Brief report on medicines segment, trend in health care sector, opportunity for private player and scope.

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Market Analysis report for Medicines segment of
Healthcare Industry
Overview:
Over the years, India has made significant strides in the advancement of healthcare
and the quality of life. Recently in India, the life expectancy of a person is 64.4
years, a notable increase compared to the situation in the early 1990s. However,
the WHO estimated in 1999 that the percentage of the Indian population having
sustainable access to essential drugs was within the 0-49 range, resulting in India
being categorized as a country with a low-level access to healthcare (Basak, 2005).
It is often held that the main obstacles preventing consumer access to medicine are
economic constraints, particularly as a majority of Indians reside in rural areas.
Recently, drug costs are among the main drivers of the overall healthcare cost
inflation along with more aggressive contract bargaining by doctors, hospitals and
new medical technology. Within this scenario, there is a need to ensure that
economically weaker sections of the population in rural India (who exhibit higher
rates of disease proneness, higher infant mortality, higher malnutrition and lesser
life expectancy) have better access to medicine. One of the remedies in tackling the
problem of the escalating cost of healthcare in general and that of the drugs in
particular has been the use of generic drugs. Generic drugs are expected to play an
important social role in making life-saving drugs available at lower prices. That is
why governments of several countries including the USA are encouraging generic
manufacturing. Recently, the world generics market has grown to a level of $50
billion. In all countries, generics are far lower priced than their branded
equivalents. That is the very objective of the generics option. Almost 15 percent of
the formulation market in India is generics of anti-invectives, analgesics, anti-
diarroheals and cough and cold preparations. Large portions of these products go to
bulk users like hospitals, nursing homes and medical practitioners. The
composition of the Indian pharmaceutical market is a mixed one with 57 percent
formulations, 15 percent bulk and 28 percent exports. Exports form a vital
component of the growth strategy of most Indian pharmaceutical companies and
the growth over the last five years has been more than 20 percent. The USA is the

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largest export market for Indian pharmaceuticals. A major share of Indian
pharmaceutical exports is destined to highly regulated markets such as that of the
USA, Germany, UK and The Netherlands. The Indian generic drug manufacturing
has seen a substantial rise over the last few years and is expected to be the main
growth driver in the future. During the period 2002-2005, the market for generic
drugs exceeded US$55 billion. India, with its technology, R&D facilities and
trained human resources can capture a significant part of this market. With new
drugs slated to be introduced in the Indian market, the share of patented drugs is
expected to rise. Patent expirations would contribute to the growth of the generics
market. Advanced countries like the USA are publicising increased consumption of
generic drugs especially by the fixed income older generation. This is expected to
further bolster the generic drug production market in India. The Indian
pharmaceutical industry has shown tremendous progress with reference to
infrastructure development, technology base creation and the development of
production. The pharmaceutical industry produces bulk drugs belonging to major
therapy groups. India ranks fourth worldwide accounting for 8 percent of the
world’s production in terms of volume and 13 in terms of value. The industry has
developed good manufacturing practices facilities for the production of different
dosage forms. The pharmaceutical industry exports drugs and pharmaceuticals
worth over $3.8 billion. It ranks 17th in terms of export value of bulk actives and
dosage. Indian exports cover more than 200 countries including the highly
regulated markets of the USA, Europe, Japan and Australia. Therefore, the
opportunities for the Indian pharmaceutical industries are – scope for generic drug
production market, contract research, lean manufacturing, clinical research and
trials, significant export potential and supply of generic drugs to developed
markets. The fact that Karnataka High Court and subsequently the Indian Supreme
Court stayed the implementation of pharmaceutical policy 2002 questioning the
stand of government over the exclusion of many essential drugs under the gambit
of price control reveals the importance of price-controlled essential drugs in India.

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Table: The average scores of patients’ awareness and perceptions about generic
drugs

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Statistics of healthcare:
1.
While India has 20 per cent of the world’s disease burden, it has far less than
its share of doctors, nurses and technicians.
2.
In terms of hospital beds per 10,000 people India is far, far behind other
countries. This is because of abysmally low spending.

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3.
India’s public spending on health care, as a percentage of GDP, is lower
even than in Haiti. Note that this does not mean the spending on health care
in general is very low.
4.
Four per cent of GDP goes on health spending.

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5.
What this means is that private health care has grown at a fast clip of 15 per
cent a year.
6.
Most of that money is spent on hospitals, and practically nothing on
insurance.

