Pharmaceuticals Industry Opportunities and Challenges …Presentations\160\Mr. Nitin... · 15 Takeda Japan 13,819. Indian Pharma Industry ... 5 Cadila Healthcare 13,399 3.64% 6 Sun

Pharmaceuticals Industry –

Opportunities and Challenges

in current market

Nitin Parekh

Chief Financial Officer

Cadila Healthcare Ltd., Ahmedabad

15th September, 2009

Global Pharma Industry – An Overview

• Pharma industry broadly includes finished dosage formulations (tablets, capsules,

injections, liquids, ointments etc.).

• Other ancillary industries include active pharmaceutical ingredients (API), excipient

chemicals, pharma packaging, pharma related capital goods, clinical research etc.

• Chemical formulations account for over 80% of the market, though biotech products

(pharma formulations based largely on a new recombinant DNA technique) have been

strengthening their presence since last decade.

• Global pharma industry is valued at ~ $ 773

billion, currently growing at ~4.8%, which is

lower compared to last 5 year (2003-2008)

CAGR of 6.6%. (Source : IMS Dec-08)

• US dominates the global pharma market with

~$ 291 billion, followed by Japan ($ 77 billion).

Top 5 markets of Europe are valued at ~$ 150

billion. (Source : IMS Dec-08)

• Growth in these regions, however, have been

lackluster (US – 1%, Japan – 2%, Top 5 EU –

4%). They are expected to grow at the same

pace for next couple of years. (Source : IMS Dec-08)

(Source : IMS Health Market Prognosis, Mar 09)

393

605648

715773

7.20%

6.80%6.60%

4.80%

11.80%

0

100

200

300

400

500

600

700

800

900

2001 2005 2006 2007 2008

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Mkt Size Growth

Global Pharma Market Size ($ bn) and Trend

• In fact, in US, the largest pharma market, generic drugs account for over 60% of pharma

prescription volumes, but 16% of total value.

• Globally, generics account for over half of volume sales, but only 15% of value sales, clearly

indicating the cost differential between patented and generic drugs. (Source : IMS Dec-08)

Global Pharma Industry – An Overview

• Overall growth in ‘Pharmerging’ markets

(China, India, Russia, Brazil, Mexico, Turkey

and South Korea) was ~14% in 2008.

• These markets are expected to lead the

growth journey in future also with same pace.

• Innovative, patented and branded drugs

have been dominating the market with over

90% value till last decade.

• However, generic drugs (copy of the

patented drugs, launched generally after

patent expiry), have significantly increased in

size mainly due to substantial cost

differential, and account for over $ 100

billion in value. (Source : IMS Dec-08)

• The top three therapeutic categories globally are - Neuro-psychiatry drugs at $118 billion,

Cardiovascular drugs at $ 105 billion and Anti-cancer drugs at $70 billion, which is growing

at highest rate of 19%.

• Overall, chronic segments (cardiovascular, anti-diabetic, anti-depressant, respiratory etc.)

and specialty segments (anti-cancer, biologics etc.) are growing at higher rate than acute

segments (anti-infective, pain-mgmt etc.)

Global Pharma Industry – An Overview

• The list of top 15 pharma companies in

the terms of sales (2008) is dominated by

US and other developed countries.

• These cos., known as ‘Big Pharma’, are

innovation driven, and spend 15-20% of

their sales on R&D.

• These companies enjoy profit margins

between 15-25%, making Pharma

industry one of the most profitable

industries in the world.

• Teva is world’s largest generic co.

Sandoz (Germany based subsidiary of

Novartis), Mylan (US) and Watson (US)

are other leading generic companies. (Source : IMS Health 2008, Top 15 Global corporations)

Rank   Company   BaseSales

($ mn)  

1 Pfizer US 43,363

2 GlaxoSmithKline UK 36,506

3 Novartis Switzerland 36,506

4 Sanofi-Aventis France 35,642

5 AstraZeneca UK/Sweden 32,516

6 Hoffmann–La Roche Switzerland 30,336

7 Johnson & Johnson US 29,425

8 Merck & Co. US 26,191

9 Abbott US 19,466

10 Eli Lilly and Company US 19,140

11 Amgen US 15,794

12 Wyeth US 15,682

13 Teva Israel 15,274

14 Bayer Germany 15,660

15 Takeda Japan 13,819

Indian Pharma Industry – A Snapshot

• India’s total pharma industry, comprising of domestic formulations market and exports of

formulations and APIs, is valued at $ 17 billion in 2008.

