This document describes current structure and reimbursement policies in Pharmaceutical industry in India and also comments on the way forward.

1. 1
 June 2017

2. Index
- Healthcare Structure
- Healthcare Expenditure
- Pharmaceutical Industry Overview
- SWOT Analysis
- National Pharmaceutical Ecosystem
- Regulatory Framework & Pricing Mechanism
- Reimbursement Structure
- The Generic Market
- A leading player, GSK’s performance in India
- Way Forward
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3. Healthcare Structure
• The private healthcare sector is responsible for the majority of healthcare in India. Most healthcare expenses are paid out of pocket by patients and
their families, rather than through insurance.
• The overall Indian healthcare market is worth around US$ 100 billion and is expected to grow to US$ 280 billion by 2020, a Compound Annual
Growth Rate (CAGR) of 22.9 per cent.
• Healthcare delivery, which includes hospitals, nursing homes and diagnostics centers, and pharmaceuticals, constitutes 65 per cent of the overall
market. The Healthcare Information Technology (IT) market which is valued at US$ 1 billion currently is expected to grow 1.5 times by 2020.
• India requires 600,000 to 700,000 additional beds over the next five to six years, indicative of an investment opportunity of US$ 25-30 billion.
Given this demand for capital, the number of transactions in the healthcare space is expected to witness an increase in near future.
• A total of 3,598 hospitals and 25,723 dispensaries across the country offer AYUSH (Ayurveda, Yoga & Naturopathy, Unani, Siddha and
Homoeopathy) treatment, thus ensuring availability of alternative medicine and treatment to the people.
• The hospital and diagnostic centers attracted Foreign Direct Investment (FDI) worth US$ 4.09 billion between April 2000 and September 2016,
according to data released by the Department of Industrial Policy and Promotion (DIPP).
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Source: IBEF.org
13,849.50
3,592.10
1,097.13
Drug and Pharmaceuticals Hospitals and Diagnostics centres Medical and Surgical appliances
FDI Inflows in Healthcare sector (from April 2000-March 2016)
Cumulative FDI inflow(US$ million)

4. Healthcare Expenditure
• Healthcare expenditure in India amounted to Rs 7,550bn (USD113bn) in 2016 and is expected to reach Rs 13,768bn (USD196bn) by 2021 and
Rs 24,801bn (USD342bn) by 2026. This represents a compound annual growth rate of 12.6% in local currency terms and 11.7% in US dollar terms.
• As a proportion of GDP, healthcare spending amounted to 5.5% in 2016.
•On a per capita basis, health spending remained low at USD85 in 2016.
•Government health expenditure remained low in India, amounting to INR2,276bn (USD34bn) in 2016.
• Private health spending continues to be the main contributor to total health spending at 70%. This amounts to INR5,274bn (USD79bn) in
2016.
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2015 2016 2017e 2018f 2019f 2020f 2021f
Pharmaceutical sales,
USDbn
16.612 17.713 19.262 20.880 22.845 24.974 27.252
Pharmaceutical sales, % of
GDP
0.82 0.86 0.85 0.85 0.84 0.84 0.83
Health spending, USDbn 104.294 113.018 125.309 138.859 155.659 174.573 195.692
Pharmaceutical sales, % of
health expenditure
15.9 15.7 15.4 15.0 14.7 14.3 13.9
Headline Pharmaceuticals & Healthcare Forecasts (India 2015-2021)