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7.
The difference between India and the rest of the world in health spending
here it is a private, out-of-pocket expense.

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Some of finding from Mckinsey report:
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OPPORTUNITIES AND IMPERATIVES FOR THE PRIVATE SECTOR
In this section, we discuss about the driving forces that are likely to shape the
industry in the next decade. We then identify opportunity areas these forces create
for the sector, and the imperatives necessary for players to capture these
opportunities. We discuss about four industry segments – providers (including
diagnostics providers), insurers, pharmaceutical manufacturers and devices and
equipment manufacturers.
Drivers for growth
The private industry stands at an interesting juncture, facing several headwinds and
tailwinds. We have identified the drivers that will shape the private sector
opportunities.
▪ The rising burden of NCDs: As the prevalence of non-communicable
diseases balloons in the next decade, policy makers as well as insurers should
increasingly push for long-term care models as opposed to event based models that
are currently the norm. This approach will be a more holistic one, and will also
drive the need for increased diagnostics and sophisticated devices.
▪ Increasing affordability: With rising income levels across the population, as
well as increasing insurance coverage, the number of patients accessing health
services will rise. This fact is reflected more strongly in the rural and urban middle
class clusters. These ‘consuming’ classes will see the addition of nearly 150
million people over the next decade. Social insurance coverage under RSBY and
state schemes will likely increase over the next plan period. Similarly, private
insurance penetration has increased from 4 per cent to 7 per cent over the past
decade and trend is expected to continue.
▪ Increasing awareness of disease, prevention and treatment: Rising awareness
of health and related outcomes, and the rising perceived need for health insurance
will lead to more patients exhibiting care seeking behavior, especially if covered
by insurance.

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▪ Evolution of the six India’s, leading to newer and varying business models:
Different population clusters vary significantly in terms of access, epidemiology
and expenditure and are growing at highly different growth rates. These
differences will drive the industry to evolve different business models for each. For
example, the urban poor, which is currently the most neglected segment from a
healthcare access perspective, will grow to nearly 10 per cent of the country’s
population by 2022. The provider industry will need to explore ways to serve this
large population group at right price points. A low cost model will be needed.
▪ Addition to and improved utilization of the existing medical workforce: This
will be applicable to the country’s strength of general practitioners, specialists,
paramedics, technicians and nurses, whose numbers has been a key constraint to
the expansion of the provider and equipment’s industry.
▪ scaling up of public infrastructure: This will drive the growth of all
associated healthcare industries. Depending on the government’s choice of a pay or
provider role, the relative distribution of public versus private infrastructure will
differ.
▪ Margin pressures will increase: As costs of manpower and utilities continue
to rise, while prices come under competitive and regulatory pressure, the private
sector will witness a steady pressure on margins.
▪ Saturation of the metro and urban centers: Analysis reveals that currently
urban India enjoys 3.4 beds per 1,000 populations, higher than global average of
2.6. This of course does not take into consideration the well-known ‘drainage
routes’16. Within India towards the urban centres. Nonetheless, it does reveal the
dramatic crowding of the sector in the metros. Discussions with leaders in the
sector highlight the resultant pressures on utilization and pricing17.
▪ Governmental push to ensure equitable access to affordable health services:
This stated position, as per the Twelfth Five-Year Plan, could likely lead to a
regulatory environment that aims at reducing the cost of care and OOP spend. The
government should ideally take a holistic system-wide view to this cost
containment.

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▪ Stronger regulatory framework can shape efficiency and performance levels
of the private sector. It is likely that the government will strengthen the regulatory
framework through the standardization of treatment guidelines, enforcement of the
Clinical Establishment Act, and stronger redressed mechanism against
malpractices is likely.
We fully expect India’s healthcare sector to grow at a steady pace during the next
decade. The share of value added between the private and public sectors will
depend in large measure on the pathway government adopts and the choices it
makes. Notwithstanding these choices, we expect the sector to grow at a CAGR of
15 to 17 per cent, reaching up to 5 to 6 per cent of GDP. This will imply that total
spending in healthcare could well be in the range of INR 17,00,000 crore to
21,00,000 crore by 2022. Needless to say, such growth will take place provided the
government and other stakeholders choose to undertake the challenging journey of
health reforms.
Opportunities and imperatives for the provider industry
As we discuss ‘providers’, we refer to the entire industry, including diagnostic
services. We will make explicit references to diagnostic providers or unique
business models only in cases when the implications for these segments are
different.
Traditional opportunities for the provider industry are well known. Beyond these,
the opportunities that stand out are:
▪ Non-communicable diseases. NCDs represent an important high-volume and
high-value opportunity. For the hospital, the ‘lifetime value’ of the patient will go
up at no incremental capex.
▪ Non Metro urban market. This geographic segment will provide a large
opportunity even for secondary and tertiary multispecialty hospitals. The business
model for these hospitals will need to be adapted to lower costs, and staffed with a
different doctor pool.