• Domestic formulations market is valued at over $ 7 bn (>Rs. 35 K crores), currently growing

at over 10%. It has been growing at CAGR of 14% over last 4 years, and is one of the

fastest growing pharma markets in the world. (Source : ORG IMS MAT Mar-09)

• In terms of size, domestic formulations market is 8% of global pharma volumes and ranks

4th, but in terms of value, it is only 1% of value, and ranks 12th in global pharma markets.

• The Indian pharma industry has grown

significantly as can be observed from the

export and domestic sales figures from

2003-04 to 2008-09.

• Indian pharma industry is self sufficient to

meet the demand of drugs in the domestic

market, and at present over 95% of

domestic requirement is met by domestic

pharma manufacturers.(Source: Express Pharma, Equity Master)

Year

Exports

Form &

Others

% Gr

Domestic

Form &

Others

% Gr

2003-04 15,213 18.61 32,575 7.28

2004-05 17,857 17.38 34,128 4.77

2005-06 22,216 24.41 39,989 17.17

2006-07 26,895 21.06 45,367 13.45

2007-08 30,760 14.37 50,946 12.30 2008-09 38,433 24.94 55,454 8.85

• This has been made possible because of lack of patent protection to pharma products (after

Patent Act of 1970), and formulations market today is accounted for almost entirely by low

cost branded generic drugs, which still offer high margins and sustainable business.

Rs. Crores

Indian Pharma Industry – A Snapshot

• Domestic formulations market in India is highly fragmented one, with over 20,000 registered

drug manufacturers.

• Top 5 companies hold less than 25%

of the total market.

• MNCs used to hold dominant position

in the domestic formulations market 40

years before, which gradually exited the

market or slowed down their operations

post Patent Act, 1970.

• List of top 10 companies is now

dominated by Indian companies, with

GSK being only MNC.

• Indian pharma manufacturers are also dominant players in API and generic formulations

exports due to lower cost base.

• In terms of overall revenues, considering domestic and exports sales, Ranbaxy ranks 1st

among Indian pharma cos., followed by Dr. Reddy’s Lab, Cipla and Sun Pharma.

• Indian healthcare market, contrary to developed markets, is still characterized by high ‘out of

pocket’ spend by patients themselves, and government spending is very low. Over 90% of

healthcare costs are borne by patients, which is highest in the world, which puts check on

drug prices so as to ensure its affordability and availability to all.

(Source: ORG IMS MAT Jul-09)

Rank CompanySales

(Rs. mn)

% Mkt

Share

Total Pharma Market 368,471

1 Cipla Ltd. 19,917 5.41%

2 Ranbaxy Laboratories 18,138 4.92%

3 Glaxo Smithkline Pharma 15,917 4.32%

4 Piramal Healthcare 15,023 4.08%

5 Cadila Healthcare 13,399 3.64%

6 Sun Pharmaaceuticals 13,054 3.54%

7 Alkem Laboratories 11,608 3.15%

8 Lupin Laboratories 10,085 2.74%

9 Mankind Pharmaceuticals 9,719 2.64%

10 Aristo Pharmaceuticals 8,962 2.43%

Challenges for Big Pharma- Opportunities for Generics & India

• Declining R&D Productivity of Big Pharma –

• Increasing failure rate in clinical trials

• Increasing cost of developing a new drug –

from $ 1.1 bn in 2004 to $ 1.3 bn in 2008

• Increase in time taken for trial completion

and drug approval

• Lack of replacement of blockbuster drugs that

have gone off patent in past – very few drugs

launched in recent past have blockbuster potential

• Deceleration in growth of existing blockbusters

• Increasing competition from generics, with govts.