5. Pharmaceutical Industry Overview
5
30%
70%
Emerging Markets
Rest of World
Total Sales: USD1,190 Bn.
Industry Growth drivers
• 73 million households in the middle and upper middle income segment
• 650 million people will have health insurance coverage with largest impact through Government
sponsored programs focusing primarily on Below Poverty Line segment
• Growing Medical infrastructure with an anticipated investment of USD200 billion over next
decade
• Prevalence of diseases such as Diabetes and Cancer will grow significantly
• By 2020, pharmaceutical consumption through Hospital channel is expected to reach 25-30%
from 15-20% market share
*Numbers are sourced from McKinsey report
70%
21%
9%
India - Sales Share
Generic Drugs
OTC Medicines
Patented Drugs
The government is aggressively pushing for the use of low-priced unbranded generic medicines through Jan Aushadhi stores. However, limited number
of stores, shortage of medicines, lack of publicity and poor monitoring didn’t really help the scheme to take off.
India is the largest provider of generic drugs globally
with the Indian generics accounting for 20 per cent of
global exports in terms of volume. Branded generics
dominate the pharmaceuticals market, constituting
nearly 80 per cent of the market share (in terms of
revenues).
The Indian government has taken many steps to reduce
costs and bring down healthcare expenses. Speedy
introduction of generic drugs into the market, the thrust
on rural health programs, lifesaving drugs and
preventive vaccines has remained in focus.
Presently over 80 per cent of the antiretroviral drugs
used globally to combat AIDS (Acquired Immuno
Deficiency Syndrome) are supplied by Indian
pharmaceutical firms.
6
30
36.7
55
2005 2015 2016 2020F
Revenue of Indian Pharmaceutical Sector (US$ Bn)
Source: Dept of Pharmaceuticals, PwC, McKinsey

6. SWOT Analysis
6
Strength
• India exports 20% of Generics global demand, in terms of
volume
• Cost of production is approximately 60% lower than in US and
almost half of that in Europe and the cost of setting up a
production plant is 40% lower than in Western countries
• Highly competitive market where 20% market-share is acquired
by Top 4 firms; there are more than 10,500 registered
manufacturing units and over 3,000 pharma companies
• An average of 8-11% of total revenue is being spent on R&D,
spurring increased Clinical Trial activities
• Recently, consolidation has become an important characteristic
of the highly fragmented Indian pharmaceutical market
Weakness
• Non-adherence to global standards and thereby unacceptable
quality product and counterfeiting
• Under-developed medical infrastructure
• Bio-technology sector is still at a nascent stage and already
facing strong competition from Chinese counterparts
• Inefficient drug pricing and reimbursement policy
• Household expenditure incurred on healthcare is negligible
Threat
• High dependence on US market
• Worldwide muted growth along with change in political control in
some bigger markets puts a downward pricing pressure on
pharmaceutical suppliers
• Drug Price Control Order made by the Government put undue
pressure on product prices which affects the profitability of the
pharmaceutical companies
• Government’s push for unbranded generics pose a long term
negative effect on branded suppliers
Opportunity
• Government-sponsored initiatives such as Rashtriya Swasthya
Bima Yojana and Employee's State Insurance compel increasing
penetration of health insurance across nation
• Favorable federal policies such as 100% FDI, quick turnaround
of NOC for export license and Zero duty for technology upgrades
in the pharmaceutical sector through the Export Promotion
Capital Goods (EPCG) Scheme
• Increasing urbanization in Tier 2&3 cities with improving
infrastructure and higher propensity to spend is going to be the
next driver of growth in healthcare segment
• Increased penetration of pharmacists, especially in rural regions,
would increase the availability of OTC drugs in the country

7. National Pharmaceutical Ecosystem
Prices of drugs and medical devices in India get artificially inflated due
to high promotional expenses and steep mark-ups at various stages of
the supply chain before they eventually get to the patient. Out-of-pocket
expenditure constitutes more than 60%of all health expenses, a major
drawback in a country like India where a large segment of the population
is poor.
This year the Parliament has cleared two bills including the Mental
Healthcare Bill, 2016 that decriminalized suicide attempts and the
Human Immunodeficiency Virus (HIV) and Acquired Immune Deficiency
Syndrome (Prevention and Control) Bill, 2014, making it obligatory for
the Central and state governments to provide anti-retroviral treatment for
HIV positive people.
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GST Regime
As per the GST rates - life-saving active pharmaceutical
ingredients (APIs) will be charged 5%, other APIs 18% and
formulations at 12%. Finished medicines come under the 12%
slab of the recently announced GST rates. Currently, the
combined excise duty and VAT on a pharmaceutical product for
retail sale is about 9% of MRP (with the tax on inputs for bulk
drugs pegged at 12.5%).
16%
13%
11%
9%8%
7%
7%
29%
Indian pharmaceutical market segments by value
(FY15)
Anti-infectives
Cardiovascular
Gastro-intestinal
Respiratory
Vitamins, minerals
Pain/analgesic
Anti diabetic
Other
The domestic drug market grew at 8.3% in April 2017 compared to
5.5% growth in the same period last year, according to data from
market research firm AIOCD-AWACS. Segments like anti-diabetic and
derma have grown by double digit and anti infective segment has not
de-grown for the month. Cardio segment has posted single-digit growth
for the month, central nervous system (CNS) also growing by single
digit.
Indian companies grew by 9.1% for the month while the MNC grew by
5.2%. Sales of drugs under non-national list of essential medicines
(NLEM) category grew at 10.4 percent in March, while NLEM declined
5.3%.
Source: IBEF.org, 2017

