An Overview of the Pharmaceutical Industry
The pharmaceutical industry plays an important role in the socio-economic development of the country. It develops, produces, and markets the drugs which are used by the patients as medicines. Apart from helping the patients this industry also provides employment and generates revenue for the country. Around 1970-90 many domestic companies had started their operations and export initiatives were taken. After the liberalization in 1990 Indian companies increasingly launched operations in foreign countries. The Approval of Patents Act (Amendment) of 2005 led to the adoption of product patents in India which resulted in an increased number of patents filed by the Indian pharma companies. By 2015 there were 10,500 manufacturing units and over 3,000 pharma companies. India is the source of 60,000 generic brands across 60 therapeutic categories and manufactures more than 500 different Active Pharmaceutical Ingredients (APIs).
Leading pharma companies had started raising funds aggressively to fund the acquisition in domestic as well as international markets to increase their product portfolios. The governments relaxed the FDI norms and now 100 percent FDI in the pharma sector allowed in greenfield pharma and 74% FDI in the pharmaceuticals sector is allowed for brownfield pharmaceuticals projects under the automatic route. India is the largest provider of generic drugs globally.
Market Size
The pharmaceutical sector was valued at US$ 33 billion in 2017. The country’s pharmaceutical industry is expected to expand at a CAGR of 22.4 percent over 2015–20 to reach US$ 55 billion.
Global presence
Indian pharmaceutical sector industry supplies over 50 percent of global demand for various vaccines, 40 percent of generic demand in the US, and 25 percent of all medicine in the UK. The Indian Pharmaceutical industry has shown considerable growth in the past years. Globally, the Indian pharma market is the third-largest in terms of volume and 13th in terms of value.
Job creation
The pharmaceutical industry currently employs approximately 5.5-5.7 lakh people. Recruitment companies have estimated that thousands of work openings are available around job positions at pharma for freshers. The increase in partnership between Indian and global pharmaceutical companies would help boost innovation and scale that has resulted in hiring growth and the reduction of layoffs.
Also, in line with the industry-wise hiring goals for women in the pharmaceutical and healthcare industries, the overall demand is about 38.67% of women as set out in the India Skill Study and the overall employability of women is only about 28.28%, which calls for the need to ensure gender diversity in the pharmaceutical industry.
According to a report, 58,000 additional job opportunities are likely to be generated given prevailing challenges in the Indian pharmaceutical sector, as the industry is projected to expand up to 45 percent by 2025.
Exports
India’s pharmaceutical exports were US$ 17.3 billion in FY18 and have reached US$ 19.14 billion in FY19. In FY20 it is estimated that the exports will reach US$22 billion. The export of generic drugs is one of India's strengths. Pharmaceutical exports include bulk drugs, intermediates, drug formulations, biologicals, etc.
Indian companies received 304 American Food and Drug Administration (USFDA) Abbreviated New Drug Application (ANDA) approvals in 2017. The country accounts for around 30 percent (by volume) and about 10 percent (value) in the US$ 70-80 billion US generics market. Presently over 80% of the antiretroviral drugs are supplied by Indian pharmaceutical firms to fight AIDS.
India's biotechnology industry, which includes bio-pharmaceuticals, bio-services, bio-farming, bio-industry, and bioinformatics, is projected to expand at an average annual growth rate of about 30 percent, reaching US$100 billion by 2025.
The biggest destination for exports is the US. In FY 2019, 32.1% of Indian pharma’s exports were to North America, 18% to Africa, and 15.7% to the European Union.
FDI inflows in this sector
According to the data released by the Department of Industrial Policy and Promotion (DIPP), the drugs and pharmaceuticals sector attracted cumulative FDI inflows worth US$ 15.98 billion between April 2000 and March 2019.
What are the supply and demand-side parameters? Supply-side --- like price variations / cash flow constraints / supply chain disruptions / imports etc AND Demand-side --- like consumer sentiments / exports etc.
Supply Parameters:
1.Launch of patented drugs
After the introduction of product patents, several multinational companies are expected to launch patented drugs in India. Due to the increase in lifestyle diseases the sale of drugs in this segment will be increased. Also, the high court allows the export of patent drugs to foreign countries.
2.Medical infrastructure
To tap rural markets and develop better medical infrastructure, pharma companies have increased spending. The market size of hospitals is projected to increase by US$200 billion by 2024. India's medical devices industry has grown by 15.2 percent annually and was valued at US$5.2 billion in 2018, reaching US$50 billion by 2025.
3.Scope in the generics market
In terms of volume, India's generic drugs account for 20 percent of global exports, making it the world's largest distributor of generic drugs. The generic drugs market represents about 70% of India's pharmaceutical industry and is projected to cross US$ 27.9 billion by 2020
4.Over-The-Counter (OTC) drugs
India’s OTC drugs market is estimated to have grown at a CAGR of 16.3 percent to US$6.6 billion over 2008–16 and is further expected to grow on the account of increased penetration of chemists, especially in rural regions. The Indian OTC market is projected to hit US$ 10.22 billion by 2024, accounting for US$ 4.61 billion in 2018
5.Patent Expiry
In the next 10 years, nearly 120 medicines are projected to go off-patent; with worldwide sales estimated between US$ 80 and 250 billion.
