Capturing the India Advantage

8/8/2019 Capturing the India Advantage

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Capturing the India Advantage

Working Paper

'India Pharma Summit - 2009'

Organised by Department of Pharmaceuticals, Government of India

November 30, 2009

Pharmaceuticals & Medical

Products practice


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Confidential Working Paper. No part may be quoted or reproduced for distribution without priorwritten approval from McKinsey & Company, Inc. McKinsey makes no representations orwarranties regarding the completeness of the information and expressly disclaims any and all

liabilities based on such information or on omissions therefrom.


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India has long been considered a strategic destination for the global

pharmaceuticals industry. The Indian pharmaceuticals market has witnessed

impressive growth and the countrys potential in pharmaceuticals

manufacturing and research has been well discussed and documented. As a

result of several structural advantages and enterprise, the Indian

pharmaceuticals industry has grown to US$ 20 billion1.

However, it is only now, with shifts in the global pharmaceutical industry, that

Indias uniqueness and true potential is coming to the fore. The Indian

industry has recognised this in most part, and increasingly, global

pharmaceutical companies are making bold strides to leverage Indias

potential.

This paper has been prepared for the India Pharma Summit 2009

organised by the Department of Pharmaceuticals, Government of India, in

collaboration with the Federation of Indian Chambers of Commerce & Industry.

It synthesises views on Indias strategic importance in the global

pharmaceuticals industry. The objective of this paper is to facilitate the

discussions and deliberations at the summit. Thus, it is not a comprehensivearticulation of McKinsey & Companys perspectives on the topic.

DEFINING TRENDS IN THE GLOBAL

PHARMACEUTICALS INDUSTRY

Over the past few years, several trends in the global pharmaceuticals

industry have brought to the fore Indias strategic importance. These trends

outlined below provide useful context to understand the countrys growing

importance to the pharmaceuticals world.

The rise of emerging markets: During the next 5 to 6 years, emergingmarkets will account for nearly half of the growth in the global

1 The domestic market in 2008 09 was estimated at close to US$ 11.5 billion

(at end-consumer price levels) including retail sales, hospitals and institutional

purchases, OTX segment, direct purchases by dispensing doctors and diagnostic

consumables. The exports of pharmaceuticals products during 2008 09 isestimated at US$ 8.2 billion.


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pharmaceuticals industry. Five markets Brazil, China, India, Russia and

Turkey will account for nearly 70 per cent of this growth [Exhibit 1].

In order to sustain high growth, several global players have significantly

increased investments in emerging markets [Exhibit 2]. Such investments

are no longer limited to the early movers. Late entrants have also set bold

aspirations and invested in organic and inorganic growth strategies.

Innovative approaches in R&D: The high cost of drug development, longlead times, and low success rates are forcing a re-evaluation of R&D

models. Over 70 per cent of compounds are not recovering the cost of

capital [Exhibit 3]. Consequently, several innovators are distributing risks

by investing in many minority bets and engaging in risk sharing

partnerships and out-partnering of assets. Moreover, low cost country

(LCC) R&D centres are now an integral part of the R&D infrastructure of

global pharmaceutical companies.

Outsourcing and off-shoring to control costs: Profitability is under pressurefrom patent expirations, pricing challenges and falling R&D productivity.Outsourcing to low cost countries has the potential to fundamentally

change cost structures. Several pharmaceuticals majors have announced

their exit from the manufacturing of active pharmaceutical ingredients

(APIs) and are aggressively rationalising their facilities [Exhibit 4]. While

outsourcing in R&D continues to lag behind manufacturing, few global

pharmaceuticals are leading pioneering efforts in this regard [Exhibit 5].

The rise of biologics: Future leadership in pharmaceuticals will be drivento a large extent by biologics. Select bio-therapeutic technologies will

drive a significant proportion of global pharmaceuticals growth [Exhibit 6].

Estimates suggest biologics are expected to account for over 30 per cent

of the revenues of major pharmaceuticals companies. By 2012, nine of

the top twenty drugs are expected to be biologics, with six of them being

new entrants to the top 20 [Exhibit 7].