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▪ The urban poor. This is the segment in which the private sector has the
lowest penetration.
Less than 50 per cent of hospitalizations take place in the private sector. This
cluster will represent 10 per cent of India’s population by 2022, and could
represent an interesting source of growth in metros.
▪ Government sponsored social health insurance programs. This opportunity,
combined with the one above, will open doors to a hitherto underserved
population.
Early examples indicate that it is possible to develop low cost facilities to focus on
such program.
To capture these opportunities, providers will need to undertake three imperatives.
First, invest in business model innovation. Corporate chains will require different
modules within their network - with different levels of capex, equipment usage,
doctor models, non-healthcare services and utilities, and modes of payment.
Second, maintaining profitability and ROIC18 in the existing facilities through
greater operation efficiency and optimization of capital. Third, collaborate with
other stakeholders in ‘private-private partnerships’ to plug leaks in patient funnel.
This requires solutions that increase awareness, improve access to diagnostics,
improves follow-up on referrals and strengthens trust amongst patients.
Opportunities and imperatives for the pharmaceutical industry
The Pharmaceutical industry has seen robust growth of 13 to14 per cent during last
five years. India’s domestic drug market was estimated at nearly INR 63,000 crore
in 2010. Going forward, four opportunities stand out.
▪ Metro and tier-I markets. These geographies will continue to make
significant contributions to growth, driven by rapid urbanisation and greater
economic development. However, even here, medical treatment and compliance
levels need significant investments and enhancement.

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▪ The urban poor. This cluster is one of the fastest growing and much
neglected segments.
Geographical proximity makes it easier to tap than the rural segments.
▪ Infectious diseases and vaccines. If government adopts a provider role and
continue with its thrust on immunization, there will be new opportunities in these
therapeutic areas.
▪ The rural population. This is currently the most underserved of all
population clusters. A profitable model to penetrate these markets at scale will
need to be worked out.
To capture six opportunities, the pharma industry will need to undertake the
following imperatives. First, protect margins and drive costs and efficiencies to
cope with price pressures and changing demand landscape. Low cost
manufacturing and improving operational efficiency will be critical. Second,
segment the market at a granular level and develop different business models for
different opportunities .Third, strengthen two sets of commercial capabilities:
marketing excellence and sales force excellence. Fourth, leverage partnerships
across the value chain (e.g., with providers, diagnostics) to plug leakages in the
patient funnel. Fifth, engage with government extensively, particularly if it adopts
the provider model. Sixth, design its commercial model to cater to the rural
population.
Opportunities and implications for medical devices and equipment industry
The medical devices and equipment sector is seriously under-penetrated in India.
Poor diagnosis and treatment rates combined with an absence of affordable
products have led to this situation. If Indian healthcare were to fulfil its promise in
the next decade, the following opportunities would arise for medical devices and
equipment players:
▪ High income population segments in metros and tier I markets. Unlike in
pharmaceuticals and providers, this population segment continues to remain

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underpenetrated for medical devices. In order to capture the full potential, players
would need to drive awareness and acceptance. Orthopedic reconstructive joints
and pacemakers are cases in point.
▪ Mid-income segment in urban areas. The potential in this segment is
underpinned by a large and growing population, rising incidence of non-
communicable disease, old age and greater access to diagnosis and treatment. To
capture this opportunity players will need to introduce products with mid-tier
pricing and coordinate with the other players in the value chain to provide a low
‘cost of treatment’ offering.
▪ Home-based self-monitoring devices. This opportunity is supported by the
growth of chronic diseases, greater awareness and compliance. In addition, we
witness a growing tendency amongst patients to become self-reliant with regards to
non-invasive and periodic monitoring for chronic disorders.
▪ Provider based equipment. This opportunity will grow, driven by an increase
in healthcare delivery facilities. To accelerate this growth innovative financing and
public-private partnerships (PPP) will be crucial.
To capture these opportunities, the private sector will have to undertake the
following imperatives. First, strengthen commercial capability to cater to the
traditional urban rich segment. Second, introduce globally relevant products with
state-of-the-art features targeting specialists and super-specialists in metros. Third,
enhance product development capabilities to offer product with reduced features at
mid-tier pricing. Fourth, drive collaboration across players in the business system
in order to provide end-to-end treatment solutions. Fifth, for provider based
equipment, drive innovation in financing and PPP models to develop solutions that
can be scaled up.

