Pharmaceutical Sector Analysis
A flight-to-quality, or flight-to-safety, is a financial market phenomenon occurring when investors sell what they perceive to be higher-risk investments and purchase safer investments, such as gold and other precious metals.
The Global pharmaceutical markets are in the midst of the major discontinuities. While growth in the developed economies is seen to be slow down and emerging markets will become increasingly important in the coming decade. The India pharmaceutical market, along with markets of Brazil, China, and Russia will spearhead growth within these markets. So, observing the current situation we can estimate that Indian pharma leaders can start posting strong EPS growth in near future, and pharma can see “Flight to Safety”.
An Expanding Pharmaceutical Market
The global pharmaceutical market, estimated at US$1.2 Trillion in 2019, is expected to expand at a Compounded Annual Growth Rate (CAGR) of 3–6% to US$1.5–1.6 Trillion by 2024. Much of this is likely to be driven by the volume growth in emerging markets and the launch of high-end specialty innovative products in developed markets. However, overall tightening in pricing and patent expiry in developed markets could offset this growth.
The US and emerging markets will remain key constituents of the global pharmaceutical industry — the former owing to size, and latter due to their growth prospects.
Growth Enablers of Global Pharmaceutical Market
Global R&D spending is estimated to grow at a CAGR of 3% by 2024, lower than that of 4.2% between 2010 and 2018, partially driven by companies’ focus on smaller indications, with lower clinical development costs.
Digital technologies are being leveraged significantly for patient-to-doctor connect currently since a face-to-face consultation may not be possible due to COVID-19. It remains to be seen if this trend will continue in the post-COVID-19 period also.
Growth in emerging markets will be powered by higher volumes for branded and pure generic medicines led by increasing access among the populace. Some latest generation innovative medicines are likely to be launched in these markets, but given the high price of such products, the uptake may be limited.
The Indian Pharmaceutical Industry
The Indian pharmaceutical industry is on a high growth (~12 percent) trajectory over the past few decades. It has contributed significantly to the global generics market fulfilling 20 percent of the global demand in generics in terms of volume, making India the largest provider of generic medicines globally. Also, ranked third in the world, the Indian bulk drug industry has grown at a compound annual growth rate (CAGR) of around 8.6 percent over 2016–20. It is further expected to expand and grow at a CAGR of around 8.6 percent during 2020–24, signifying its future potential and evolving global importance.
India is uniquely positioned as a crucial supplier of pharmaceuticals by way of chemistry expertise, lower personnel costs, and the ability to manufacture quality medicines in compliance with global regulatory standards. It will continue to be an important player in the global generics market.
The Indian pharmaceutical industry is the world’s third-largest by volume with annual revenue of about USD41 billion (domestic formulations market and exports). This journey can be attributed to the world-class capabilities in formulation development, the entrepreneurial ability, and the vision of the industry to establish India’s footprint in large international markets such as the United States and other emerging markets.
- Public health improvement
The industry has played a key role in driving better health outcomes across the world through its affordable and high-quality generics drugs. After adjusting for changes in the population age structure, the country has witnessed a drop-in per person disease burden by 36% between 1990 and 2016 measured as Disability Adjusted Life Years (DALYs). Increased accessibility to affordable drugs has been one of the key enablers for lowering the disease burden in India. During the same period, drug penetration in the country increased by 50%. The industry has also helped in bringing down the treatment costs of life-threatening diseases such as Chronic Myeloid Leukaemia and Hepatitis C, to less than five percent of the original cost.
India also accounts for 60% of global vaccine production, contributing 40 to 70 percent of the WHO demand. Estimates suggest that one in every three pills consumed in the United States is produced by an Indian generic’s manufacturer. In the UK, approximately 25% of the medicines used are made in India. In Africa, the availability of affordable Indian drugs contributed to greater access to treatment of AIDS, with 37% of AIDS patients receiving treatment in 2009 compared to just two percent in 2003.
- Contribution to Economy
While shaping public health outcomes, the industry has largely contributed to India’s economic growth. It is estimated that the industry, directly and indirectly, provides employment to over 2.7 million people, in high-skill areas like R&D and manufacturing. The industry generates over USD 11 billion of trade surplus every year and is amongst the top five sectors contributing to the reduction of India’s trade deficit.
