Four Opportunities in India's Pharmaceutical Market
Garg, Rajesh, Kumra, Gautam, Padhi, Asutosh, Puri, Anupam, The McKinsey Quarterly
Since price decontrol the nominal growth rate has increased to 19 percent per year
One key option: outsource production of bulk actives or intermediates
Even after shipping costs, import duties, and local trade margins, formulations sourced from India to international markets are likely to generate hefty margins
Previous experience has led multinational pharmaceutical companies to cast a jaundiced eye on India's basic research capabilities. They should reconsider
For the past quarter of a century, multinational pharmaceutical companies have shown limited interest in India. Protectionist policies introduced by the Indian government in 1970 hit profits hard, and companies have been further deterred by the lack of intellectual property rights. As a result, MNCs have just 30 percent of India's pharmaceutical market, compared with 80 percent 25 years ago [ILLUSTRATION FOR EXHIBITS 1 AND 2 OMITTED]. Yet the climate is changing. As part of government efforts to liberalize the economy, regulations governing the industry are being abolished or simplified, and price levels are rising. At the same time, increased personal spending, fuelled by economic growth and greater access to medical care, is helping to expand the market.
These changes make it an appropriate time for multinationals to reconsider India. Opportunities exist not only to expand market share rapidly in the country itself, but also to use it as a base for sourcing bulk actives and intermediates,(*) for sourcing formulations for export to other developing nations, and for research and development. Together, these four areas of opportunity could represent from $300 million to $800 million of net present value to a leading multinational. To capture this value, however, MNCs will have to consider fundamental strategic and operational changes, which in turn will require them to rethink traditional management policies and practices.
A change of climate
The regulatory changes initiated in 1970 were aimed at establishing a thriving domestic pharmaceuticals industry driven by low costs and pirated or generic products. Drug prices were set at levels that were sometimes no more than 4 percent of developed market prices (resulting in a market ranked sixth in volume terms, but about fourteenth in market value), import tariffs were high (above 200 percent in the 1970s) in order to encourage domestic manufacturing and prevent the outflow of foreign exchange, and foreign direct investment in any business was limited to 40 percent, curbing MNCs' earnings from Indian operations. Patent laws protected processes only - product patents were open to reverse engineering.
These restrictions had various effects on MNCs' activities. Some stopped selling products that were priced too low, while others continued to compete but created new local brands to prevent their international brands being exported from India and sold cheaply elsewhere. Ceilings on foreign equity led to creative methods of redirecting or securing earnings: some subsidiaries entered into royalty-bearing licensing agreements with their parent companies; some parent companies charged inflated prices for raw materials. In addition, Indian subsidiaries were discouraged from exporting; export markets were more profitably served by an MNC's 100-percent-owned operations.
The absence of patent protection led many multinationals to limit their portfolios to patent-expired products or a few selected patented products a move that further eroded their market share as local competitors went ahead and introduced the most advanced medicines through reverse engineering. Additionally, for medical, legal, or economic reasons, most were unwilling to introduce products not already on their international product list simply to cater for the Indian market, limiting their participation in the Indian-branded generic market. Finally, MNCs were generally unwilling to introduce products that infringed other companies' non-Indian patents (despite local company practices and the regulatory freedom to do so). …