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INDIAS UNIQUE POSITION IN THE GLOBAL

PHARMACEUTICALS INDUSTRY

India enjoys a unique position in the global pharmaceuticals industry. This is

underpinned by several factors. To begin with, even within emerging markets,

the market opportunity stands out due to a strong and sustainable growth

momentum, and the diversity of business opportunities. Next, contrary to

other emerging or developed markets, strong process chemistry skills lead to

truly competitive manufacturing cost structures. Finally, a successful local

industry and entrepreneurship culture spur partnership opportunities and

business development.

A high-growth and diverse market backed by strong fundamentals: TheIndian pharmaceuticals market is well on course to reach the US$ 20

billion mark by 2015. In absolute terms, only the United States and

China will surpass this growth. Indias growth trajectory is sustainable

and backed by strong fundamentals. Nearly 60 per cent of the growth will

be driven by shifts in income demographics and the rise in medicalinfrastructure [Exhibit 8]. Finally, the Indian market opportunity is diverse,

well distributed across business segments (e.g., chronic and acute,

mass therapies versus specialty therapies, metro versus tier II markets),

and consequently provides multiple options to specialise and succeed.

Truly competitive manufacturing cost structures: The costs of manufacturingAPIs in India can be up to 50 per cent lower in India than in developed

markets [Exhibit 9]. Indias formulations development capabilities remain

unmatched elsewhere. The quality of chemists and scientists in India is

among the best in the world; and the availability of such talent is higher

than in several developed markets [Exhibit 10].

A centre for experimentation in business model innovation: The diversityof market opportunities and inherent entrepreneurial culture make India

an ideal centre for experimentation. Global players can test, incubate and

export business models in areas relevant to other emerging markets

such as branded generics and comprehensive care for the treatment of

chronic diseases.


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A successful domestic industry creating partnership opportunities: Indiasdomestic industry is strong and entrepreneurial, and has been largely

responsible for building industry talent and infrastructure. Leading

domestic players have global businesses, organisations and mindsets.

Consequently, the industry offers meaningful partnership opportunities

for international players in their global businesses.

THE INDIA ADVANTAGE

While the factors outlined above provide India a unique position in the global

pharmaceuticals industry, the extent of the India Advantage is yet to be fully

comprehended and captured. No single company, domestic or global, has

geared up to take full advantage of the broad spectrum of opportunities.

The India Advantage spans 3 areas the domestic market, manufacturing

and research. Meaningful collaborations between industry players will further

enhance these opportunities. From the current US$ 20 billion, the Indian

pharmaceuticals industry has the potential to grow to US$ 40 billion by 20152.

While the domestic market has the potential to grow to US$ 20 billion,

exports by Indian companies and off-shoring by global companies can

account for another US$ 20 billion.

Capturing the domestic market opportunity: Unlike several emerging anddeveloped markets, the Indian market will not grow in one primary

direction. Growth will be in multiple directions thereby opening up

substantial and diverse market segments [Exhibits 11 & 12]. For example,

the market for chronic therapies is estimated at US$ 3 billion and

growing at 17 per cent, while the market for acute therapies is estimated

to be much larger at US$ 5.4 billion and still growing at 10 per cent.

2 The domestic market is estimated to reach a size of US$ 20 billion by 2015.

Trends in market performance and underlying infrastructure build-up during the

past three years indicate that the market is well poised to achieve this scale by

2015. Government of India estimates indicate that Indian pharma exports have

been growing at a CAGR of above 20 per cent over the past 4 years. This

momentum should be maintained given the DMF and ANDA filings of Indian

companies and the opening up of new segments in contract manufacturing.

Consequently, exports are expected to reach the US$ 20 billion milestone by2015.


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Hospitals and OTC markets are each valued at close to US$ 2 billion,

and are growing at over 10 per cent. Analysing the geographic

distribution of the market suggests that most segments offer

opportunities. While the tier II and rural markets estimated at US$ 3.2

billion are growing at above 10 percent, the much larger and well covered

tier I markets continue to grow at 12 to 14 per cent.

Such diversity across products, geography and demographics creates

possibilities for a larger number of players and a variety of business

models. While scaled-up market leaders can operate across segments,

smaller, more specialised players have an opportunity to customise their

business models and lead in their areas of strength.