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Conclusion:
Drugs always constitute an integral and important part of any healthcare system; it
has been estimated that medicines, which consume 70% of total public and private
spending on health in developing countries, present a key challenge to achieving
universal coverage. Provision of incorporation of generic drugs is often considered
as a cost-effective and attractive option for moving ahead with healthcare reforms
in developing countries. High spending on medicines and inefficient use of them,
threatens the financial viability of a UHC scheme. With various recommendations
for strengthening the healthcare system in India and implementation of a UHC, it
will be important to see how the proposed changes affect the life sciences industry.
Kinapse contends that the following trends could be observed if a UHC is
implemented in India.
 A UHC will grow the generics market primarily in the public sector, with
low prices moderating the financial impact of increased volume, eroding
margin for MNC generic players competing with low-cost locals.
 Innovator brands are already under significant threat due to the recent court
orders related to the CL of Nexavar and the listing of Sprycel, Ixempra and
Herceptin, which are considered to be priced too high for India as next CL
candidates. Allowing generic versions of these drugs to be sold harms both
MNC pharma revenues and Indian public health as new products are less
likely to launch in India.
 Despite these twin pressures, a UHC will unlock pockets of value in a
growing Indian healthcare market, which agile MNCs with smart customer
segmentation and supportive pricing strategies
Over the next decade, the market will proliferate, presenting a variety of
opportunities. To lead, players must not only participate across multiple
opportunity areas, but also significantly modify their business models to enable a
profitable scaling up.

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Pharmaceutical companies have taken note of new opportunities and begun to
make meaningful investments in these areas. On balance, multinational companies
have probably covered more ground. Most leading multinational companies have
set bold aspirations for their India businesses, adopted a localized model including
dramatic sales force ramp-ups and branded generics launches, and made major
investments in their local organizations. Leading local players have made
investments in market creation, developed differentiated business models and
maintained the momentum of new product launches.
While these are all steps in the right direction, a lot more needs to be done to fully
capture the potential of the market. The requirements for leadership have gone up
manifold. Enhanced competitive intensity and a rapidly evolving market have left
limited room for complacency. For instance, a few years ago, market creation
entailed expanding therapies to new doctor segments and geographies, identifying
opportunities in underpenetrated therapies, and deepening penetration in
established markets. These levers remain important, but are not sufficient anymore.
Market creation during the next decade will involve collaborating with a broader
set of partners to enhance diagnosis rates and compliance, thereby changing the
very nature of the patient funnel.
Another suitable example is the rising importance of large brands, particularly in
the context of dwindling generics launch opportunities. Not only can the large
brands make up for the gap created in the topline, they can also bolster
profitability. Unfortunately, over the last few years, large brands have not kept
pace with the market and lost share. This is a cause for concern.
While winning in the Indian market will require cross-functional focus, the
capabilities that require the most substantial improvements are related to the
commercial model. We believe that three commercial capabilities will be critical.
These capabilities will need to be supported by a strong organization and
collaborative partnerships with stakeholders within and outside the industry.
Commercial operations will be a source of differentiation. Profitability will remain
a major focus area for leading players. Business building investments in non-
traditional opportunities, coupled with heightened competition and a rising cost of
talent, will result in margin pressures. In order to safeguard profitability, and

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consequently encourage market investments, players will need to seek productivity
enhancements in marketing and sales operations.
Sales force costs, promotional expenditure, and supply chain are three potential
areas that offer opportunities for enhancing productivity. Greater sales force
productivity will be a function of differentiated sales force models, heightened
performance management, and capability building. In the area of promotional
spending, clear linkages are often missing between brand strategies, their likely
sources of business, differentiation and messaging, and the consequent spend
allocation plan. Further, players will have the opportunity to create an efficient
supply chain, and enhance the viability of accessing hitherto difficult-to-reach
markets. Even partial improvements in processes can increase margins by a
percentage point, without accounting for any decline in lost sales. Aspirants for
market leadership will do well to master these three capabilities.