The Indian pharmaceutical industry has also attracted more than USD 2 billion in FDI inflows over the last three years, making it one of the top eight sectors attracting FDI. The Indian pharmaceutical industry can contribute substantially to the growth of the Indian economy. It can aspire to push the net foreign exchange earnings to around USD 30 billion to 40 billion annually by 2030 from current levels of ~USD 11 billion. The industry can also create one to two million additional jobs for the country in the same period, boosting consumption in the local economy.
- Universal Healthcare Enabler
The Ayushman Bharat Yojana (a centrally sponsored National Health Protection program) is estimated to benefit 10 crore vulnerable families (about 50 crore beneficiaries or about 40 percent of India’s population). It will provide affordable access to healthcare facilities, while also improving health insurance penetration in poorer households. This is an opportunity for the industry to help India’s underserved masses with affordable drugs. Additionally, with the transition of disease burden in India now transitioning towards chronic disease, there is an increased demand for specialized drugs that are currently more expensive than acute drugs in India. The industry is well placed to address this need through affordable, high-quality drugs for chronic diseases.
- Growing exports
Globally, India is one of the top suppliers of bulk drugs and formulations. Its pharmaceutical exports are expected to reach USD19 billion — USD21 billion in 2019–20. According to a report by Business standard, the country also has the highest number of US FDA approved plants (665) outside of the US as well as 44 percent of global abbreviated new drug applications (ANDA).
The Indian generics industry can benefit substantially from the patent cliff as patents for branded molecules with cumulative global sales of over USD 251 billion are expected to expire between 2018 and 2024, opening new opportunities for the industry.
The domestic formulations market in India has recorded ~9.5% CAGR in 2014‑19 to reach US$22 Billion and is expected to grow at 8–11% CAGR to US$31–35 Billion by 2024.
… and then Coronavirus Strikes
The COVID — 19 is defining the global health crisis and the greatest challenges to humanity the world has faced since World War II. The virus is spreading rapidly and a number of cases are rising as the government is working day and night to slow its spread. Along with other nations, India implemented a nationwide lockdown with the goal of flattening the curve. The impact of Corovirus pandemic and lockdown triggered is clearly visible in the financial market but there is still no clarity on the deeper impact that it is having on the across the business and different industry sectors.
Pharma players in India are closely monitoring the Corovirus outbreak in China and its impact on the supply of Key Starting Material (KSMs) and Active Pharmaceutical Ingredients (APIs), especially antibiotics and vitamins, in the country. The effect of china’s production slowdown has been more detrimental for smaller players compare to larger firms with diversified drug portfolios. For Indian drug makers, the price of several pharmaceutical drug makers, the price of several (APIs) has spiked, at least in the short term. Since, January 2020, the price of various mainstream antibiotics such as Azithromycin has increased by at least 50%, according to a report by Financial Times.
The Indian government had moved to set limits on the export of around 26 pharmaceutical ingredients to counter the domestic shortage of essential medicines and additional combative measures include monitoring inventory of critical APIs / intermediates, evaluation of alternate sources of raw materials and fast-tracking regulatory approvals for environmental clearance for certain APIs where capacity is available, according to a report by Pharmabiz.
Impact of Corona on Indian Pharmaceutical Market
India pharma’s global standing
The Indian pharma industry has been a world leader in generics both globally and in domestic markets contributing significantly to the global demand for generics in terms of volume. Made-in-India drugs supplied to developed economies such as the US, EU, and Japan are known for their safety and quality. In recent years, India has seen increasing competition from China, which it has been able to leverage due to its inherent cost advantage, manufacturing intermediates and APIs at a cost much lower than those in India which has resulted in a gradual increase in API imports from China to India and this, in turn, has led to the killing of domestic manufacturing capacity for certain key APIs and their advanced intermediates (KSMs).
- The risk from India Pharma’s China Linkage
India’s large import dependence on China nearly 70% by value has become a significant threat to India’s healthcare manufacturing and global supply chain. While Indian pharma players over a time period have steadily mitigated up the value chain to focus on value-added formulations with higher margins but this its over-dependence on china has increased threat to India’s health security as some of these critical APIs such as Vitamin C and Erythromycin are crucial to mitigate India’s growing disease burden.
India’s pharma market growth was resilient in FY20 despite a collapse in growth in March 2020 due to the lockdown.
