Good future for Indian pharma

The future looks somewhat bright for the Indian pharmaceutical industry which is wholly into generics.

It expects to get a push from the new US legislation bringing into the health-care fold 32 million or 10 per cent of the country's population which is currently uninsured.

As the US administration has also projected a reduction in the fiscal deficit of $143 billion by cutting the cost of public health-care delivery over a 10-year period, there is a strong business opportunity for the suppliers of cheap medicines, that is, generics.

The best placed to exploit this opportunity are the Indian and Chinese pharmaceutical industries and between them it is the Indians who have the lead with their substantial, in-place capacity to produce quality drugs at 175 plants (the largest outside the US) approved by the US regulator.

The Indian domestic scenario is also bright with growing incomes giving a boost to private health-care expenditure as also a rising public health-care bill. In 2009, the domestic market grew 17 per cent.

Thus, the volume scenario is bright but margin prospects are another matter. Generics (drugs off patent) are a commoditised business marked by high volumes, low costs and low margins. And things on the margins front are likely to, if anything, get tougher.

On the export front, as far as the regulated markets are concerned, the drug majors that have so far relied on their patented blockbusters are rapidly changing their business model in several ways.

They are acquiring capacities and forging partnerships with some of the best Indian names to get a foothold in the generics space.

By riding on their marketing and distribution networks, Indian suppliers will be able to clear larger volumes. But their margins in this segment will be lower than what they would have been if they were on their own.

The drug majors are also thinking up new and ingenious ways to extend the life of patents and thus hang on to their blockbusters for as long as they can. This prevents the generics space form growing to its full potential.

The domestic market has always been very highly competitive, not allowing high margins. The only bright spot is the unregulated market like Russia, Africa and Southeast Asia where the reputation of leading Indian brands give them an edge.

In this scenario, there are two ways to improve margins. One, keep pecking away at the long-term goal of discovering new molecules that will command a premium under patent protection.

Two, in the medium term, those with well-developed R&D facilities, should go in more for custom development of new entities on behalf of drug majors.

By doing this kind of high-value work, Indian pharma companies will be doing exactly what the product development and engineering services firms are doing in software. There is also the lucrative allied business of conducting clinical research to test new drugs belonging to others.

The hope is that in this way, by developing and testing others' blockbusters, Indian firms will develop enough expertise to one day produce blockbusters of their own.