8. Regulatory Framework & Pricing Mechanism
The drug prices in India are controlled using what is called the Drugs (Prices Control) Order (DPCO) issued by the government under Section 3 of the
Essential Commodities Act, 1955 empowering it to fix and regulate the prices of essential bulk drugs and their formulations. NPPA controls and
regulates the prices of Pharmaceutical drugs in India.
The current DPCO has three primary aims:
• Expanding the National List of Essential Medicines (NLEM)
• Authorizing the NPPA to regulate prices of India’s NLEM
• Authorizing the NPPA to regulate price increases of non-essential medicines
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Market-based Pricing
• The DPCO uses market-based mechanisms to set
price ceiling (the ceiling price is decided by taking the
simple average of prices of brands with more than 1%
market share). In the case of each bulk drug, which is
under price control a single maximum selling price is
fixed that is applicable throughout the country and
that is called as ceiling price.
• The categorization is done based on the number of
competitors in that category- if there are many drugs
in the same category then the price cap is calculated
based on the average price of the available drugs
which collectively have at least 1% market share in
category and if the drug is the “only” drug available in
the product category then the price cap for that drug
is the “fixed percent” and this fixed percent
calculations are based on the price reduction done in
similar drug categories, of the current drug price.
• This market based pricing (MBP) move initiated by
the Government of India is highly debatable and has
come under severe criticism from various Non-
governmental organizations (NGOs).
The ‘National Health Policy, 2017’ calls for patients to receive drugs, diagnostics and
emergency care services for free in all public hospitals. It also proposes to accelerate
public health spending to 2.5% of GDP, from the current 1.4%, by 2025.
NPPA Out
NPPA to be wound up in its present
form and deployed in dept of pharma
with new mandate
DPCO to be delinked from essential
medicines list
Government to regulate prices
Licence for drug manufacturing and
sale to be issued for perpetuity
Why is it needed
Controls are discouraging
investments in pharma sector
India has lost bulk drugs and
intermediate markets to China
(importing almost 90% of its
requirement)
Ease of doing business will attract
more investments
A Revamped Pharmaceutical Policy On Its Way

9. Reimbursement Structure
On an average, developed countries spend 8-9%of their GDP on healthcare and largely this is tax-funded or a form of social insurance. Government
spending in healthcare in India is only 1%. In India, two-third of the spending on healthcare comes out of pocket. That is considered one of the most
inefficient funding of healthcare.
India has no all-inclusive national health insurance and reimbursement system. However, various health insurance schemes, which are operated for
particular sections of society, offer drug reimbursement provisions for their members. According to World Bank data, only around 25% of India's
population is covered by some form of health insurance.
India lacks a comprehensive reimbursement system. To the extent that reimbursement is available under the various government schemes it is for the
most part limited to generic drugs.
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Emerging Trends in Healthcare Funding
 Growth of venture capital and private equity – heightened investor interest in the past 5 years, with transaction value increasing from 94
million USD (2011) to 1,275 million USD (2016) – a jump of over 13.5 times
 With the recently announced National Health Protection Scheme (NHPS), a precursor to Universal Health Coverage (UHC), the
government is increasingly moving towards the role of being a payor. It envisages an annual coverage of 1,00,000 INR for a family.
Implementation plans for NHPS are underway.
 A slew of investments by global health players, including the Parkway Group and a host of Middle East players, have strengthened the
perception of India as an attractive healthcare investment destination.
 The success of initial public offerings (IPOs) – four key IPOs over the last 18 months – Dr Lal PathLabs, HCG, Narayana Hrudayalaya and
Thyrocare – all IPOs were oversubscribed, reinforcing investor confidence in the sector.
Source: PwC.in