- Supply Chain Disruptions
Any disruption in the supply chain of APIs can result in significant shortages in the supply of essential drugs in India. Some of the critical APIs for high-burden disease categories such as cardiovascular diseases, diabetes, and tuberculosis are listed in the National List of Essential Medicines (NLEM). In fact, the current market is largely dependent on China for many antibiotic APIs manufactured by the fermentation route such as Penicillin, Cephalosporins, and Macrolides. The increased dependency of low-cost API is mainly attributed to China’s extensive efforts towards developing economies of scale, easing regulations for bulk drug manufacturers, availability of low-cost utilities, building process efficiencies, and supporting manufacturers in the form of subsidy, low taxes and fiscal incentives by the government. India has significantly lost out on the API manufacturing owing to the inadequate government support and API focused infrastructure coupled with complexity in getting approvals for setting up a manufacturing plant, delayed pollution clearances, the high cost with low availability of utilities, regulatory and price control regime are some of the key challenges faced by the bulk drug industry.
- Major earnings cut be observed in the near future
According to leaders in the sector, the novel coronavirus, or COVID-19, the pandemic has caused severe supply-side disruptions in various sectors, earnings will be cut by 10–15%. Pharma as a sector has emerged as a strong contender to drive the next leg of the rally, whenever it comes as we observed in past years. In anticipation, pharma stocks have seen a huge run-up in after March 2020. This is a scenario not just true for India, but globally too pharma companies have performed well. While in the short term, most companies will bounce back from the last 5 years of underperformance, this time around, the emerging leader will be different.
- Margin Expansion from improving product mixes
In the pharma sector, 65–70% of revenue comes from export sales hence depreciating dollar situation would be a tailwind for export-oriented pharma companies. Aurobindo and Biocon are the biggest gainers from a strong US dollar as companies raised US$: Rs to US$1: Rs76 for FY21–22, compared to Rs71 earlier. Recently, the launch of differentiated products like specialty drugs for Sun, biosimilars for Biocon and Lupin, injectables for Dr. Reddy’s, and Cadila and respiratory drugs for Cipla are showing improved product mix will surely act as a benefit in the near term.
Factors that changed in Indian Pharmaceutical Market
Considering the COVID pandemic all around the world we are definitely at the exciting inflection point for Indian Pharmaceutical and Healthcare in particular. If we look back over the past decade this space saw significantly de-rating as government mainly focused on Infrastructure and power sector leading to EPS shrink. There were a lot of headwinds in the US and Indian pharma markets but, now the market has fair understanding that pharma demand is far more resilient as compared to some of the other sectors. One of the factors that would change today's market is Specialty Pharma Sector which is a high margin and a significantly larger market which Indian companies are attempting to target and some companies have already put in close to a billion dollars in this area.
The future of our generation is depending on the effective vaccine on the COVID virus so, understanding the importance of situation pharma companies and working to find a suitable situation. If anyone of the companies gets to succeed in their quest then it has the potential to change the overall Indian pharma sector. We are also seeing a shift towards Atmanirbhar Bharat where people wanting to create significant backend infrastructure and reduce dependencies on one single supplier or one single region. That allows for the comeback of APIs and KSMs manufacturing in India.
I think the risk-taking ability is there the initiatives that we intend to take but few successes will navigate the Indian pharma businesses to invest a lot more in this area over the next few years.
- Declining US Pharma Market
In the last four pharma sector has gone through virtually a carnage because earnings had collapsed for this space and this was happening because, in the previous 5 years, the earnings had grown at 25–30% for the most of the cases. Now, we are observing fundamental changes in the sector.
First, the US pricing environment is not as bad as it used to be before and there is definitely some improvement we can observe now. Second, a lot of companies that had built their business around 20–25% compounding growth, have re-corrected their infrastructure materially.
The other important aspect is the domestic piece. It was a very small component of overall earnings about 5 years back. It was 15–20% of the total earnings of this sector because the US business had become very large. Over the last 3 years, because of the slowdown of the US business and because of domestic business continuing to compound at double-digit, we are observing the share of domestic profit has risen almost 40–50% in larger Indian companies.
India being a chronic market, a lot of sustained growth is possible so, directionally earnings are becoming more secular and the probability of earnings doubling in the 4–5 years only increases, given that the mix is also changing in their favor.
- Diagnostic market and Robust R&D
Diagnostic business is one of the segments of the pharma industry that is compounding to double-digit volume for a very long period of time. A reasonable consolidation is happening and excellent and efficient players such as Metropolis and Thyrocare can materially drive up volume growth for the next few years.
