Pharma

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 KEY POINTERS TO UNDERSTAND PHARMA
INDUSTRY
• Important pharma terminologies :
Formulation, Bulk Drugs, API, Generics, OTC Drugs, Acute diseases and
chronic diseases, Speciality Drugs, Regulated markets, semi-regulated
markets, ANDA,, DMF, FDA approved facilities, Biologics, Bio-similar.
• Regulatory changes and how it affected the industry
• Key trends related to the Indan pharma industry
• Global trends
• Future Growth projections and growth drivers
• Key Concerns for the industry
• Whether the current pharma industry player’s strategy is
sustainable and what should be the long-term strategy?
• Why Indian pharma players are looking at M&A route for future
growth?
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 Key Pharma Terminologies

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 Simplified Definitions

•Formulation – Final Drug in the form of tablets, capsules,

injections etc
•Bulk Drugs – Raw Materials used to make the final drug
(formulations)
•API – Active Pharma Ingredients (Important raw material that
treats the ailment)
•Generics – Drugs that have come out of patents
•Acute diseases and chronic diseases: Acute diseases require
short-term treatment (Ex: cold, Fever etc), whereas Chronic
diseases require long-term treatment (Ex: Diabates, Blood Pressure
etc)
•Regulated markets: Developed markets (US, Western Europe and
Japan)
•semi-regulated markets: Developing markets (Asia, Africa etc)

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 Simplified Definitions

•ANDA: Abbreviated New Drug Approval. ANDA is required to

sell formulations in the US retail market
•PARA IV FILINGS: The company that is the first to file the
ANDA will get the 180 day exclusivity to market the drug. It
means no other generic version of the same drug can be sold in the
market during these 6 months.
• DMF: Drug Master Files: DMF is required to sell bulk-drugs in
the US.
•Specialty Drugs: High cost, High Complexity, High Touch drugs.
Speciality drugs are typically priced at more than $600 per 30-day
supply. Complex to manufacture. Need more face-to-face time
with doctors. Around 500 drugs are categorized as specialty drugs
in US.
•Biologics: Drugs derived from living cells.
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 Major Regulatory Changes

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PRE 1970s

Era of MNCs

1970-1995 •Decline of MNCs

•Strong Domestic Players
• Indian Patents Act • Process Chemistry or Reverse engineering
• DPCO skills
• SSI • Low Manufacturing Costs
• FERA •Did not even attempt to develop new drugs
for patents
1995-2014
• Product Patents from 2004 • Return of MNCs
• Relaxation of DPCO • Growth of Exports
• Relaxation of SSI norms • Growing of Strength of Large
• Dilution of FERA Pharma Companies
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Post 2014

• US regulatory pressures
• Slowing down of
• Competition from countries
Growth especially
like China
Exports growth
• Domestic price controls.

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 TRENDS IN INDIAN
PHARMA INDUSTRY

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KEY POINTERS FOR INDIAN PHARMA TRENDS

• Size, Growth and Share of Exports

• Exports geographies

•Domestic Market-share of Companies

• Share of market between acute and chronic diseases

• Player Performance

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 Between 2003 to 2014, Indian Pharma market grew at a CAGR of 12-
14% while between 2014-19, the growth rate dropped to a CAGR of 5-
5.5%

INDIAN PHARMA : SIZE AND GROWTH

Segment 2003 2014 2019

Domestic $3.9bn $13 bn $19 bn
Formulation
Global Pharma industry
Formulation $1.4 bn $11.1bn $14.4 bn : $ 1025 bn
Exports

Bulk-Drugs $1.1 bn $3.6 bn $ 3.9 bn

Exports

Total $6.1 $27.7bn $37.3 bn

bn

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Source: Crisil research
 Formulation Exports to regulated markets now constitutes 54%
of total formulation exports.

Formulation exports by India (2014 to 2019)

Share of Regulated 2014 2019

Markets : 48% 54%

Source: Crisil Research

 US constitutes 68% of India’s exports to regulated markets.

India's pharmaceutical exports : Share of various countries in regulated market

Source: Crisil Research, DGCIS

Domestic formulation industry - highly fragmented
•The domestic formulations industry is highly fragmented in terms of both,
number of manufacturers and variety of products.
•There are 300-400 organised players and about 15,000 unorganised players.
•However, organised players dominate the formulations market, in terms of
sales.
•In 2017-18, the top 10 formulations companies accounted for about 43% per
cent of total formulation sales.

