The pharma sector's growth momentum is unlikely to flag anytime soon as many avenues beckon…
16-Mar-2011 •Research Desk
The pharma sector’s growth momentum is unlikely to flag anytime soon as many international and domestic growth avenues beckon.
These are turbulent times for the markets. In the wake of the recent pullback the Sensex’s one-year return has got whittled down to 12 per cent only. Nevertheless, some sectors continue to perform well. One such sector is pharma. An investment in the BSE Healthcare Index would have fetched you a substantial 21 per cent return over the last one year.
What are the fundamental factors that have contributed to the pharma sector’s strong showing? A number of factors are playing out in its favour. A burgeoning list of drugs whose patents expire over the next couple of years is expected to keep the momentum strong for India’s generic manufacturers. Then there is the humongous domestic market that is growing fast. Add to this emerging economies that provide Indian pharma companies with similar playing grounds, mergers and acquisitions (M&As), and new opportunity areas all of which together make Indian pharma one of the must-invest-in sectors for investors.
Drugs going off patent: The biggest opportunity for Indian companies arises from patent expiries estimated at around $80 billion (in revenue) over the next few years. Assuming a price decline of 90 per cent once these products go generic, that still creates a market opportunity worth $8 billion or around Rs36,000 crore. As Ranjit Kapadia, vice president, HDFC Institutional Research points out, “This is nearly 80 per cent the size of the Indian market.”
In many developed markets, there is ample scope for sales of generic drugs to grow. Says Sarabjit Kour Nangra, vice president, research, Angel Broking: “Generics will remain the key drivers of growth in the US, Eastern Europe and Japan. They have ample scope for growth on account of low penetration.” According to Nangra, while the US generic industry is growing by 6-7 per cent every year, Indian companies operating there are growing at a faster clip — around 20-22 per cent. Moreover, Indian companies have a mere 4-5 per cent share in this space, which should give you an idea of the market potential that remains to be tapped.
In all, about 24 blockbuster drugs (a drug that has an annual sale of US $1 billion or above) are expected to go off patent by 2015 of which 16 are expected to expire within the next two years alone. For example, Lipitor, Pfizer’s blockbuster cholesterol-lowering drug, which saw sales of $10 billion in 2010, is expected to go off patent this year. Similarly, another of Pfizer’s blockbusters, the very popular Viagra, is expected to go off patent next year. According to a report by HSBC Global Research, Indian companies are expected to corner 20 per cent share of this pie. Critical to success in this area is the first-to-file (FTF) status that gives companies a 180-day period of exclusive marketing right, which could potentially enable it to gain a firm grip on the generic market for that drug. Ranbaxy, for instance, has the FTF status for Pfizer’s Lipitor and is expected to benefit thereby. Other companies that are well placed to gain from such patent expiries are Dr. Reddy’s and Lupin which have 12 FTFs each in their portfolios.
Domestic opportunities: Global opportunities apart, Indian pharma companies are finding the domestic shores fertile ground for growth. With an estimated market size of $9.8 billion (around Rs45,000 crore), the Indian pharma industry is one of the world’s biggest and is growing at a robust 17 per cent annually, driven primarily by lifestyle diseases (think diabetes, blood pressure and heart problems). Says Manoj Mohta, head, CRISIL Research: “The domestic pharmaceutical industry is witnessing strong growth and within it lifestyle or chronic diseases are growing at around 1.2 times the overall market’s growth rate.” The incidence of diabetes and cardiovascular diseases has increased on account of sedentary lifestyles, working habits, increasing urbanisation and high stress levels.
Lifestyle or chronic diseases constitute around 30 per cent of the total domestic pharmaceutical industry. The two main categories in this segment are cardiovascular drugs and anti-diabetic drugs, which are the biggest therapy areas.
The Indian cardiovascular drug market is worth $1.1 billion (Rs5,000 crore) and is growing at a compounded annual growth rate (CAGR) of around 20 per cent. It is expected to burgeon into a $2.6 billion (nearly Rs12,000 crore) market by 2015.
Within the cardiovascular segment, antihypertensive drugs account for the biggest, 50 per cent, share of revenue. They are closely followed by cholesterol-lowering drugs that account for one-third of total sales. The companies expected to benefit from growth in this segment include Sun Pharma, Torrent and Cadila Healthcare.
Anti-diabetes is a $563 million (Rs2,500 crore plus) market in India that is growing at an estimated 16-20 per cent CAGR. It is expected to scale up into a $1.5 billion (Rs6,765 crore) market by 2015.
The insulin market is growing at a CAGR of 22 per cent and is expected to top Rs5,400 crore by 2020. Companies servicing oral anti-diabetic therapy (72 per cent of the anti-diabetic drug market) include Sun Pharma, Lupin and Cadila. The listed companies that are expected to benefit from growth in this segment include Cadila, Torrent and Biocon.
Opportunities in emerging markets: Being present in one of the world’s largest developing economies does have its advantages. It enables Indian companies to understand the nuances of these markets and replicate their success across other developing economies which are quite similar in character. This pattern is evident across industries, be it Indian pharma, FMCG, or auto companies, which are all servicing other similar markets with a high degree of success.
“Pharmerging” markets, as they are called, include South Africa, BRIC countries, Mexico, Turkey, Indonesia, Poland and Romania. These economies are seeing faster growth than developed economies. According to IMS, their share of the global pharma market is expected to increase from 16 per cent in 2009 to 25 per cent by 2015.