in developed countries encouraging generic players

to reduce heavy burden of healthcare costs

• Recent financial crisis and economic slowdown,

though having relatively less impact on pharma

industry, have impacted consumer spend on

healthcare (# of prescriptions in US down by 2%

in 2008-09 for the first time in decade)

31

36 35

39

2002-04 2003-05 2004-06 2005-07

Number of projects terminated in Phase III

(Source : 2008 CMR International)

53% 53% 49% 43% 37%

47% 47% 51% 57% 63%

0%

20%

40%

60%

80%

100%

1999 2001 2003 2005 2007

Brands Generics

% of total prescriptions dispensed in US

(Source : IMS Health, National Prescription Audit Plus)

(Source : IMS Health)

2004 2005 2006 2007

24% 14% 10% 9%

Challenges for Generics and Indian Pharma Industry

• Price erosion and margin restrictions putting severe earnings pressures

• Stiff competition from Indian and Eastern European players – all fighting on price front.

• Market for blockbuster drugs gets crowded on very first day of patent expiry with over

10 players competing for market share

• Over 90% erosion in the prices on branded products on ‘genericisation’ in US and other

developed markets; in some products, it was higher than 97% (e.g. Simvastatin)

• Price and margin controls and regulations for generic drugs by Govts. in some markets

to contain healthcare costs (e.g. France)

• Non tariff barriers and product registrations

• Compulsory requirement of having local mfg. and QA / QC facilities (e.g. Brazil)

• Regulations for manufacture, import, packaging, marketing and distribution by govt.

• Could be used as measures by MNCs to place obstacles for generics

• Big Pharma entering generics space with ‘deep pockets’ – could further intensify the

competition in the generics space (Daichi Sankyo acquiring Ranbaxy, many others in race)

• IP risk and EHS perception – major outsourcing customers i.e. big MNCs still perceive IP risk

in India due to lack of laws for data protection. Also EHS compliance standards in India are

considered to be below average. Both these factors could be growth deterrent for CRAMS

players.

• Stringent Regulations and increasing regulatory costs

• Instances of manufacturing irregularities and deviations from quality standards

surfacing (several generic companies having issues in USFDA approved plants),

• Regulatory authorities across the world have become more stringent on compliance

and have started taking stiff actions against the defaulters.

• This has caused increase in cost of regulatory compliance

• New patent regime in India (post 2005)

• Move from process patent to product patent

• Molecules patented post 1995 get protection and can’t be copied

• Availability of new off-patent molecules (or pre 1995 patented) drugs drying up slowly

• Drug discovery pipeline of Indian companies to take time to deliver results

• Price controls - India only country in the world to have cost based drug price controls

• Drug Price Control Order (DPCO) 1995 – regulates prices of 74 essential drugs

• New pharma pricing policy proposing 354 other drugs to bring under price control, if

implemented, would severely hurt pharma cos. and discourage investments in R&D

• Regulatory environment within India (approval processes and timelines), though better than

China and Eastern Europe, needs to be improved to match standards of western countries.

Challenges for Generics and Indian Pharma Industry

Opportunities for Pharma Industry – Global Factors

Aging of the world population

• World population aging is unprecedented (not seen before in

the history of humanity), pervasive (a global phenomenon

affecting everybody), profound (having major consequences

and implications for all facets of human life) and enduring.

• During the twentieth century the proportion of older

persons continued to rise, and this trend is expected to

continue in the twenty-first century.

• Healthcare needs are expected to rise with aging population

across the globe, inducing greater demand for pharma drugs.

New diseases and diagnosis of newer syndromes

• More than 300 diseases have been discovered since 1940 - SARS (Severe Acute Respiratory

Syndrome), Ebola, HIV, West Nile Virus, MRSA (Methicillin-resistant Staph), Swine Flu….

• For most of the diseases emerged in last 25 years, no prevention or cure is still available.

• India, China and sub-Saharan Africa regions are ‘hotspots’ for new emerging infectious

diseases (EID).

• This gives tremendous opportunity (and responsibility too) to the pharma industry to

innovate remedies for these diseases and syndromes and create newer markets.

