent Indian generic companies gaining compulsory licenses to market Glivec due to ambiguous IP regulations.

So it’s little wonder, perhaps, that the top 10 Indian pharma companies control more than 65% of the market, which has over 3,000 competitors in total. Multinational pharma firms currently represent only 10%–15% of sales.

Re-examining the Indian pharma opportunity

However, positive moves from the current Government, in office since 2014, are leading some multinationals to re-examine the Indian opportunity. The Government has recently eased up foreign direct investment (FDI) limits in pharma, allowing multinationals to acquire up to 74% (Brownfield or existing project) and 100% (Greenfield or new project) stakes through direct route. The Government has also announced plans to bring its various regulatory bodies, including the Department of Pharmaceuticals, the National Pharmaceutical Pricing Authority, the Central Drugs Standard Control Organization and the Drug Controller General of India, under one roof. This should significantly reduce the bureaucratic process and streamline approvals.

No doubt, given the pitfalls multinational pharma firms encountered as they attempted to penetrate the Indian market, they’re unlikely to rush back in headlong.

However, with investment/entry barriers down, the Government planning to streamline the regulatory process, and promises (albeit vague) to strengthen IP protection, global pharma companies now have significant incentive to acquire cost-effective Indian manufacturing capabilities and/or to partner with domestic manufacturers. India is explicitly trying to position itself as a global business destination under World Trade Organization rules, while political upheavals drive instability and uncertainty in the EU and the US. All this provides further reason for global pharma to re-evaluate its investments in emerging nations such as India.

As the Indian market opens up, there may be early-mover advantages for those able to rapidly and effectively reposition their product portfolios to optimally address the very regionally specific, yet significant, health and social needs of the world’s second-largest population.

Will global pharma be able to challenge the dominant Indian players? That’s unlikely. But the opportunity to gain a significant presence looks more promising than ever.

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