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 Indian pharma industry is fragmented and the top 10 players
put together have only 43% market share.

DOMESTIC MARKET SHARE (2017-18)

Low penetration of health insurance in India
•Per capita annual healthcare expenditure in India, as per World Bank data
is very low at $100 as compared to $550 in China, and $4000 to $ 5000 in
developed countries like US, Japan etc.
•This can be attributed to the large population in India and lower share of
health expenditure in total government expenditure.
•In India, about 85 per cent of medical spends is out-of-pocket expenditure,
wherein the consumer directly pays for medicines.
•Unlike the US, India lacks a strong health insurance sector that can share
healthcare costs with patients.
•In the US, government organisations and managed care organisations
reimburse majority of drug costs to patients.
 About 60 per cent of total drugs sold are used to treat acute
diseases.

ACUTE VS CHRONIC
 Top therapeutic category in India are for acute diseases- Anti-
infectives.

DOMESTIC FORMULATION MARKET BY TOP THERAPEUTIC

CATEGORIES
 Chronic market has been much faster than the acute market.

GROWTH : ACUTE VS CHRONIC

Source: Crisil Research

 Player Performance – Formulation
Players

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CLASSIFICATION OF THE FORMULATION PLAYERS

•Indian formulation players can be categorized into:

• large (revenues greater than Rs. 45 bn),

•medium (revenues between Rs. 5 bn to Rs. 45 bn) and

•small players (revenues less than Rs. 5 bn).

•Performance of each type of players vary significantly

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 List of formulation players

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 Large players post stronger growth compared to medium and
smaller players.

GROWTH RATES OF DIFFERENT FORMULATION PLAYERS

Type of Player CAGR (2014 to 19)

Large 10%

Medium 5%

Small 6%

Source: Crisil Research

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 Large and medium players report significantly higher ROCE
compared to the smaller players.

Average ROCE (2014 to 2019)

Source: Company Reports, Industry

 Exports make up more than 70% of large formulation players and 44%
for medium players but only 8 to10% for small players.

Share of exports to total sales

LARGE PLAYERS MEDIUM PLAYERS

Source: Crisil Research

REASON FOR DOMINANCE OF LARGE PLAYERS

•Greater access to international markets as they have the required capital,

labour and better infrastructure/manufacturing plants and the required
compliance certifications.
•Exports to regulatory markets which have higher margins than that of
semi-regulated and domestic markets. Large players focus on regulated
markets.
•Strong brands in the domestic market.
•Economies of scale in procurement
•Strong distribution network.
 Player Performance – Bulk Drug
Players

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 Exports constitute around 65% of large bulk drug players revenues
whereas the figure is about 55% for medium and small players.

BULK-DRUG PLAYERS: SHARE OF EXPORTS TO TOTAL SALES

Large Players
Medium and Small Players

Note: Large Bulk Drug players have revenues of over Rs. 1000 crores , Medium and small players have revenue
of less than Rs. 1000 crores.

Source: Crisil Research

 Large players report significantly higher margins and
returns

Average OPM and RoCE (2014-2019)

Source: Company Reports, Industry

 GLOBAL MARKET TRENDS

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 Size of global pharma industry was $1025 bn in 2019.

Trend in global pharmaceutical sales

Source: IMS Health

GLOBAL MARKET: TOP THERAPEUTIC CATEGORIES

Source: Crisil Research

 North America, US and Japan (Regulated markets) contribute to 72%
of the global pharma industry

REGION-WISE SHARE

Region % Share of the Global

Pharma Market

North America 36.2

Europe 23.1

Japan 11.7

Asia, Africa and Australia 17.5

Latin America 7.5

Source: IMS Health

 Top 10 global players have about 49% share.

Top corporations by market share (2018)

Source: IMS Health

 Global companies are heavily dependent on a few
drugs for bulk of their revenues

HIGH DEPENDENCE ON SPECIFIC DRUGS

Drug
contribution
Drug In % of
Sales in Company Company
Company Drug $bn Sales in $bn Revenues Ailment
Arthritis and
Abbvie Humira 19.3 32.58 59% Spondylitis
Blood clots in
veins of legs or
Bristol Eliquis 9.9 22.6 44% lungs

Celegne Revlimid 9.9 15.2 65% Leukemia

 Reason for Faster Growth between
2005 to 2015

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 Formulation exports grew at a CAGR of 19% between 2005 to 2015.