Collaboration opportunities exist, and can go beyond the much-tested

product out-licensing. Indian companies can support international players

launch branded generics in India by bringing to bear their formulations

development and product sourcing skills, and salesforce coverage.

Partnerships can be explored to build comprehensive care models for

lifestyle diseases and non-traditional business models in rural markets.

Leveraging Indias manufacturing competitiveness: The global pharmaceuticalsmanufacturing outsourcing industry is expected to grow to US$ 100 billion

by 2015, driven in large measure by margin pressures and patent

expirations [Exhibit 13]. India has the potential to capture 8 to 10 per cent

of this industry by 2015. This potential is distributed across opportunity

segments along four dimensions: stage of production, stage in product

lifecycle, technology type and customer segment.

APIs and intermediates will account for up to 70 per cent of the US$ 8 to

10 billion potential, with finished dosage formulations (FDFs) accounting

for the remainder. Mature and generics drugs account for more than half

of the potential and onpatent drugs another 25 to 30 per cent. While

biologics manufacturing will grow, small molecules will account for more

than 95 per cent of the opportunity by 2015. Within customer segments,

large and mid-sized pharmaceuticals companies will account for up to

70 per cent of the opportunity with generics companies capturing the

remainder.


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Several large-scale collaboration opportunities exist beyond plain contract

manufacturing of specific products. One obvious opportunity lies in the

sourcing of branded generics with a focus on emerging markets. Others

include the sourcing of biosimilars for emerging markets and Europe, and

the lifecycle management of mature products supported by capabilities in

formulations development and drug delivery technologies [Exhibit 14].

Leveraging Indias R&D opportunity: Indias potential in R&D isunderscored by its large talent pool of process chemists, a large and

diverse patient pool across therapeutic areas, world-class hospitals and

trained investigators for clinical trials, and IT talent for bio-statistical and

other analytical capabilities.

With strong support and championing by the government, India has the

potential to emerge as one of the top five innovation hubs globally in the

next ten years. The focus will be primarily in two areas: in NCE R&D

including services such as clinical trials, chemistry research and

biostatistics; and in process and lifecycle R&D for mature products and

generics. With several biologics products losing patent protection in thecoming years, biosimilars R&D will be a clear opportunity area. This

opportunity will be captured by a fewer set of domestic players with

strong bio-pharma capabilities.

However, it is worthwhile to highlight that unlike the domestic and

manufacturing opportunities, Indias R&D potential is less certain.

Despite a strong starting position, India faces strong competition from

emerging R&D hubs such as Singapore, China and Israel. Achieving

Indias true potential will require a visionary outlook by the government

backed by tangible actions to step up financial incentives; forge public

private partnerships in education and research infrastructure; and shape

a favourable regulatory environment.


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CHALLENGES AHEAD

For India to realise its full potential in pharmaceuticals, several challenges

need to be overcome. These include low healthcare spends and insufficient

infrastructure, limited access to insurance, shortage of specialised talent,

funding gaps, and aspects related to production quality. To overcome these

challenges, the industry and the government will need to make concerted

efforts.

Lagging healthcare spends and infrastructure: Indias per capitahealthcare spend remains below that of several developing nations

[Exhibit 15]. Consequently, the country lags in medical infrastructure. For

example, India will need an additional 2 million beds to match the

standards of other major developing nations.

Limited insurance penetration: Insurance covers only 10 per cent of thepopulation, and while growing steadily, is likely to cover up to only 20 per

cent by 2015 [Exhibit 16].

Shortage of specialised skills in a few disciplines: In research, India lagsin biology talent [Exhibit 17]. Moreover, in clinical research, resources

such as principal investigators are in short supply. In healthcare delivery,

the country faces a significant shortage of physicians, nurses and

support staff.

Funding gaps in important developmental areas: Government funding inhealthcare delivery infrastructure needs to increase. In R&D-related

developmental activities, the annual funding gap is in the range of

US$ 1.5 to 2 billion.

Aspects related to production quality: Recent setbacks in Indianmanufacturing have led to perceptions of average or substandard

quality. While such incidents are few and far between, they could

potentially lower growth momentum.


