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Indian Pharmaceutical Industry An Update on Emerging Markets – A Key Export Destination

Contacts: SubrataICRA Ray RATING FEATURE +91 22 6179 6386 [email protected] Shamsher Dewan +91 124 4545 328 [email protected]

What’s inside? I.

Executive Summary

II.

Snapshot of India’s Pharmaceutical Exports

III.

An update on Emerging Markets with perspective on growth drivers & market potential

IV.

Coverage on Pharmaceutical markets in: a. Brazil i. Market Size, Structure & Growth Drivers ii. Competitive Landscape & Regulatory Developments

b. Russia i. Market Size, Structure & Growth Drivers ii. Competitive Landscape & Regulatory Developments

c. South Africa i. Market Size, Structure & Growth Drivers ii. Competitive Landscape & Regulatory Developments

d. Middle East & North Africa (MENA) e. Asia Pacific – Indonesia, Thailand & Philippine V.

An update on Japan’s evolving generic drug industry

VI.

Impact of regulatory developments & market dynamics

VII.

The Road Ahead…

Annexure I: Snapshot of Indian companies in RoW markets Annexure II: List of ICRA-rated Pharmaceutical Companies

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INDIAN PHARMACEUTICAL INDUSTRY An Update on Emerging Markets – A Key Export Destination ICRA RESEARCH SERVICES

Industry Update February 2015

Executive Summary Generic opportunities outweigh challenges emanating across emerging markets

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 With approximately 20% contribution to revenues of leading pharmaceutical companies, Emerging markets have evolved to become an important market segment for Indian pharmaceutical industry. Although United States remains the key growth driver, pharma companies have steadily expanded their presence across some of the key emerging markets.  Aided by acquisitions, geographic expansion and steadily expanding product portfolio, the top-10 pharma companies from India have achieved a CAGR of 23% in revenues from emerging markets over the past five years (i.e. FY 2010-14).  Driven by improving affordability levels, government’s commitment to expanding healthcare access and rising prevalence of lifestyle related disorders, the spending on pharmaceutical products in these markets is estimated to almost double to ~US$380-390 billion by 2017 according to IMS1. Much of this growth is likely to benefit the generic segment which would gain traction on back of government-supported programs and cost competitiveness in markets, which rely heavily on out-of-pocket spending for healthcare.  While the growth prospects in emerging markets remain undisputed, pharma companies also face their fair share of challenges. Frequent regulatory changes, government’s intervention in drug pricing (to contain healthcare costs) and efforts to promote usage of un-branded generics are some of the common themes influencing industry prospects. In some countries, the regulatory framework has also evolved to favour local industry by implementing measures like higher import duties, creating price differentiation and incentives to invest in manufacturing facilities, locally.  The impact of weakening macro-economic environment and political instability across some countries has further added to set of challenges, which has got accentuated by the sharp correction in crude oil prices and its adverse impact on exchange rates of some of the oil-dependent economies like Russia. This is likely to impact margins of companies in the near-term given the intensity of currency de-valuation and limited ability to implement price hikes.  The competitive intensity in emerging markets is also on the rise. While on one hand, local players are moving up the ladder in terms of R&D skills, MNC pharma companies are also increasing their focus on emerging markets in view of single digit growth expectations in mature markets. Besides access to portfolio of innovator drugs, their presence in emerging markets is also characterized by well established marketing network, a factor that is critical for developing a branded generics business. 1

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Executive Summary  Despite challenges, Indian pharma companies would however continue to benefit from the growth opportunities that emerging markets offer. With cost competitive manufacturing capabilities and many of the characteristics (i.e. high outof-pocket expenditure on healthcare and preference for branded generics) similar to the Indian market, Indian firms remain in an advantageous position. Additionally, their relatively low market share also provides scope for market traction going forward.  In the following report, we present an update on key emerging markets of Brazil, Russia, South Africa, Middle East & North Africa (MENA), and Asia Pacific from the perspective of industry structure, growth drivers, regulatory landscape and competitive intensity. In each section, we have also commented on the presence of Indian companies in these markets and their strategies going forward.  The report also covers an update on Japan’s generic drug industry, which is going through another phase of government-led mandate to increase generic penetration. With several key drugs also expected to lose patent protection over the near-term, the pro-generic reforms provide adequate opportunities for generic drug manufacturers. At present, Indian companies have relatively limited presence in Japan given the stringent regulatory framework. However, we expect them to increase their focus going forward.  The report concludes with likely strategies that Indian companies would pursue in emerging markets. In our view, acquisitions will play an important role given the long gestation period involved in establishing branded generics business. To address competitive pressures, companies would also shift their focus towards niche therapy areas, biosimilars and segments like OTC that offer greater pricing power. As regulatory framework in some markets supports local manufacturing presence, we expect Indian companies to invest in Greenfield facilities as well in select markets.

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