EXPORTS AND DOMESTIC GROWTH: 2005-15

Source: Crisil Research

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 Global generics market grew at a healthy pace between
2005 to 2014-15.

PATENT EXPIRIES

• Between 2005-2014, $250 bn worth of drugs went off patent blockbuster

drugs going off-patent which created opportunities for Indian players.

• Such patent losses and subsequent launch of generic versions helps boost both

revenue and profitability of Indian players.

 Rising healthcare costs to drive preference for generic drugs in
regulated markets.

HEALTH CARE SPEND IN REGULATED MARKETS

COUNTRY-WISE
% of GDP HEALTH CARE
EXPENDITURE

Source: World Bank, Crisil Research

 India has a very low manufacturing costs compared to US
and Europe.

Cost of manufacturing drugs in India, China, Europe and the US

 Share of Generics has been increasing the Regulated
Markets.

INCREASING SHARE OF GENERICS

EUROPE UNITED STATES

Share of Generics has reached

27% of the overall pharma
market in 2019.

Source: Crisil Research

 India has the 2nd largest number of US FDA approved
facilities, skilled manpower and process chemistry skills.

US FDA APPROVED FACILITIES

•India has the highest number of US FDA (US Food and Drug

Administration) approved facilities outside the US.

•As per DMF fillings data of 2018 , there are 10,000 active manufacturing

units [both formulation and active pharmaceutical ingredient (API)

facilities] - foreign and domestic - registered with the US FDA.

• About 3700 (37%) registered units are estimated to be present in India

alone.
 Indian companies have been getting around 35% to 45% of
the global ANDA approvals every year since 2006.

ANDA APPROVALS
2006-2014 2014-2018

Source: US FDA
 India has the largest number of ANDA approvals after
US but low penetration in generics market.

COUNTRY WISE ANDA APPROVALS (UPTO 2006-18)

•Despite large no. of ANDA

approvals, India’s market
share in US generics market
is only 6%
• This indicates under
penetration and huge
potential.

Source: US FDA
 Apart from large ones, Indian mid-size pharma companies
are also flocking US through ANDA approvals.

Small-, mid-sized Indian formulators flock also going for

ANDA approvals
•Over the last few years, many Indian companies - mostly small- and mid-sized
players - invested in US FDA approved facilities to capitalise on the generic
drugs opportunity.
•Indian companies, which traditionally used the contract manufacturing route
to access regulated markets, have simultaneously obtained ANDA approvals
for a direct entry into the retail segment.
 Indian companies account for nearly 45 – 50% of US DMFs.

DMF filings (global vs India)

Source: USFDA
 India is considerably ahead of its competitors in terms of the
total number of DMFs.

Country-wise DMF filings (2018)

 Indian bulk-drug companies are making in-roads in patented
bulk-drug market.

Increasing innovator confidence

•In addition to a high number of DMFs, India's proposition in the bulk

drugs industry is also reflected in the innovator confidence that it enjoys.

•Companies such as Piramal Enterprises, Divi's Labs, Dishman Pharma,

Shasun Pharma, Jubilant Lifesciences, Aurobindo Pharma etc, supply

bulk drugs for patented products to large and mid-sized pharmaceutical

players in regulated markets.

 Indian bulk-drug companies are making in-roads in patented
bulk-drug market.

Major Deals between large global companies and Indian bulk drugs
players
 India is better positioned in the medium term
compared to China.

CHINA VS INDIA

Though China’s manufacturing cost is comparable to that of India’s,

we have an advantage because of

•US FDA approved facilities,

•large number of DMFs, (India – 44% and China – 16%)

•skilled manpower

•Advanced process chemistry skills.

SUMMARY OF REASONS FOR FASTER GROWTH OF EXPORTS

• Many drugs coming out of patents and the growth of Generic

market.
• Developed countries trying to reduce pharma expenditure.
• Low manufacturing cost.
• Second largest number of US FDA approved facilities in India
• Second largest number of ANDA after US in the last 10 years
• Largest number of DMFs in the last 10 years.
 KEY CONCERNS AND REASONS
FOR RECENT SLOW-DOWN

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DECREASE IN NUMBER OF DRUGS GOING OFF-PATENT

• Between 2006-14, about $270bn

worth of drugs went off-patent while
the best years were between 2012-14.
• While between 2014-22, only $160 bn
worth of drugs is expected to go off-
patent.
• This drop in the value of drugs
going off-patents which limits the
opportunity of growth for Indian
Source: USFDA, Industry players.