10. The Generic Market
Even though the Indian generic drugs industry is 3rd largest in terms of volume and 14th largest in terms of value globally, its long-term profitability and
sustainability remains debatable due to low entry barriers that lead to intense competition and narrow margins in the industry. Branded generics make
up to 70 to 80 per cent of the retail market.
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Areas of concern
• Efficacy of Indian-made drugs
• Lack of data integrity
• Hygiene standards of the manufacturing plants
20% 25%
50%
70%
30%
60%
80% 80%
100%
40%
50%
50%
30%
30%
40%
20% 20%25%
40%40%
0%
25%
50%
75%
100%
Sun
Pharma
(7.1%)
Dr.
Reddy's
(11.6%)
Lupin
(8.6%)
Cipla
(6.2%)
Glenmark
(10.2%)
Cadila
(6.5%)
Aurobindo
(2.9%)
Torrent
(4.8%)
IPCA
(5.2%)
R&D spend by key Indian Generic Drug Makers (2015)
(R&D as %age of sales)
Speciality
Branded
Complex
Me-Too
Leading Indian Pharmaceutical
Companies have ramped up their
R&D expenses by 4x within 5 years.
R&D has been a key focus area for
the Indian generic manufacturers as
they continue to move further up the
value chain and become more
competitive globally.
R&D on Generics
Low income per capita, ineffective reimbursement policy and prevalent
unethical practices across pharma sales channel has spurred Indian
Government to come up with an amendment of prescribing generic formulation
of medicines, as opposed to specific brands. This is expected to bring down
drug prices and expand access to affordable health solutions.
Big Pharma’s access to Indian consumers will have to be routed through
generic companies using channels such as voluntary licensing. Voluntary
licensing to a local partner under mutually agreed terms will not only help drug
makers expand the market but also avoid compulsory licensing action.
Generic Incentives

11. GSK in India
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Performance Review
• GSK is among the top ten players in the Indian pharmaceutical market, having a market share of
~3.7%.
• Since the start of fiscal 2017, GlaxoSmithKline Pharmaceuticals Ltd shares have lost almost 10% of
their value
• In the June quarter 2017, sales grew by 8%, but price cuts took away Rs.20 crore in sales, and
supply constraints took away Rs.55 crore, as per company’s Annual analyst meet.
• Financial performance has been hit by supply constraints in FY16 and some of that has continued
into FY17 as well
• On the price control front, 23% of GSK Pharma’s sales in FY16 are in the essential list that is subject
to price control
• The company commands a dominant position in the domestic vaccines market after its acquisition of
Novartis’s vaccines portfolio in September 2015
• It announced a Rs 864cr investment in India to set up a medicine manufacturing unit. The new facility
will substantially increase the company’s manufacturing base.
44%
24%
14%
12%
4%
Sales Share
Tablets & Capsules
Powders & Ointments
Vaccines
Liquids - Orals, Topicals,
Parenterals & Malt
Others
Source: ET.com
Financial Ratio comparison with Peer group
Parameters Sun Pharma Cadila Health Dr Reddy’s Lab Cipla GSK Pharma
Net Profit Margin (%) -14.09 28.10 13.26 11.61 11.24
Return on Capital
Employed (%)
-4.23 28.93 10.61 10.80 14.61
Total Debt/Equity (X) 0.26 0.17 0.27 0.09 0
GSK is operating with close to zero level of long term debt. ROCE above industry average and lower solvency risk boosts investors confidence on GSK.

12. Way Forward
Drug prices in India are among the lowest in the world driven by intense generics competition. Any further controls on pricing will impair the viability of
industry, reduce investment and wipe out USD 20billion market opportunities by 2020. Hence policy makers should consider measures beyond price
control (e.g. wider health coverage, reimbursement control) to control overall healthcare costs.
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Ensuring healthcare delivery through traditional methods will require additional investments of 245 billion USD by the year 2034. This amount can be
reduced by 90 billion USD by focusing on preventive care, leveraging technology to deliver care and shifting care from hospitals to homes.
If we get this right, 340 million more people will have access to quality healthcare, 4.3 million additional employment opportunities will be generated, and
141 billion INR will be saved for the country by preventing daily loss due to heart disease, stroke and diabetes in the next 5 years.
Thank You!