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Affordability and medical infrastructure will drive 75% of demand growth in Indian pharma

The cost of medical care in India now hovers on the edge of affordability for many middle class people. The prognosis made in a McKinsey report on the state of Indian pharmaceuticals market, written in 2005, now seems an underestimate:

Healthcare grew from 4 per cent of average household income in 1995 to 7 percent in 2005, and is expected to grow to 13 percent by 2015.

Most of the rise in the cost of healthcare comes from the decay of the public health care system, and its replacement by “five star” hospitals. However, the pharmaceuticals market is also a big part of this inflation.

Perhaps it was projections of this kind which led to acquisitions and rising costs. This is brought out by a recent report in ET:

Japan’s biggest pharmaceutical company Daiichi Sankyo has initiated buyout talks with at least three mid-sized firms in India, nearly four years after it acquired a majority stake in the generic drugmaker Ranbaxy Laboratories.

The target firms have a product portfolio straddling anti-diabetes, rheumatology and woman’s healthcare, persons familiar with the matter told ET. The promoter of one such firm also confirmed the development on the condition of anonymity. Daiichi Sankyo is focusing primarily on firms with an annual turnover of 300-500 crore and it has appointed IMS Consulting Services for the purpose.

Ranbaxy has been faring well in the domestic market, though, clocking a turnover of 2,689 crore and recording an 18% growth in 2011, against the industry’s 15%. It has a strong presence in the anti-infective, cardiovascular and anti-inflammatory segments, and some of its antibiotic brands like Cifran and Sporidex have been very successful. However, analysts say, the company is looking to beef up its presence in segments such as woman’s healthcare, diabetes and rheumatology.

Daiichi’s move is in line with other multinational companies that have been focusing on buying mid-sized companies with niche product portfolios over the past year. Sanofi Aventis’ acquisition of Universal Pharma and Zydus Cadila’s buyout of Biochem are two such examples.

“Mid-sized companies typically have a large presence in the domestic market, so any company that wants to expand in the Indian market targets these companies,” says Sujay Shetty, head of pharmaceutical and life sciences at PWC. Abbott Pharma, which clocked the biggest acquisition in India when it bought Piramal Healthcare, leads the domestic market with a turnover of 3,500 crore, while Cipla, which is growing at 11%, reported a turnover of 2,500 crore in 2011.

Most pharma markets are moving towards trade driven generics

In view of these rising medical costs, it is interesting to see that the Indian market has not moved to generic drugs. This, in spite of the fact that India is a powerhouse in manufacturing and exporting generics. See for example, this report in BS:

Dr Reddy’s stellar performance for the quarter ending December (Q3) was led by the launch of an anti-psychotic drug, Olanzapine generics (Zyprexa brand) in the US on an exclusivity basis. The pharmaceutical services and active ingredients (PSAI) segment also provided a boost, as did Russian & CIS sales. While it is heartening that domestic sales growth touched a double-digit figure (11 per cent), it was still below industry growth.

US growth prospects remain strong for Dr Reddy’s, given the robust product pipeline. Russia/CIS sales are also expected to post good growth, with the rest of the world (RoW) growth estimated at 15 per cent. However, most of these positives remain factored in at current levels. Based on the one-year consensus target price, there is an upside of 7.5 per cent from current levels of Rs 1,644.

Or, this press release from a little-known company:

Revenues for the full year 2011 were $1,349,341, an increase of $567,666, or a 72% increase as compared to 2010 revenues. Net loss for fiscal year 2011 was $548,990, as compared to a net loss of $980,457 for fiscal year 2010. The bottom line results for 2011 improved 44% as compared to fiscal year 2010.

Mr. Shailesh Shah, CEO of SOHM, Inc., stated, “We continue to make significant improvements in our top and bottom line results and believe our infrastructure, combined with our sales and marketing plans will continue to provide very good results. Last year we made strategic changes in our systems, including distribution channels and became very aggressive towards new product and new market launches, all of which provided our customers with better service and allowed us to streamline operations and control expenses.”

“We are focusing our business plan on profitability by continuing to expand operations and partnerships, but ensuring that our expenses are in line with gross profit margins,” concluded Mr. Shah.

About SOHM, Inc.
SOHM, Inc. is a generic pharmaceutical manufacturer that produces and markets generic drugs covering all major treatment categories. Global headquarters is located in North America with manufacturing sites in India. Generic pharmaceuticals are exported globally with a focus on distribution in emerging markets in Africa, Latin America, and Southeast Asia

So what is the reason that low-cost generics are not the norm in Indian markets? Lack of information or market control?

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