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 SLOW-DOWN IN EXPORTS

FORMULATION EXPORTS

As against robust 19% CAGR

reported from 2005 to 2016,

exports to regulated markets

have stagnated after 2016.

Source: DGCIS
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 Bulk-drugs exports decelerated between 2013 -18 and the bulk-
drug’s contribution to exports dropped from 42% to 22% in the
last 10 years.

SLOW-DOWN IN BULK DRUG EXPORTS

INDIAN BULK-DRUG EXPORTS ($BN) BULK-DRUG EXPORTS as
percentage of Overall Exports

2014 2019

Source: USFDA
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 Bulk-drugs exports have been coming down due to competition from
China and drugs going off patents.

REASON FOR SLOW-DOWN IN BULK DRUG EXPORTS

India’s imports of Bulk drugs
• Competition from China and other
Asian countries in getting DMFs
• China has become very strong
dominant in Intermediates (due to
low cost) and even Indian
dependence on China have been
increasing.
• Indian players export bulk drugs
for patented drugs also and when
these drugs go off-patent, revenues
will fall. Source: DGCIS, CRISIL Research
 Quicker ANDA approvals have increased the competitive intensity
for Indian players.

QUICKER ANDA APPROVALS

The US FDA has started collecting a GDUFA
fee from generic drug manufacturers to
• help the agency increase its staff and
resources to cope with the rising number
of ANDA application backlogs, and
• improve the quality of oversight on
generic drug manufacturers globally.
Due to GDUFA, the number of ANDA
approvals have become quicker and gone up
which is putting the price pressure on

Source: USFDA Generics..

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 More number of companies getting ANDA approvals has also
intensified the competitive intensity.

NUMBER OF COMPANIES (GLOBAL) GETTING ANDA APPROVALS

Source: USFDA
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 Players face tighter scrutiny as the number of inspections have
increased.

USFDA INSPECTION OF INDIAN FACILITIES

Source: USFDA
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RISE IN US FDA REGULATORY ACTIONS

•Due to GDUFA, the number of

inspections have gone up.

•This has increased the number of

warning letters and import alerts

which in turn adversely

impacted US exports growth.

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 Higher instances of import alerts and warning letters for Indian
companies. This impact exports negatively.

IMPORT ALERTS AND WARNING LETTERS

IMPORT ALERTS WARNING LETTERS

Source: USFDA
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 WHOLESALER CONSOLIDATION

• Indian pharma companies predominantly

MARKET SHARE OF
WHOLESALERS IN US use wholesalers to sell in US.
• About a decade ago, USA had more than
10 distributors contributing to about 80 per
cent of the USA's generic market.
• But due to consolidation, currently 3
players control about 85% of the generic
market and have higher bargaining power.
• Indian players are put under pricing
pressure due to this consolidation.

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PATENT LITIGATION
•Though India follow Product Patent from 2005, two clauses of the intellectual
property right (IPR)laws in India remain a significant area of contention between
foreign drug companies and generic Indian producers:
• Ever-greening (For example: patent revocation for Gleevec.)
• Compulsory licences for already patented drugs (in case of lifesaving
drugs). For example: compulsory licence granted to Natco for Nexavar.
• There have been many intellectual property right (IPR)-related cases in the
country involving drugs of MNCs.

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PATENT LITIGATION

Source: Industry, Crisil Research

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PATENT LITIGATION
•This has resulted in the intervention of the US government.
•In order to protect the interests of US companies, the US government reviewed
India's intellectual property (IP) policies and placed it in the "inadequate list" (the
US special 301 watch list).
•This list tracks countries with inadequate IPR laws, deemed detrimental to US
companies.
•In order to address this issue, India agreed to set up a bilateral mechanism on IP
rights through the US-India trade policy forum and drafted a new draft national
IP policy.
•Unfavourable outcomes from continued litigation against MNCs will dissuade
them from bringing innovative medicines to India.
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PRICING INTERVENTIONS

• Government impose pricing restrictions from time to time on various drugs by

including them in the list of National List of Essential Medicines (NLEM)

•As of March 2019, 870 drugs were under NLEM that constitute around 19% of the

total market by value have been brought under price control.

•Such pricing orders amplify the risks posed to chronic care drugs and will have

impact of revenue and profitability.

