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Category: Special Reports

Special Report: India’s Pharmaceutical Industry

India's pharmaceutical industry has faced many set backs in recent years. This special report details why the sector might now be about to become...

14 April 2019


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India’s pharmaceutical industry has faced many set backs in recent years. This special report details why the sector might now be about to become a major driver of a resurgent Indian economy

Overview of India’s Pharmaceutical Industry

India continues to grow as a major exporter of generic drugs around the world, pushing its produce to the US, UK and Russia while accelerating its exposure to Canada, Germany, Brazil and Japan. India’s pharmaceutical industry is one of the largest suppliers of cost-effective generic medicines to the developed world, distributing a wide range of drugs.



Source: Indian Pharmaceutical Alliance

According to consultancy firm Mckinsey & Company, the Indian pharmaceutical industry has been showing a growth rate of over 12% since 2005. The year on year growth has generally been on a tear since 2008 and we are of the belief that this industry will be worth more than $43 billion by 2020.

Competition within India is rife as there are more than 200 companies manufacturing medicines for one of the largest populations in the world. It is estimated that the Indian healthcare industry will be worth $275.6 billion by 2020. Currently, 8% of India’s GDP is spent on healthcare but India will need to spend at least $80 billion more over the next five years to meet its targets of provision.


Source: Indian Pharmaceutical Alliance

Source: Indian Pharmaceutical Alliance

India’s pharmaceutical industry is driven by both strong demographics and robust economic growth, year on year. This growth is supported by a rising middle class whose disposable income keeps growing rapidly; a large proportion of these funds are being spent on healthcare and health insurance as the country and its people develop and mature. The industry will eventually be transformed as it goes through increased M&A activity, consolidating itself into a more efficient and experienced sector.

The industry players, particularly the large ones, have rendered expansion by setting up subsidiary companies and regional offices or by taking over local companies in other geographies. Many have also set up their manufacturing plants in developed nations. This expansion has allowed the Indian pharmaceutical industry to command a strong global presence.

Global player

Approximately 40% of all pharmaceuticals produced in India are exported, accounting for around 20-25% of global generic drugs. The US is the largest consumer of Indian pharmaceutical exported medicines, followed by the UK. As per the updates from Pharmexcil (the government agency responsible for the promotion of pharmaceutical exports from India), North America alone contributes to 27% of the total generic drug consumption of Indian pharmaceutical medicines, followed by the European Union and Africa, who each consume 18%.

Indian production also dominates its domestic pharmaceutical market, making it largely self-sufficient in the case of formulations. Within India, the acute therapy industry dominates with a share of over 75% of the total market value, this is notable as the country has suffered public hygiene and sanitation issues for decades.

Currently, Indian consumers are spending nearly 1% of their total income on drugs and pharmaceuticals. With the rise in the per capita income, current spending is going to triple, to approximately $33 per year, by 2020. The government is looking to ensure that quality healthcare and drugs are made affordable, targeting provision for more than 50% of the country’s population by 2020 and 80% of the population within the following decade.

Diseases such as diabetes are becoming more prevalent within Indian society and this fact is driving the growth of new treatments within the home market. Diabetes affects more than 50 million people within the country and ends up killing 5% of this group on an annual basis. With treatments for chronic diseases, such as asthma, cancer, diabetes, heart ailments, osteoporosis and kidney problems, likely to account for more than 50% of India’s pharma market by 2020, it will be a sector worth watching.

Why is this sector a good space for investors?

Using a quantitative factor model that is re-evaluated on a weekly basis and that ranks stocks from the cheapest (at the top) to the most expensive (as you go down the list) it is possible to track undervalued sectors. Over the years, we have also been tracking what these rankings look like when they are classified into industry groups. This tends to highlight not only underperforming stocks but also poorly performing industry groups that we call “clustering”. Over the past 15 years, we have seen several examples of clustering, such as:

The IT sector has been clustering

The IT sector has been clustering

Computers: September 2007 to February 2008, and now pharmaceuticals: January 2017 to December 2017.

