Indian drug market will grow to $20 bn by 2015, says McKinsey

Indian drug market will grow to $20 bn by 2015, says McKinsey

New Delhi: Back in 2002, Malvinder M. Singh had to choose between heading theIndian operations of Ranbaxy Laboratories Ltd or its US business. Singh, now managing director of Ranbaxy, chose the Indian business, then a pale shadow of the drug giant’s US operations.

Five years later, not only has the Indian business been turned around, Ranbaxy has become the No. 1 company in the domestic market, with the segment emerging as one of the most consistent sales engines for the company.

It isn’t just Ranbaxy, though. Once seen as a drag on growth, the Indian drug market is turning profitable with double-digit growth rates for most domestic drug makers. At the same time, the regulated US and Europe markets are facing increased competition and shrinking profits.

Indeed, according to a new report from consultant McKinsey & Co. released on Wednesday, the domestic drug market will grow to $20 billion (Rs82,000 crore) by 2015, up from $6.3 billion in 2005 and ending up in the Top 10 global markets by sales.

McKinsey predicts the market will grow at a compounded annual rate of 12.3% over the next few years, well above the 9% annual rate between 2000 and 2005. “The sheer quantum of the increase will make it top growth opportunity for every pharmaceutical company," says Palash Mitra, who authored the report, which also predicts “a major transformation for the market in the next decade." It indentified five fundamental growth drivers: increasing per capita income, medical infrastructure build-up, rising health insurance penetration, incidence of diseases, and competitive intensity in the branded generics Indian market.

The report predicts that even though chronic therapy segments—heart aielmnts, diabetes and neurological disorders—will grow from 36% to 45% of the total market, mass therapies for anti-infectives and pain management, among others, will continue to hold sway.

It also debunks a seeming shift from sales in metros to increased sales in smaller, semi-urban towns and villages. “The?Tier?I?markets are far from being saturated," says Mitra.

Another recent report by equity analyst firm Edelweiss Securities Pvt. Ltd made a similar bullish prediction on market growth, though it put that at 13-14% annually.

Edelweiss cited structural changes in the last two years, which lead to implementation of uniform good manufacturing practices, imposition of a retail price-based excise duty and concentration of drug manufacturing in excise tax-free zones for reducing fragmentation and price erosion in the industry.

The domestic market’s performance is reflected in the financials of several drug makers. Sun Pharmaceutical Industries Ltd, the largest Indian drug maker by market capitalization, saw domestic sales rise by 26% in the April-June quarter to Rs367 crore, generating 56% of total revenue. Ranbaxy and Dr Reddy’s Laboratories Ltd, too, posted increases of 19% and 16%, respectively, in domestic sales to Rs322 crore and Rs200 crore, respectively, in the same quarter.

Meanwhile, companies such as Mankind Pharmaceuticals Pvt. Ltd have benefited from the overall growth by using innovative marketing techniques. Mankind, says Chrys Capitals’ Sanjiv Kaul, has managed to be one of the fastest growing companies, month-on-month, in the last four years by focusing on the Tier II cities and rural areas first, perfecting its “business strategy without even being on the competitive radar of other companies, and then broke into the Metros."

McKinsey’s Mitra says challenges to continued growth will come from pace of reforms. “The government needs to carry out reforms in the health insurance side, build infrastructure as well as nurture human resources in health care," he said. “The research encouragement, too, has to go beyond mere fiscal incentives."