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BAN ON FIXED DOSE COMBINATIONS
• Fixed Dose Combinations (FDCs) are two or more drugs contained in a single
dosage form, such as a capsule or tablet.
• An example of a fixed-dose combination HIV drug is Atripla (a combination
of efavirenz, emtricitabine, and tenofovir).
• In March 2016, Supreme Court banned 344 FDC drugs due to safety concerns.
• The ban covered about 6,000 brands from major pharma houses including
Pfizer Ltd, Wockhardt Ltd, Alkem Laboratories Ltd, Cipla Ltd, Sanofi India Ltd,
and Sun Pharmaceutical Industries Ltd.
• This constitutes around 3-4% of the domestic pharma market.

 On Sep 12, 2018, the government prohibited the manufacture, sale or distribution
of 328 fixed dose combination (FDC) drugs for human use with immediate effect.
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GOVERNMENT’S PROPOSAL ON PRESCRIBING MEDICINES BY
ONLY GENERIC NAMES
.
•Prime Minister Narendra Modi’s announced in April 2017, that there could be
a law mandating doctors to prescribe medicines with their generic names
instead of brand names.
•Union health ministry also asked the medical community to follow a 2016
notification by the Medical Council of India (MCI) that mandates doctors to
prescribe medicines by generic names.
• The WHO defines a “generic” as a bioequivalent to a branded drug.
• So, instead of writing ‘Allegra’ ‘Agimfast’, ‘Alafree’, doctors might have to
prescribe it with the molecule name, i.e. Fexofenadine.
• Aims to bring down the medicine costs for patients and break the doctor-drug
company nexus.
•It has resurrected the ghost for the Indian pharma market dominated by
branded generics.

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CONCERNS ABOUT PRESCRIBING ONLY GENERIC NAMES
• Profitability of the large companies may take a hit.
••. The onus of what patients should consume will shift from doctors to chemists.
Chemists are unregulated and have no obligation, ethical or commercial, on
what they sell patients, they have pointed out.
•Drug companies also say various regulations need to be put in place to qualify
medicines as generics as per the norms laid down by the WHO.
•One key requirement for generic makers is to submit bio-equivalence (BE)
studies. A BE study is a process where companies have to test their generic
products as against the innovator’s product for their effectiveness.
•According to IDMA only 15% of the products of various brands will be bio
equivalent. The rest might just be ‘similar’ products,”
•Unless the safety and efficacy of similar products are not proven, they cannot
be interchangeable.

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SUMMARY OF REASONS FOR SLOWDOWN AND KEY CONCERNS

• Reduction in the number of drugs coming out of patents.

• Quicker ANDA approvals and many companies getting ANDA
approvals after GDUFA.
• Patent Litigation
• Wholesaler Consolidation
• Pricing interventions by Indian government
• Ban on many FDCs in India
• Indian government’s proposal to prescribe only Generic names.
 Future Growth and Long-term Strategy

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 Indian pharma is expected to become $59 bn by 2024 primarily
driven by domestic growth and not exports.

FIVE YEAR GROWTH OUTLOOK

Segment 2018-19 2023-24 CAGR
Domestic $19 bn $33 bn 12-13%
Formulation

Formulation $14.4 bn $21 bn 8-8.5%

Exports

Bulk-Drug $ 3.9 bn $4.9 bn 5-6%

Exports

Total $37.3 bn $58.9 bn

Source: DGFT
LONG-TERM STRATEGY
• The current strategy is not a sustainable strategy in the long-run.
• Overall Generics opportunity itself is slowing down as patent expiries
decreases.
• Also the competition in conventional generics is increasing.

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 FUTURE GROWTH STRATEGIES

• Complex Generic / Speciality drugs

• Bio similar
• Biologics accounted for ~25% of total patent expiries by value during fiscals
2013-18.
• In coming five years, their share is expected to increase to ~44%, signifying
a tremendous opportunity for players.
• Seven of the top 10 drugs by sales in 2017 were biologics.
• Increasing focus on biosimilars would also increase R&D cost.
• The average cost of developing a biosimilar is ~$150 million, compared with
$1-5 million for developing a generic drug.
• Patents through new drug development
• M&As
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 Though Indian companies have increased their R&D spends,
MNCs spend on R&D is much higher.

R & D EXPENDITURE OF INDIAN COMPANIESAND MNCS

R&D EXPENDITURE: INDIAN R&D EXPENDITURE: MNCs
PHARMA COMPANIES

• Most of Indian R&D expenditure go into developing generics.

• Indian companies got only 26 patents between 2006-16 (compared to the
75 total 840 patents)
SOURCE: Crisil Research