Pharma now clustering

Pharma now clustering

There has been a significant clustering at the top of our factor model with several pharmaceutical companies ranked within the top 15 positions.

How have they performed?

As you can see from the images above, the pharmaceutical industry has been clustering towards the top of the model throughout the whole of 2017. The industry has significantly underperformed relative to the broader market over the last 24 months, trading down on average over 40%. Of the larger players within the Indian pharmaceutical market, two-thirds of these constituents have fallen more than 30%. Lupin, Sun Pharmaceutical and Glenmark Pharmaceuticals have been the worst performing over multiple periods (as you can see below), both on an absolute and relative basis.

The industry has come under severe pressure recently due to:

  • Slippages in manufacturing processes and quality defects
  • US Food and Drug Administration (USFDA) has increased competition and so pricing pressures in the US have risen
  • Many products are under investigation
  • Patent issues in India
  • Export focused industries are worried by Trump tariffs


companies table

Companies’ table

Indian pharma index to Nifty real return

Indian pharma index to Nifty (Indian stock exchange) real return


Indian Pharma has fallen in recent years

Indian Pharma has fallen in recent years. Source: Hinde Capital / Bloomberg

Government Cutbacks, Slippage in Manufacturing & Quality Defects

Companies within the Indian pharmaceutical industry have come under a spotlight over the past two years following some self-inflicted errors and the pressures of government healthcare cost-cutting. They have tried to do this by forcing doctors to prescribe cheaper unbranded generic drugs – reducing demand for branded generic drugs produced made by Lupin, Sun Pharma and Cipla etc – while extending the range of drugs that are subject to price controls.

While implementing these controls, the government also announced its plans to phase out loan licensing (which is a form of contract manufacturing). By removing these loans, the government is trying to tackle general drug quality issues, believing that smaller subcontractors may not be as quality conscious as the larger drug producers. In effect, these loans are helping a number of non-competitive and inefficient players to remain in business – these players make up 40% of the total market. The withdrawal of these loans will force many groups to restructure and build their own in-house production to higher standards.

To add further fuel to the fire, the government is also proposing to raise import duties on active pharmaceutical ingredients to help boost the domestic market, a move that will add pressure on an already strained sector by raising short to medium-term manufacturing costs.

While the government’s restrictions force production costs to rise, price controls and a generally stronger rupee is putting pressure on revenue generation, which has led to global fear of a compression in margins.

Historically, India has been full of corruption and given a lack of governance, businesses have always looked to cut corners. As a result, the USFDA put several drug producers on watch as they found irregularities with many of the factories.

Stories of irregularities in production have damaged the industry

Stories of irregularities in production have damaged the industry

Product Pricing Pressure & USFDA

There are a great many pharmaceutical companies in India, making it a highly fragmented market that is overloaded with generic manufacturers. High fragmentation creates instability and uncertainty and has resulted in significant underperformance over the past 24 months. Furthermore, so much competition within the sector has forced profits lower, and this has not been helped by reforms being imposed by the Indian government and the USFDA.

Export focused industries worried about Trump

america first

Indian merchants within export-focused sectors with significant links to the United States have become very apprehensive about the growing noise from within the White House for higher import tariffs. India’s pharmaceutical sector is heavily exposed to the US market, which accounts for at least 20% of revenues generated by Indian pharmaceutical companies. Donald Trump’s protectionist stance has sent shockwaves across the world as he looks to put ‘America First’ and make the country self-sufficient rather than reliant on outside help.

The revenues Indian Pharma generates from different global regions

The revenues Indian Pharma generates from different global regions. Source: Hinde Capital / Bloomberg

Patent Issues

For decades, there has been a titanic battle between generic producers in India and Big Pharma giants across the world. Major pharmaceutical producers have been looking to maintain their patents on blockbuster drugs, but there has been a significant push back from within India as it is a well-known fact that these patented drugs cost more than six times their generic cousins. High Court battles have been taking place over the past few years with large pharmaceutical giants, such as Roche, Pfizer and Novartis, all involved. In many ways, this is keeping drugs out of the hands of the average patient who is currently stuck in no man’s land. Many of the large international players have been warned sternly that they cannot hold onto the drugs they have innovated since their own inception.