These players are very capital efficient hence their ability to grow is possibly far more than another market which requires the capital. There are some smart companies that are investing their R&D dollars in the small size category and producing results that are very effective. Considering the example of Dr. Reddy's company, it is coming with a lot of material launches in FY20 and FY21. Recently it has got approval for Remodulin and have Kuvan and Amitiza in the pipeline. Sun Pharma has more turnaround possibilities in specialty with most of its operating costs already in P&L. So, overall, we can say companies’ journey of this sector is long.
- Emerging Speciality market
The larger market in the US is actually the specialty pharma or the branded generics market or branded pharma market where innovative products are either first marketed or new therapies come out, which provide a material advantage from existing solutions to patients there. This market is 8–10 times larger than the US generic market and Indian companies are attempting to target this.
The growing demand for specialty medicines has been a steady growth driver in global pharmaceutical spending during the last decade, especially in the developed markets. Specialty medicines are used in the treatment of chronic, complex, or rare diseases, which require advanced research and innovation (biologic drugs for chronic ailments, immunology drugs, orphan disease treatments, gene, and cell therapy, among others).
These products have made a significant difference in patient outcomes. Given the higher pricing, the majority of these products’ uptake is likely to be in markets with robust reimbursement systems. In ten years, from 2009 to 2019, the contribution of specialty products to the global pharmaceutical spending rose from 21% to 36%. Additionally, in the developed markets, contribution increased from 23% to 44%, while in the emerging markets, it grew from 11% to 14% by 2019. The uptake of these products is slower in emerging markets due to the absence of or inadequate prescription insurance coverage for the masses.
The growth trend is expected to continue as more specialty products are developed and commercialized for unmet medical needs. They are likely to account for 40% of global pharmaceutical spending by 2024, with the fastest growth expected to be in the developed markets, where the contribution of specialty products is likely to cross 50% by 2024. Oncology, autoimmune diseases, and immunology are the main segments in the space, and will likely remain the key growth drivers in the 2019–2024 period.
- A pressing need for self-sufficiency in the API industry
The global API market is projected to reach approximately US$232 Billion by 2024, growing at a CAGR of about 6%. Some key factors driving this is the spike in infectious diseases and chronic disorders. The demand is being driven by consumption for manufacturing formulations in the anti‑infectives, diabetes, cardiovascular, analgesics, and pain management segments. Another factor is the rising use of APIs in novel formulations to pursue niche therapies like immunology, oncology, biologics, and orphan drugs.
- Rising use of telemedicine and remote tools does not offset the loss of in-person interaction
World wide lockdown is giving rise to various practices which was never been tried on large previously such as telemedicine and e-pharmacy. Using a vast amount of patient data, advanced health analytics tools can help identify trends and anomalies as well as suggest solutions. Tools like AI chatbots, which can analyze symptoms, offer advice, and link to a human doctor, all at a lower cost than a doctor visit. Health-tech is the delivery of health-related services and information via ICT technologies.
The 5 main categories are:
1) Store-and-forward telemedicine — involves acquiring medical data;
2) Remote patient monitoring — Enables medical professionals to monitor a patient remotely;
3) Interactive/real-time telemedicine — provides real-time interactions between patient and provider;
4) Remote training — opportunities for healthcare professionals in remote locations and
5) Electronic consultation — enables patients to receive treatment without requiring face-to-face meet.
The impact so far on offline pharmacies & on pharma-cos is limited as market size (about 2–3%) is still small and many players are yet to turn into profitability. The main market of e pharmacies is currently chronic healthcare only as they do not have logistics to deliver acute medicines in a short time frame to different cities. For instance, 1mg has a large presence in the NCR region and the only option for them to deliver medicines in cities down south is via mail which can take time. Many of the chains have to do more outside offering discounts in terms of earning trust factor by delivering medicines on time and increase customer perception about quality.
- Vaccine efforts a mix of competition & cooperation
In the hunt for a vaccine against Covid-19, the New England Journal of Medicine published an interim analysis describing an immune response generated in participants of phase I clinical trials for a candidate vaccine, developed by US-based biotech company Moderna.
In India, Bharat Biotech International Ltd and Zydus Cadila Ltd have completed phase I of clinical trials for their respective vaccine candidates against COVID-19, just three weeks after the two companies started human dosing of the immunization shots against the fatal respiratory disease, Indian Council of Medical Research (ICMR) director-general Balram Bhargava said.
hence we can arrive at a thought that if COVID vaccine comes from India the Indian Pharma Sector will see new Flight to safety and companies like Dr. Reddy, Cipla and Lupin to an extent be able to ride this wave and start posting good EPS growth in the near future.