810

21

1950 2000 2050 E

% of World Population :

60 years or older

(Source: UN Report on World

Population Aging 1950-2050)

Opportunities for Pharma Industry – Global Factors

Biologics – promising future

• 17% of total world pharma market, 42% of pre-clinical

candidates and 26% of submissions in 2008

• Fastest growing therapies – oncology and diabetes are

being driven by biologics

• Expected to grow to 23% of world pharma market by 2013

• Complex technology, hence lower risk of early entry of

generics – a positive factor for ‘big pharma’

89%72%

50%

11%28%

50%

2000 2008 2014

Conventional Biologics

Share of biologics in

top 100 molecules

(Source: EvaluatePharma World

Preview 2014)

All roads lead to Emerging markets

• ‘Pharmerging’ markets are key engines of

growth for pharma industry – comprising of

82% of world population, which contribute

to only 12% of world pharma sales

• Growth would be driven by increasing per

capita spend on healthcare, lower

penetration of modern medicines,

increasing insurance penetration and

improving lifestyles

• Offer highest growth potential due to

strong GDP growth expected there

773

312

248

914777

12.7%

13.7%

2.7%

6.4%

5.7%4.8%

0

100

200

300

400

500

600

700

800

900

World Mkt North Am Europe Japan Asia / Africa /

Aus

Latin Am

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Mkt size CAGR 2003-08

Pharma Markets - Size ($ bn) and CAGR of 2003-08

(Source: IMS Health, 2009)

Opportunities for Generic Pharma Industry

Spiraling healthcare costs

• Governments in developed economies

bear healthcare costs of people, which

has been rising very sharply.

• Governments are taking various steps to

promote generics to reduce costs like-

• centralized purchase (Germany),

• generic substitution (Japan),

• waiving co-payments for generics (US)

• promoting and monitoring physician

prescription habits

50

100

150

200

250

300

350

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Healthcare Costs will continue to

outpace GDP and Wage Levels

Va

lue

In

de

x

(Source: OECD Health Data, 2006)

Healthcare Costs as % to GDP

(Source: IMS Health, National Prescription Audit Plus)

USSwitzer

landFrance Germany Canada Japan

15.3% 11.3% 11.1% 10.6% 10.0% 8.2%

Low generic penetration

• In some of the developed and emerging

markets, generic penetration is still very low.

• Governments in such countries are encouraging

generic players to play vital role in reducing

healthcare costs.

• Outlook for growth of generics in these markets

and eastern European markets is promising.

Generic Penetration % in total market

20

19

17

10

7

5

Brazil

Germany

Japan

France

Spain

Italy

(Source: Sandoz presentation)

Patent expiries

• Products worth US $ 235 billion are going off

patents from 2009 to 2014,

• Includes many blockbusters like Lipitor (Pfizer -

$ 12 bn), Plavix (Sanofi-Aventis & BMS - $ 8 bn),

Diovan (Novartis - $ 6 bn), Zyprexa (Eli Lilly -

$ 5 bn), and $ 40 bn worth of biologics

• This gives huge opportunities to generics

Opportunities for Generic Pharma Industry

26 27

58

48

39 37

2009 2010 2011 2012 2013 2014

Sales of Products having Patent Expiry ($ bn)

players, with low cost development and mfg. capabilities, to tap market for these products

• Biologics, which are difficult to copy and hence have low price erosion post patent

expiry, is an attractive market for players with biologics capabilities

(Source: EvaluatePharma World Preview 2014)

Generic industry growth estimates (2008-2013)

9%

12%

10%

11%

13%

3%

5%

World

ROW

Rest of US

Japan

Eastern EU

Western EU

US

(Source: Sandoz Presentation)

Generics industry – poised for growth

• With aging population and rising healthcare costs,

acceptance of generics has been increasing.

• Expected to grow at CAGR of 9% over next 5 years,

emerging markets being key growth drivers.

• Players with efficient development and mfg,

capabilities, and ability to develop and manufacture

‘difficult’ technology stand to gain. Indian players

should benefit the most.