For many years prior to its WTO membership, India did not recognise product patents within the pharmaceutical industry. By not granting these patents, Indian pharmaceutical companies were able to churn out the generic drugs that have establishing the country as one of the world’s leading producers. The drugs produced by India have been relatively affordable in comparison to patented counterparts, enabling India to provide cheap drugs to its own people, and as a result, it has made India the default pharmaceutical producer for many emerging countries.

With the growing number of High Court tussles, this has created significant instability as it does not offer the Indian pharmaceutical industry clear direction and only adds to the negativity that has been observed over the past two years within the sector.

The pharmaceutical industry has come under severe pressure over the past two years as political risk, pricing pressure and product/manufacturing slippages have seen the industry lose over 40% of its total value. We believe that the sector has finally got most of the negativity priced in and so it is now a good period to be investigating for alpha generating opportunities. Some of the political risks have potentially been overstated and the industry seems to be at a turning point from a regulatory and pricing perspective. 

Trade Wars – Trump is after China

Donald Trump appears hell-bent on having an all-out trade war with China. The US President has ushered in significant tariffs (tariffs that were much steeper than expected) in steel and aluminium, angering many of the United States’ major trading partners. China has slammed the proposal, suggesting that such protectionist moves will affect national security and lead to major international trade imbalances. Despite all the threats made by the United States, the damage to India is limited for now and, in fact, some industrialists within India believe New Delhi should take a lead from Trump’s trade policies, as his current play is an important step towards safeguarding the steel industry.

The whole integrity of the World Trade Organisation may be in jeopardy because of the attitude that the US has taken. As of now, India should not worry, but ‘when two elephants fight, grass will be trampled’. Once the dust has settled, India will be in a better position to rebuild itself, as the country is independent of the bipolar framework and has few enemies across the world.

The former Indian ambassador to the US, Meera Shankar, believes that this situation has the potential to undermine world trade, but for now the impact will be limited as countries look to use dispute mechanisms, where they introduce national security as a trade guard. Furthermore, Shankar believes that India has significant safeguards in place in order to protect its national interests and suggests that there are other markets outside of the US that India could come to agreement with.

The situation is important because India’s current exemption from Trump’s ire is symbolic. Even though Trump is beating his chest and attempting to show his power position, if the US ever dropped out of the WTO (as they have threatened) it would have a significant impact on its own exporters, as they would lose preferential access to many global markets and US consumers would face higher prices on many imported goods. Even though the country has free trade agreements with 20 nations, this only accounts for 40% of American trade and it would ultimately have a very detrimental impact on the US.

USFDA Dishing Out Fewer Warning Letters

Over the past two years, Indian pharmaceutical producers have had a significant issue with quality controls and manufacturing slippages across a number of different production factories. It is important to note that this has been an issue across the whole industry.

Many of the issues have been blown out of proportion and misreported by the media: it has not been well documented that many producers in India have been collaborating with the regulators, investing in automation and training staff over this same period. This has resulted in Indian pharmaceutical plants receiving less than 33% of USFDA warning letters. This is a significant improvement as the share of Indian sites receiving warning letters was approximately 50% only three years ago. The Indian Pharmaceutical Alliance (IPA), which represents the top twenty drug makers, began an initiative to improve quality standards in 2015 and the efforts seem to be paying off. Companies have built awareness and steps are now being taken to improve investigation. Increasing the size and base of quality talent in the country is another aim for 2018.

Pricing Pressure

High competition and supplier consolidation have translated into pricing pressures, which are expected to continue to impact exports. The haemorrhaging of value over the past two years has been blamed on the dwindling exports to regulated markets, particularly the US and the EU, which account for over 80% of exports.