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IMPERATIVES FOR STAKEHOLDERS

The challenges in fulfilling Indias true potential suggest several imperatives

for domestic players, global pharmaceutical companies, and government and

regulatory bodies. These imperatives include specific actions that need to be

undertaken, and more importantly, a need to change mindsets and

entrenched points of view. The imperatives for key stakeholders are outlined

below.

Domestic companies: The first task at hand for domestic companies willbe to further strengthen capabilities in critical functional areas such as

manufacturing and formulations development. Front-end skills such as

brand marketing, product lifecycle enhancement and scientific selling will

also need to be upgraded. In the years ahead, the depth and consistency

of capabilities will be key to competing and collaborating. Second, the

quality of assets and infrastructure in manufacturing and research will

need to be upgraded. In doing so, companies should exercise caution to

avoid gold plating. Third, domestic players will need to avoid the

temptation of attempting too much and stretching their resources and

leadership bandwidth. The model of being distinctive in fewer areas is

more likely to win in a regulatory world that will continue to raise the bar.

Finally, domestic players should lead the way in forging public-private

partnerships.

Global pharmaceuticals companies: Global players are far from fullycapturing the India Advantage. Embracing this opportunity to its fullest

will require bold and seemingly unreal aspiration setting, changing

mindsets, and deep commitment from the highest levels in global

management. Second, global players need to step up investments to

capture the domestic market opportunity. These companies need to ring

fence their business in India and relax margin expectations for a period

of a few years. Moreover, global players need to scale up and customise

the India business model (i.e., scale up coverage, develop local portfolio,

potentially launch branded generics). There has been a marked

improvement on this dimension during the past two years, and this

trajectory needs to be sustained. Finally, global pharmaceutical

companies should scale up their collaboration with leading and capable


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domestic players. The frame of reference for such partnerships needs to

transition from project-based associations to strategic and global scale

partnerships. If configured with imagination and boldness, such

partnerships could drive important global businesses such as emerging

markets or biologics.

Government and industry regulators: First, the government will need tostep up spending on healthcare delivery as well as investing in education,

research infrastructure and research funding. Publicprivate partnerships

could be an important enabler of this process. Second, the government

will need to facilitate greater insurance coverage in a bid to substantially

enhance access. Government efforts to provide minimum coverage to the

economically deprived segments could completely transform access and

public health outcomes. The Rashtriya Swasthya Bima Yojana has been a

strong step in this direction. Third, to promote greater innovation, the

government needs to shape the countrys vision and accelerate

development efforts. As highlighted earlier, Indias potential in this area

is less certain than in other areas, and hence the need for greater

intervention. Finally, the government should continue its efforts to

harmonise the regulatory framework on important issues such as patent-

related matters and clinical research.

* * *

The India Advantage has gathered momentum, and domestic and global

pharmaceuticals companies are increasingly recognising this. However, they

are yet to comprehend and leverage Indias true potential. Despite thecountrys impressive track record, sheer momentum alone may not be

enough to capture this opportunity. Industry and government will need to

make concerted, scaled-up and sustained efforts. And most importantly, the

global industry will need to fully acknowledge and wholeheartedly embrace

the India Advantage.


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Exhibit 1

McKinsey & Company

Emerging markets likely to drive 40% of total pharma industry growth

SOURCE: IMS Prognosis; McKinsey analysis

Geographical breakup of total

pharma market

USD billions, percent

22 26

3030

Emerging

Markets

100% =

USA

Japan

Europe

2013

987

9

34

2008

773

10

38

Distribution of growth (2008-2013)