Opportunities for Pharma Industry – Domestic Factors

• India is poised to be one of the most important pharma markets and formulations pharma

market is likely to triple over next decade to ~ $ 20 bn by 2015 at CAGR of 12%

• Real GDP growth – expected to grow at 7.3% pa

• Rise in income levels and shift in income

demographics

• Per capita disposable income – expected to

rise from $ 463 in 2005 to $ 765 in 2015.

• 27 mn households currently in lower income

category to move up.

• Middle income category to rise steeply – 59

mn more households to be added by 2015.

• Rural and Tier-2 markets to contribute to

almost half of total growth till 2015

• Increase in healthcare spends by people (from 4% of household consumption in 1995 to 9%

in 2015 and 14% in 2025) with-

• Increase in affordability of living costs, both in tier 1 and tier 2 markets, and

• Increasing importance to health, fitness and wellness, due to changing lifestyles

• Increased coverage of health insurance – expected to cover 200 mn people by 2015

(Source: McKinsey Report on India Pharma 2015)

Shift in Income Demographics

Opportunities for Pharma Industry – Domestic Factors

• Increased spending by Govt. on rural development, healthcare access improvement thru

National Rural Employment Guarantee Scheme and National Rural Health Mission

• Improvement in medical infrastructure

• Number of hospital beds and physicians expected to double, with 2 mn additional beds

and 0.4 mn physicians.

• Corporate hospital chains to play vital role in transforming quality of healthcare

• Lifestyle related and chronic diseases

are expected to rise rapidly with

changing lifestyles

• With over 50 mn cardiac and ~40 mn

diabetic patients, India is already the

cardiac and diabetic capital of the

world.

• New Patent regime post 2005 –

Product patent and compulsory licensing

provisions should encourage

multinationals to launch products

• All these factors provide huge potential

for Pharma to grow in India.

India projected to be 10th largest Pharma market by 2015

(Source: McKinsey Report on India Pharma 2015)

• R&D and mfg. outsourcing market (Contract Research and Mfg. Services or CRAMS, as it is

known in Pharma world)

• Representing 19% of global pharma

R&D and mfg. spend in 2008.

Opportunities for Pharma Industry – CRAMS

“…The need for a continued evolution

of the innovative pharma business

model, coupled with the war for

technical talent, has put India at the

heart of the global sourcinginitiatives. Strong cost competitive

and well developed local industry base,

combined with the large pool of

technical talent has necessitated the

inclusion of India as a part of all global

sourcing initiatives across global

pharma businesses…”

Dr. Harit B. Joshipura

Chairman,

GlaxoSmithKline Pharmaceuticals Ltd.,

India

• Increasingly becoming a strategic decision for big

pharma cos. to reduce costs and sustain margin

pressures felt due to

• Large block-busters going off patent

• Declining R&D productivity, and

• Increasing generic penetration

• Expected to grow despite the financial crisis and

economic slowdown

• India and China top two best CRAMS destinations

due to their huge market potential and tremendous

cost saving offered by them

(Source: Morgan Stanley Report on „Global

Outsourcing – Best Ideas, 2007‟)

APIs &

Intermediates

$ 33 bn

(up 13%)

Research

$ 6 bn

(up 19%)Drug

Development

$ 12 bn

(up 16%)

Global Outsourcing Industry 2008

$ 51 bn

(up 14%)

CRAMS – huge opportunity for Indian Pharma Industry

• India has an edge over other countries in the CRAMS space with –

• Highest no. of US FDA approved plants (119) outside US, with largest share in DMF

and ANDA filings (34% in DMFs with >1100 filings, 30% in ANDAs with >450 approvals)

• Significantly lower costs (65% lower than US plants and 50% lower than EU plants)

• Lower facility installation costs (30% lower than US), and

• Significantly lower manpower costs (>1/10th the US cost)

• Largest pool of qualified, skilled and English speaking manpower

“…Out vision is to catapult India

into top five pharma discovery

and innovation hubs by 2020

with a significant number of

drugs discovered worldwide by

2020 coming from India. We

want to position India as the

destination of choice for global

pharmaceutical R&D…”

Ashok Kumar

Secretary, Govt. of India

Ministry of Chemicals &

Fertilizers, Dept. of

Pharmaceuticals

•Significant advantage for drug discovery and process

development outsourcing due to

•Process, analytical and chemistry skills,

•Chemical synthesis and pre-clinical services, with

GLP-compliant facilities

•Global quality, IP and EHS standards

•India has become a major player for sourcing of APIs and

formulations, with- 24% growth in exports over 2004-08.