Lower generic opportunities, rising competition, supplier consolidation and regulatory alerts on production have been a major headwind for Indian pharmaceuticals. Sales in regulated markets are expected to rise as there has been a marked reduction in the number of regulatory alerts being placed on Indian pharmas. Increased efforts towards remediation in 2017 have resulted in the closeout of some regulatory alerts. With this expected to continue over the next two years, exports are projected to improve, and this will benefit companies and their ability to generate more investment for R&D. With this increase, certain groups of pharmas are expected to shift their focus from conventional generics to complex generics and biosimilars as competition within conventional generics has created pricing pressures. While the cost of developing niche complex drugs and biosimilars is substantially high, the potential market opportunity and profitability are appropriate.

R&D investment

R&D is on the rise. Source: E&Y

The higher investment in niche and complex drugs over the past few years is expected to start bearing fruit in fiscal 2019. The number of high value drugs likely to be launched next year is three times more than in fiscal 2018. Even the market potential of the drugs to be launched is significantly higher than in the previous year.

Growth of Biosimilars

A bi-product of the  battles between the global pharmas and domestic generic producers is that local Indian pharmaceutical players are teaming up with smaller international drug producers within the growing biosimilar industry. Recently, Biocon and Mylan have partnered to sell their version of Roche’s drug for treating variations of breast and gastric cancer.

The biosimilar industry is enabling local pharmaceutical producers to navigate their way around the issues surrounding generic drug production. Biosimilars is a new class of treatments, offering cost savings for some of the most expensive medicines. After decades of research, the biosimilar industry is only at the beginning of its adoption phase. Biosimilar and generics not only differ in size, stability and characteristics, but also in the way they are produced and how they behave over time. Unlike generics, in which the active ingredients are identical to the small molecule drug, biosimilars are not identical to the reference drug and have a different structure.

At the end of 2015, the global biosimilar market was worth $2.29 billion and this is expected to grow to $6.22 billion by the end of 2020. In many ways this will allay fears within India’s pharma industry, as growth in the biosimilar sector will eventually negate the disruption that has been seen within the generics industry. India’s medical market is morphing and taking a key role within the global biosimilars business, easing the economic difficulties encountered over previous years.

There is also now a significant backlash from within the United States as medical students studying at elite universities have started to speak out against drug giants, such as Pfizer, and the cases that they have launched to block generic production in India for cancer treatments. These individuals have expressed how disheartened they are that licensing decisions are contributing to the rising cost of healthcare and have kept these treatments away from poor people across the world. Such pressure from within the country where these drugs were first discovered and produced, is creating significant negative publicity for Big Pharma. In certain situations, these giants within the industry are removing their filings from within India’s High Court.

There will be an end to the issue within the generics industry, and when this is eventually resolved, India’s pharmaceutical industry will be in a position to generate revenues through both biosimilars and its traditional generics industry, providing a dual channel to accelerated growth.


The past two years have been a torrid time for the pharmaceutical industry in India as it has been dragged down by key battles between generic producers and Big Pharma players across the world. The industry has faced stringent regulatory changes that have highlighted manufacturing and quality slippages. Finally, pricing pressures due to a fragmented market and dwindling exports, caused by a lack of confidence, have set hard the negativity that exists within India’s pharmaceutical industry.

After the beating that the industry has received of late, it appears most of the negativity has been baked into its total market value. The industry is starting to see some light at the end of the tunnel with the development of its biosimilars industry. This supports the fact that fewer alerts are being placed against the domestic producer by the USFDA. Local pharma players have invested heavily into automation, their processes and workers in order to help eradicate the quality and manufacturing issues that they have faced. As a result, exports are expected to rise as confidence increases and price pressures are reduced, helping to turn around the sector. Trade wars may be a key political theme, but this is a situation that will affect every nation across the globe. When China and the US have fought and the grass has been trampled, India as a nation will be poised to recover from any global situation. In many ways, this trade war rhetoric has been overdone.

The pharmaceutical industry in India has been beaten down, but it seems as though we are now at a turning point. Whenever we are in these situations, there are several opportunities to generate alpha and we believe there is no better time to investigate these long-term opportunities.

This report is taken in part from Hinde Sight letters. You can view the full report and sign up for similar research here  

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