Percent

100% = USD 214 billion

13

29

30

22

USA

6

EU

JapanTop 5

emerging

markets

Other emerging

markets

Exhibit 2

McKinsey & Company

Major pharma players have significantly ramped up investments in

emerging markets

Testing the water

1980-1999

Phase I Careful expansion

Phase II

2000-2005

Real commitment to

market

Phase III

2006+

SOURCE: Company websites; press search

Enters Emerging markets in

1989 through several JVs

Merger with leading local

player gives access to

manufacturing sites

Creates China HQ

Invests in local clinical trials

center

Global Top

5 Pharma

Company

Enters emerging markets in 1979 Gradually expands activities in

OTC

Develops local manufacturingsite

Signs research agreementswith local institutions

Announces new investment totriple manufacturing capacity inemerging markets

Pursues expansion in OTC

Global Top

5 Pharma

Company

Enters emerging markets in

1993 Creates the first significant

R&D centers

Invests in local manufacturing

Announces additional

investment in local

manufacturing

Global Top10 Pharma

Company

Enters in 1982 through JVs

Develops local manufacturing

bases

Merger with local player

increases local presence Creates China HQ

Invests in local R&D centerGlobal Top

5 Pharma

Company

Enters Emerging Markets in

1989

Invests in JV in 1994

Invests in local manufacturing

Expands in diagnostics Opens R&D center in

Shanghai

Invests in new manufacturing

site

Global Top

20 Pharma

Company


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Exhibit 3

McKinsey & Company

Failure in recovering risk adjusted R&D costs in majority (~ 70%) of new

molecules

102080100

150250

450

700

1,000

10987654321

2,800

Risk-adjusted

R&D cost2 =

USD 500 million

Risk-adjusted

R&D cost2 =

USD 500 million

1 Assumes that drugs were expected to be NPV positive at beginning of R&D

2 Risk-adjusted R&D cost; discounted R&D expenditure corrected for product failures

SOURCE: Grabowski, H., Vernon, J., and deMasi, J.A., Pharmacoeconomics20, 11-29

NPV at the time of launch1

USD millions

Deciles

70% of

compounds

do not

recover their

risk-adjusted

R&D costs

Insufficient

differentiation

in the eyes of

the market

Exhibit 4

McKinsey & Company

Several international pharma companies have announced

aggressive outsourcing/off-shoring plans to control costs

Double outsourcing of manufacturing activities to 30% from 15%Top 5 Pharma

Company

Stop production at half of its 27 manufacturing facilities by 2010Top 10 Pharma

Company

Completely exit API manufacturing over the next 5-10 yearsTop 10 Pharma

Company

Outsource 30-35% of manufacturing activities to India and ChinaTop 10 Pharma

Company

Increase reliance on third-party contract manufacturers as part of

ambitious expansion plan

Top 5 Biologic

Company

Consolidate 50% of network across LCC and HCC locationsMid Tier Pharma

Company

Strike deals to offshore vast majority of API/raw materials sourcing

to India . . . to shift to countries with lower production costs

Mid Tier Pharma

Company

ILLUSTRATIVE

SOURCE: Analyst/industry reports; web/press search


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Exhibit 5

McKinsey & Company

Outsourcing and Off-shoring are also becoming important parts of the

R&D business model

Diminishing return from legacy R&D

operating model passing of the

blockbuster era

Industrialisation of R&D core

activities and processes (e.g.,genomics)

Development of healthcare

talent supply and infrastructure

around the world

Proven success stories from

pioneering industries

Transformational forces in R&D . . .

