Duzela: This anti-depressant from Sun Pharma was one of the many new launches last year that drove industry growth

Phew! That's the sound of a collective sigh of relief coming from the Indian pharmaceuticals industry. After years of uncertainty over the exact nature of the new product patents regime and introduction of a value-added tax (vat), companies are glad to get on with business on a surer footing. Despite last-minute concessions to its allies, the government has rammed through the Patents Bill into law, and despite the BJP-led states doing a volte-face, vat has been rolled out in 21 other states.

Yes, the switchover to vat this April has impacted sales (for some of the top companies, first quarter offtake by wholesalers is down 30 per cent on average), and there are signs that the consumer may have to pay more for some new drugs, but the fact remains that the pharma companies now have a better sense of where they are headed. It is evident, for example, that there will not be any significant change in the status quo for another two to three years; it is also clear that companies that don't have strong brands or a clear niche to operate in, will in the long term face extinction. On the other hand, those with a strong portfolio, marketing and distribution muscle, sophisticated R&D capabilities, and a global play-characteristic of Tier I companies-will not just survive, but thrive.

To get a glimpse of what's to come, one only has to look at what happened last year in the domestic market. According to org IMS' Market Intelligence Report, which tracks pharma's retail sales on an annual basis, the Rs 20,500-crore industry grew 6.4 per cent in value terms. Driving the growth, once again, were new launches (that is, drugs launched between 2003 and 2004). Unlike in the previous three years, the first-half sales actually jumped 9 per cent. But as S. Kalyanasundaram, Managing Director, GlaxoSmithKline (GSK) Pharmaceuticals (India), points out, the growth was in comparison to a drop in sales that happened in the same period in 2003 due to vat jitters. "Overall, the growth has been on the lower side of my expectations," says Kalyanasundaram. (After 28 years in the top slot, GSK lost the position to Cipla last year. However, if GSK's vaccines and institutional sales are included, it still comes out ahead of Cipla.)

A silver lining for the industry: prices of drugs held better. Compared to a 0.7 per cent drop in 2003, prices slipped only 0.20 per cent. Interestingly enough, it is new launches where competition was the stiffest. A good 87 per cent of the price drop that happened was due to brands launched between 2003 and 2004. If that seems like a big number, consider that the comparative figure for the previous year was higher at 94 per cent. Which means newly launched brands of 2002 and 2003 bore the brunt of pricing pressure. Which are the companies that under cut? Typically, late entrants, and primarily those in "acute" categories such as anti-infectives and gastrointestinals. Explains Dilip Shanghvi, Chairman and Managing Director, Sun Pharmaceuticals: "For new products, companies had to charge a price within a band, largely due to competition."

Sun Pharma's Dilip Shanghvi: His company has consistently maintained a double-digit growth over the last three years, thanks to successful new launches

The older products were less prone to price cuts. In fact, org IMS estimates that of the top 100 brands, two-thirds increased prices, and of these 30 per cent belonged to multinational pharma majors. The highest increase was seen among brands launched before 1985. That might seem counter-intuitive, but there's good reason for it. As Sun's Shanghvi notes, older and established products typically have a stable prescription base, which means the prescribing doctor (or the consumer) is unlikely to switch brands due to a marginal increase in price.

Ironically, price cuts seemed to be a losing proposition for the manufacturer in more ways than one. An ORG IMS analysis of the top three brands in 2004 (in each of the 14 major therapeutic categories) reveals an interesting correlation between pricing strategy and market share. Sixteen per cent of the brands that cut prices actually reported a dip in value share from 21 per cent to 20.6 per cent. Thirty-seven per cent of the leading brands that increased prices, gained 1 percentage point in value share, and 44 per cent of the brands that maintained prices, also ended up maintaining their value share.

What are the therapeutic categories where prices rose? CVS (cardio vascular system), CNS (central nervous system) and dermatology, although the extent of increase was smaller than that of 2003. The sole exception was CVS, where after an 8 per cent drop in 2002, prices jumped 2 per cent last year. Says Ajay Piramal, Chairman, Nicholas Piramal India (NPIL): "Lifestyle related diseases are driving growth, helped by the fact that detection techniques for such ailments have improved over the years."

While the so-called "acute" segment comprises 76 per cent of the market, it is growing much slower than the "chronic" segment, comprising drugs for diabetes, CNS & CVS. Compared to the latter's consistent double-digit growth over the last three years, the acute segment is growing at low single digits (4.8 per cent last year). One company that is growing rapidly on the back of chronic therapies is Sun Pharma. Ranked #5, it has upped value share from 2.92 per cent in 2002 to 3.29 per cent last year. Says Sun's Shanghvi: "Our business is structured around speciality therapy areas, which are high growth and will continue to remain so due to lifestyle factors."

NPIL's Ajay Piramal: Piramal, whose firm ranks #4 in the domestic market, believes that Indian companies will need greater innovation and marketing going forward

One question that's uppermost in the minds of consumers is whether VAT and product patent will push up prices. To be sure, vat will make drugs marginally more expensive in the short run. But in the long term, competition will even out price spikes. As for the patent impact, it is only to be expected that Indian companies will have restricted access to products patented after 1995. However, NPIL's Piramal reckons that consumers would feel the pinch only "in niche areas, such as new drugs for Cancer or Alzheimer's".

By extension, it would mean that pharma MNCs (GSK excluded, because it has long been a market leader) make a comeback after having spent the last 30 years or so in the shadows of their Indian rivals. That would, of course, depend on what kind of products they launch in the years to come. GSK, for instance, says it has four to five products in phase III that could get launched in India by 2008. Says Kalyanasundaram: "The ball is in our court now. We will have to prove to consumers that the (higher) price is justified. It certainly won't be a free-for-all."

He's right. It won't be a free-for-all. At least not until 2008.

-reported by E. Kumar Sharma

"THE FOCUS WILL SHIFT TO BRAND BUILDING"

Over the last few years, the pharma industry has witnessed a negative impact of prices on growth. However, 2004 witnessed stabilisation in pricing, with the negative price impact on the industry coming down to only -0.2 per cent as compared to -0.7 per cent in 2003. There is a progressive shift in the domestic market towards chronic therapies, which have consistently witnessed higher growths for the last few years as compared to acute therapies. But one cannot ignore the sheer base of the acute therapies-they command more than 75 per cent share of the market. Upward trend in chronic segments and growing importance of specialties have led to more companies having special task forces or divisions to adapt to this change. Cardiac, CNS, anti-diabetics and dermatology have been the key focus therapies. New introductions have been the primary growth drivers for most of the Indian companies. With the product patent regime in place, the focus will shift towards brand building. Increased leveraging of India advantage: With recognition of product patents in 2005, many global companies are interested in accessing the market potential that India provides with its large population size and wide disease profile. On the other hand, both Indian and global companies are gearing up to leverage the cost advantage provided in multiple areas like manufacturing, clinical research and basic R&D. In addition to the changes mentioned earlier, the industry has had to cope with the introduction of vat-a positive move from the government to standardise the tax regime in trade. However, the initial response has not been positive. Quarter one of 2005 witnessed a negative impact on the primary sales of the companies. The secondary sales were not affected to the same extent, possibly because of excess inventory in the market. We do expect a revival in the second quarter, but it may not totally compensate the losses incurred in the first quarter. -Shailesh Gadre is the Managing Director of ORG IMS