TREND: Disruption In Indian Drug Market To Hit Cos’ Sales, Margins

Indian pharmaceutical companies can’t seem to catch a break. Just as these drugmakers were beginning to crawl out of the woods in the US, their largest market, a fresh disruption is looming in the domestic market.

Rising clout of the Centre’s Jan Aushadhi scheme and electronic pharmacies are seen as the biggest threat to profitability of established pharmaceutical companies in India.

Indian drugmakers sell branded generic drugs, allowing them to receive a premium for their brand name. These drugs, which are essentially generics, are priced higher than plain generic products.

The rapid expansion of the government’s Jan Aushadhi or public medical stores, making cheaper alternatives available to the public in order to bring down health care costs, and advent of e-pharmacies will hurt the branded generics segment by lowering their pricing power, analysts said.

The formalisation of electronic pharmacies or e-pharmacies, which thus far had been walking in a regulatory grey area, likely from next month, is expected to disrupt the traditional brick-and-mortar pharmacies that dominate the Indian market by offering deep discounts on products.

Cipla and Lupin, in their respective post-earnings conference calls earlier this month, alluded to these threats. “Right now, we don’t see much impact. But yes, in future, once penetration goes up, we will surely have price erosion,” said India Region Formulations President at Lupin Rajeev Sibal.

Sibal believes Jan Aushadhi stores and e-pharmacies “will be in a state where they will be able to negotiate the pricing, as far as products are concerned,” in the next two years.

That will be a setback for an industry battling low profitability due to government controls over pricing and curbs on trade margins.

In the quarter ended June, most major Indian pharmaceutical companies reported below-industry-level growth rates for the domestic business as market conditions and disruption to distribution channels took a toll.

The share of Indian operations in the overall revenues of top pharmaceutical companies declined by 200-500 basis points on year in the quarter ended June to 28-34% of sales.

The government, in its bid to make medicines affordable, launched the Pradhan Mantri Bhartiya Jan-Aushadhi Kendra scheme in 2015. The scheme envisages setting up medical stores that would sell generic medicines at cost.

Since the scheme’s launch, the government has managed to open 4,000 such stores across India and plans to take up the number to nearly 7,500 in 2020.

“I think there is an impact of this right now, but I do think that the industry will still afford a fairly significant volume growth,” said Cipla Global Chief Executive Officer Umang Vohra at the company’s earnings call.

In Vohra’s assessment, close to 7% of India’s 1.2-trln-rupee pharmaceutical market has faced disruption from Jan Aushadhi stores and e-pharmacies.

The biggest change is being felt in the prescription-branded generics market where companies’ volume growth is being affected because of the substitution of demand in metros and small towns since the advent of e-pharmacies, the analysts said.

E-pharmacies pose a more near-term risk to the Indian drugmakers’ distribution network. According to a report in The Economic Times, the three big e-pharmacies–Netmeds, 1MG, and Medlife–saw sales grow three-fold in the financial year ended Mar 31, reflecting strong traction.

“In three-four years’ time, the impact of e-pharmacies will definitely be negative, but to what extent we will have to wait and see,” said Amey Chalke, a pharma analyst at HDFC Securities.  – Cogencis