. . . have resulted in significant

increase in outsourcing spends

3-5Offshore

outsourcing1

Domestic

outsourcing

2007

30-35

10-15

20

17-20

2004

20-25

Pharma industry outsourcing spend as

percent of total R&D budget

1 Majority of growth in low-cost regions such as India and China

SOURCE: KaloramaI nformation; The Pink Sheet; McKinsey analysis

Exhibit 6

McKinsey & Company

Select bio-therapeutic technologies are expected to drive pharma market

growth

Note: Biotherapeuticsincludes therapeutic vaccines

SOURCE: EvaluatePharma

Biotherapeutics are a large and

rapidly growing part of the total

pharmaceutical market

WW Rx and OTC Sales, USD billions

Within biotherapeutics, mAbs and

vaccines are the fastest growing

portions

Biotherapeutics revenue, USD billions

CAGR

Percent

5.9

12.2

4.4

CAGR

Percent

49

73

19

56

Recombinant

Proteins

Bioengineered

vaccines

Monoclonal

Antibodies

2012

152

76

8

23

2006

12.2

20.1

6.7

19.8

365 398444 473

76

99125

152

Small

molecules

Bio-

therapeutics

2012

625

2010

569

2008

497

2006

441


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Exhibit 7

McKinsey & Company

Nine of the top twenty drugs in 2012 will be biologics Biologic

USD billions

SOURCE: EvaluatePharma

Top 20 drugs in 2007 Top 20 drugs in 2012

Lipitor

Advair

Nexium

Diovan

Plavix

Zyprexa

Singulair

SeroquelEffexor

Aranesp

Lovenox

Actos

Cozaar

Risperdal

Enbrel

Fosamax

Neulasta

Gleevec

Procrit

Humira

Conventional

Conventional

Conventional

Conventional

Conventional

Conventional

Conventional

ConventionalConventional

Biologic

Conventional

Conventional

Conventional

Conventional

Biologic

Conventional

Biologic

Conventional

Biologic

Biologic

12.4

7.0

5.4

4.9

4.8

4.6

4.2

4.03.7

3.5

3.5

3.5

3.4

3.4

3.2

3.0

3.0

3.0

2.9

2.9

Drug Type Revenue

Seretide

Humira

Avastin

Crestor

Nexium

Diovan

Lantus

SingulairNeulasta

Enbrel

Cymbalta

Insulin analogs

Plavix

Herceptin

Lyrica

Lovenox

Seroquel

Rituxan

Gleevec

Prevnar

Conventional

Biotech

Biotech

Conventional

Conventional

Conventional

Biotech

ConventionalBiotech

Biotech

Conventional

Biotech

Conventional

Biotech

Conventional

Conventional

Conventional

Biotech

Conventional

Biotech

6.8

6.0

5.3

4.9

4.8

4.5

4.4

4.44.3

4.2

4.2

4.1

4.1

4.0

3.9

3.8

3.8

3.7

3.6

3.4

Drug Type Revenue

Exhibit 8

McKinsey & Company

Increased affordability and medical infrastructure will drive 60% of growth

15

10

Others

Increase inprevalence

Insurance

penetration

~15

Medical

infrastructure

20

Income

growth~40

2005 2015 Growth

between

2005-15

~14

6.3

~20

SOURCE: McKinsey analysis

Market growth, 2005-2015

USD billionsSources of growth

Percent


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Exhibit 9

McKinsey & Company

HCC US/EU

supplier quote

Indian supplier

quote (for US/EU-

quality product)

95

214

225

525

1,000

35

105

183

425

900API E

API A1,450

1,876

API D

API C

API F

API B

10

19

23

19

63

51

India API

sourcing

potential variesconsiderably by

type of molecule,

stage of life cycle

and its global

market size

Indian pharma companies have achieved significant

cost differentials in API manufacturing ILLUSTRATIVE

Variance in API price quotes

USD per kg

Savings

Percent

SOURCE: McKinsey analysis

Exhibit 10

McKinsey & Company

India offers a large pool of trained manpower at a significant cost

advantage

30

India2 777

USA 100

U.K

Singapore 30

Japan 54

Germany 134

India 36

USA 100

UK 82

6

100

70

30

79

103

8

100

80

20

75

148

1 Graduates, post-graduates and doctorates; US 100 = 13,976 chemists and 82,440 biologists

2 Assuming 25% of all science graduates in India are chemistry and 25% biology graduates.3 Cost of a production chemist roughly ~15% of US costs; however, cost of a chemical engineer higher

SOURCE: The Division of Science Resources Statistics (SRS) of the National Science Foundation, U.S.;

Higher education statistics agency, UK; Nasscomstrategic review 2008, India; RNCOS

Incremental trained manpower

comparison

Manpower cost comparison across countries

Indexed cost, US Cost = 100, 2005

Annual no. of trained chemists1

Indexed US = 100

Cost of chem.

engineer3Cost of lab.

technician

Cost of QC

scientist


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Exhibit 11

McKinsey & Company

Market evolution along 5 dimensions will drive growth opportunities (1/2)

Geography

focus

Tier 1

Tier 2

5.2

3.2

14

10

All the Top 5 companies have approx 60:40 Tier 1:

Tier 2 sales

Many companies have started strengthening Tier 2

specific sales forces

Mid tier companies have grown up the ranks with a

strong Tier 2 focused strategy

Therapy

area

Acute

Chronic

5.4

3.0

10

17

Wide variation in therapy area play amongst top 5

Chronic therapy areas expected to grow given

rapidly increasing prevalence and disease

awareness

Acute continues to remain dominant segment, to

contribute equally to absolute growth

Patented vs.