M&A’s the way: Acquisitions by Indian pharma companies, like Sun Pharma’s Taro buyout, are expected to provide fillip to their growth. Further, Indian companies too are now on the potential buyout lists of large MNC players, as is evident from the acquisitions of Ranbaxy and, more recently, Piramal. Other Indian companies that have also been acquired in the recent past include Paras Pharma, Shanta Biotech and Dabur Pharma. According to a recent report by HSBC Research, this trend is here to stay and in all likelihood will support premium valuations for the sector in the near term. According to Kapadia of HDFC, “MNCs’ share of Indian pharma could rise to as much as 40 per cent over the next five years from the current 25 per cent, fuelled by more acquisitions.”
Other opportunities: In addition to the domestic and global markets, Indian companies are finding rich pickings in niche areas. Sun Pharma Advanced Research (SPARC), for instance, recently developed a deep lung inhaler that is more effective than any other traditional inhaler in the market. Other niche areas include parenterals (injectables), nasal, ophthalmics, and transdermal delivery systems which together constitute around 20 per cent of the market.
Next, there is the whole new area of biosimilars (biological drugs produced using organic materials rather than chemicals). Still a nascent industry whose global size is pegged at $1 billion (Rs4,500 crore), the biosimilar opportunity is set to explode as more drugs go off patent. Some analysts estimate that this could develop into a more than $10 billion (Rs45,000 crore) market opportunity over the next five years. One impediment to the growth of this emerging segment is that governments, especially that of the US, are still in the process of formulating necessary legislation, which will have a major impact on how this segment evolves. For the moment, though, its pace of growth is likely to be tepid. Says Mohta of CRISIL: “The biosimilars industry is still evolving and many of the products are in the development stage. Therefore, we expect this segment to show strong growth, albeit on a low base. But it will still constitute only a small portion of the Indian pharmaceutical Industry.” The Indian companies active in this space include Dr. Reddy’s, which already has three products in the market. Other active players are Cipla, Lupin and Cadila, whose drugs are still in the research stage.
An investment in the pharma industry will, however, not be without its own set of concerns.
Fewer new drugs to copy: With fewer new drugs being developed the drug pipeline available for Indian generics could dwindle in future. After a harrowing experience (with generic companies copying their drugs), innovator companies are now developing more hard-to-copy and more complex drugs which could make it difficult for Indian players to produce their generic versions in future.
Dwindling innovator research: In a bid to contain costs, innovator companies are drastically cutting down on vital research expenditure that will ultimately have an impact on new drug discoveries in future. Recently Pfizer decided to close down its biggest research facility in Kent, UK — the one that developed the hugely successful drug Viagra. Analysts say such measures will inevitably affect the pace of new drug discoveries.
Authorised generics: In a bid to beat generics (read Indian companies), innovator companies now get their own subsidiaries to sell the generic versions of those drugs that have gone off patent. The 180-day exclusion period does not apply to authorised generics. What this means is that innovator companies can sell their authorised generics along with the FTF company during the first 180 days. As mentioned earlier, other companies are not allowed to sell the drug during this period. This allows the innovator company some cushion both in terms of time and realisation as the product finally goes off patent and sees a drastic fall in price (up to 90 per cent in some cases).
Regulations turning stringent: Regulatory norms for pharma companies are being tightened, especially in the developed markets. Recent cases include Ranbaxy’s run-in with the US Food and Drug Administration. Closer home, Indian regulations have turned more stringent with India switching to product patent (from process patent) post 2005. What this means is that earlier Indian generic companies could bypass any patent by tinkering with the production process of a patented drug; now they can’t. The saving grace for domestic players is that only a limited number of products fall under patents in India. This trend is expected to continue for some time to come. Nangra of Angel Broking says that even in the past patented products have not comprised a significant part of the Indian pharma industry, nor will they in future. According to industry insiders, despite the hoopla, patented products are expected to constitute only 4-5 per cent of the Indian market, and that too by 2015 only.
Thus while the Indian pharma sector does have its share of concerns, the emergence of a global opportunity over the next few years that is 80 per cent the size of the Indian market (due to drugs going off patent) is a development that most Indian pharma players will scramble to capitalise on. Add to this the opportunities within the domestic market and in similar emerging economies. Follow the prescription above and climb onto the pharma bandwagon whenever markets decline and valuations of these stocks become more attractive.
Glossary of Pharma Terms
Abbreviated New Drug Application: An application for a licence to market a generic version of a drug.
Formulation: Here, different chemical substances, including the active drug, are combined to produce a final medicinal product. Formulation studies involve developing a preparation of the drug which is both stable and acceptable to the patient. For orally taken drugs, this usually involves incorporating the drug into a tablet or a capsule. It is important to appreciate that a tablet contains a variety of other substances apart from the drug itself, and studies have to be carried out to ensure that the drug is compatible with these other substances.
API: An active ingredient (AI) is the substance in a pharmaceutical drug that is biologically active. Terms in similar use include: active pharmaceutical ingredient (API) and bulk active in medicine. Some medications may contain more than one active ingredient.
A dosage form of a drug is traditionally composed of two things: the API, which is the drug itself; and an excipient, which is the substance of the tablet, or the liquid the API is suspended in, or other material that is pharmaceutically inert. Drugs are chosen primarily for their active ingredients.
Drug Master File (DMF): It is a document prepared by a pharmaceutical manufacturer and submitted solely at its discretion to the appropriate regulatory authority in the intended drug market. There is no regulatory requirement to file a DMF. However, the document provides the regulatory authority with confidential, detailed information about facilities, processes, or articles used in the manufacturing, processing, packaging, and storing of one or more human drugs. Typically, a DMF is filed when two or more firms work in partnership on developing or manufacturing a drug product. The DMF filing allows a firm to protect its intellectual property from its partner while complying with regulatory requirements for disclosure of processing details.