6.Supply chain disruption
An over-dependence on bulk products, active pharmaceutical ingredients, and other Chinese raw materials could have an adverse effect on the pharmaceutical industry in India. Also, supply chain disruptions can lead to a shortage of supply.
Demand Parameters:
1. Price offered
The cost of manufacturing in India is approximately 33% lower than that of the US. And thus, India provides medicines and vaccines at much lower prices to foreign countries. This results in increased demand for medicines manufactured in India.
2.Population
Since the population in the country grows at 1.3% every year, there will be a rise in disease prevalence by nearly 20 % by 2020. Apart from the country’s own population, the population of the world is also increasing and due to low cost, the demand for Indian pharma medicines increases. As per World Population Prospects by the United Nations, the worldwide population is likely to cross 9.3 billion by 2050, and around 21% of this population is expected to be aged 60 and above.
3. Accessibility
Due to growth in medical infrastructure, the accessibility to drugs will expand. New business models for Tier-II towns and rural areas, launches of patented products, and greater government spending on healthcare will overall help to make the medicines accessible for people.
4.Affordability
Apart from aging and rising population the improvements in purchasing power and access to quality healthcare and pharmaceuticals to poor and middle-class families worldwide also are driving the growth of the global pharma industry. Also increased income has resulted in more insurance coverage. Over 650 million people are expected to be covered by insurance by 2020.
5.Exports
Due to a strong presence in generic space, the exports of Indian pharmaceuticals have been increasing. In FY 2020 the exports are estimated to reach US$22 billion from US$19.14 billion in FY2019.
The current and potential impact on the sector - Low / Medium / High
The current impact of the Covid-19 pandemic is high on the pharmaceutical industry. Some of the major impacts are as follows:
1. Before the Covid-19 was declared a pandemic, the supply chain was disrupted as India is dependent on China for the API. But due to coronavirus, the imports were affected and thus the production of the medicines which depended on the imports was affected adversely. Also, the disruption in supply resulted in a significant shortage of essential drugs in India such as antibiotics and vitamins.
2. The exports of the pharmaceuticals to the US were also affected. India manufactures 70% of the world's supply of hydroxychloroquine which was required by the US but due to lockdowns and the medical emergency in the country, the government had banned HCQ export to the US. But now the government has helped the US by supplying HCQ. This has resulted in making good relations between the US and India.
3. Zydus and Ipca Labs, being the two biggest players in the manufacturing of hydroxychloroquine have increased production several times as this HCQ is also required for COVID patients. Earlier they were manufacturing 2-4 tonnes API every month for domestic supply as well as exports but from this month itself, they will be meeting the domestic target of 20 tonnes API or 10 crore tablets. And the target 30 tonnes of pf production next month. So, this has increased production and revenues in the short run. In the long run, the company will be benefited by penetrating new markets. This will help in expanding the business.
4. Based on projected demand and increased revenue in this sector the pharma stocks have seen a huge increase in the last 15 days. Regulatory hurdles have always affected the Indian Pharmaceuticals but recently four manufacturing plants of Lupin and Dr. Reddy have got USFAD clearance.
5. This crisis may deviate the focus of industry towards managing the supply for the current need and delaying in R&D and manufacturing activities required for other diseases.
6. Drugs like paracetamols and ritonavir are massively exported to the US, UK, Africa, Brazil, etc. This pandemic has boosted the exports to new markets giving India the opportunity to become a leading supplier of generic medicines.
If the current COVID-19 pandemic lasts for a longer span of time, it may impact the supply of active material and ingredients (mainly from China), as well as the import and export of pharmaceuticals. Also, there is a need to manufacture the raw materials indigenously in order to reduce the dependence on China. Due to low cost and is the major supplier of the generic, a much greater potential for India’s pharmaceutical sector now to increase trade partners both regionally and in other parts of the world. Indian pharmaceuticals have emerged as strong and reliable by supplying the medicines during a coronavirus pandemic
Policy recommendations -- that will pep up the business
Government spending on the health care sector is inadequate and should be increased. According to union budget 20-21, Rs 69,000 crore is allocated to this sector which is just 1% of the GDP.
The R&D's expenses should be tax deductible as R&D costs are high and reduce the revenues of the company. Also, the Government should increase spending to promote R&D.
Although attracting foreign investment and 'Make in India' would be beneficial for the country in the long term, announcements such as increased import duties on medical devices and equipment would increase consumers' prices and bring more marginal pressure on businesses and hospitals.
The Government should provide more incentives to the private sector to enhance its production for export channels.
The Government should set high standards for quality checks so that rejection by USFAD is reduced.
Import tariffs should be reduced until the raw materials are not produced in the country. The raw material cost of API from China was increased by 50% added with heavy import duties increased the cost of manufacturing and reducing the margins for the companies.
The government should also spend more on infrastructure so that medicines and facilities are available even in rural areas. This will increase the accessibility of the rural population which will result in new market creation and hence adding to the revenue.
Since the pharmaceuticals have a 70% share in generic medicines, the government should encourage diversification through innovation-linked tax benefits or funds so as encourage new innovations.
Stronger Intellectual Property (IP) regulations to protect the company.
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