•Big Pharma are focusing on India for R&D outsourcing.

•Despite its inherent advantage, India accounts for only ~3%

of global outsourcing market – a significant opportunity to tap

larger share and grow rapidly.

(Source : E&Y Analysis, Indian

Pharma CRAMS, 2008)

Recent trends in Pharma Industry

• Declining R&D productivity of ‘big pharma’ cos., no major ‘block-buster’ drug expected in

near future and lackluster growth from existing block busters coupled with increasing

generic penetration, has forced them to think of

alternative strategies like :

• Strengthening presence thru consolidation

(Pfizer acquiring Wyeth, Merck acquiring Schering-Plough)

• Entering generics space either from scratch or

thru acquisition (Daichi Sankyo acquiring Ranbaxy)

• Looking at newer avenues like biotech (Roche acquiring

Genentech, Sanofi-Aventis acquiring Shantha Biotech)

• Entering ‘Pharmerging’ markets either ‘greenfield’,

thru in-licensing of products or other tie-ups (Pfizer

in-licensing products from Aurobindo and Claris,

GSK tying up with DRL)

• Improving research productivity thru contract

research from low cost Indian players (Merck’s tie up

with Ranbaxy, Eli Lilly’s tie up with Cadila),

• Rationalizing costs by outsourcing of manufacturing

to low cost players of China and India, setting up own

mfg plant there or acquiring cos. there with mfg. plant

Recent trends in Pharma Industry

• Generics are getting increased support from govts.

of developed economies, due to economic slowdown

coupled with burden of mounting healthcare costs

• Indian pharma cos., with their product development

skills and low cost mfg. capabilities have

• Substantially increased their presence in rapidly

growing developed and emerging generic markets, and

• Emerged as preferred partners of choice for MNCs

for getting their products developed and manufactured

at low cost on contract basis

• With regulatory authorities across the globe becoming more and more stringent, generic

cos. have started focusing on strengthening their regulatory compliance.

• Generic companies are adopting differentiated strategies for growth – by building product

pipeline which is difficult to develop and manufacture (aerosols, injectibles, bio-similars)

• In India, the expansion of rural market due to rising income levels across the regions and

increased government spending has prompted many Indian cos. to start initiatives for tapping

opportunities in this high potential market, considered to be the next growth driver

• With number of new off-patent (or pre 1995 patented) molecules reducing, Indian cos. have

started looking for in-licensing of products from MNCs for Indian market

Exports pf formulations and APIs

from India ($ bn)

1.6

4.11.1

3.3

2004 2008

Formulations APIs

(Source: E&Y analysis, Dec 08)

Lessons in Economic Slowdown

• Conservative approach

• No litigation for ‘one-off’ opportunities, which might be big but quite risky

• No big ticket acquisition. Buy only if it is too strategic, that too at ‘reasonable price’.

• R&D charge off as revenue expenditure – risk of failure is very high, hence it is prudent

not to capitalize any R&D spend and ‘build hopes’.

• Continue thrust on innovation and new products – long term value lies in innovation and

new products are not going to fade easily.

• Cost consciousness as a way of life

• Competition and price pressures are the ‘fact of life’, so they are going to be there and

can’t be controlled

• Only way to sustain margin pressures is thru tighter cost control, continuous cost

improvement and rationalization. ‘Cash is the King’.

• Strong periodic monitoring mechanism of business performance and costs, to establish

‘early warning system’ and prompt decision for future course of actions

• Constant eye on D/E ratio – to use the leverage cautiously, otherwise could cost heavily

Thank You.