Branded Gx

Patented

Branded

Gx1

~0.1

7.5

20-30

12

Sales of all top 5 companies dominated by

Branded Gx

Total of 12-15 patented products launched in India

with a visibility of 7-8 products in the pipeline

Some patented products distributed through

alternate channels such as direct to patient

MNCs also entering the branded Gx play

Strategic

choice

Size, 2008

USD billion

Growth

Percent Industry characteristics

1 Gx-Gx is a separate segment

SOURCE: ORG-IMS; Nicholas Hall OTC Handbook 2009; McKinsey analysis

Exhibit 12

McKinsey & Company

Market evolution along 5 dimensions will drive growth opportunities (2/2)

Rx vs. OTCRx

OTC

6.8

1.6

12

8

Top 5 companies have dominant Rx portfolio with

a few strong OTC brands in their portfolio

Ayurvedic medicines make up significant

proportion of OTC segment in India

Hospital vs.

Retail

Retail

Hospital

8.4

1.4

12

18

4 of the top 5 companies have more than 85% of

their total sales from retail segment

Hospital segment growing rapidly due to

government thrust on improving hospital

infrastructure and growth in private hospitals

Strategic

choice

Size, 2008

USD billion

Growth

Percent Industry characteristics

SOURCE: ORG-IMS; Nicholas Hall OTC Handbook 2009; McKinsey analysis


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Exhibit 13

McKinsey & Company

35

52

42

45

44

41

20

Total

2008-15

~300

2015141312111009

14

2008

Mature and Gx drugs becoming increasingly critical as drugs worth

~USD 300 billion go off-patent by 20151

Worldwide sales of expiring products including biologics in year of US patent

expiry 2008-152

USD billions

1 Department of Pharma, Government of India, is optimistic that up to one-third of the corresponding Gx opportunity can be leveraged by Indian industry

2 Nominal patent expiries not corrected for supplementary patents or litigation probability

SOURCE: Evaluate (forecasts; 2011-15 extrapolated)

Exhibit 14

McKinsey & Company

Indian vendors have significant experience and success

in producing reformulations and combinations at a low cost

76

59

India sublingual 2

India sublingual 1

Latin America

sublingual400

Current US pill 100

ILLUSTRATIVE

Many experienced Indian vendors . . .

. . . can produce drugs at significantly lower

cost than producers in other countries

Prices are indexed

SUBLINGUALEXAMPLE

Injection

Oral solid dosage

Oral-controlled release

Top 5 Indian

player

Gastro-retentive

Modified matrix Multi-particulate

Aero gel

Topical lotion

Top 5 Indian

player

Nasal spray

Liposomal

Pulmonary

Biodegradable Depot

Top 10 Indian

player

Injection

Fast-melt

Chewable tablets

Oral soft gel capsule

Top 20 Indian

player

SOURCE: IMS; company Web sites; McKinsey analysis


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Exhibit 15

McKinsey & Company

Per capita public and private expenditure (PPP USD) in developing countries

(2007)

Healthcare spends in India are lower than other

developing countries

SOURCE: OECD Health Status; WHO; McKinsey analysis

117 128

280

430105

251

232

374

10975

Sri Lanka

222

Thailand

379

Pakistan

37

146

India

15

90

Mexico

804

China

512

Per capita private expenditure

Per capita government expenditure

Exhibit 16

McKinsey & Company

Health insurance is likely to cover 20% of population by 2015

~220100-110

Removal of regulatory hurdles

Active market shaping by players

Entry of new competitors

Increasing consumer awareness

Traditional

premium-based

health insurance

25-30 ~125

Relaxation in income ceiling or enterprise

criteria

Social insurance/

welfare funds

35-40 ~50

Employers shifting to premium-based

coverage plans

Low growth in public sector employment

Employer provided

(sponsored

benefits)

30-35 ~35

Increased efforts of NGO/self-help groupsCommunity

insurance (self-

funded)

2-3 8-10

SOURCE: McKinsey Analysis

Coverage

Million

Components Key drivers 2006 2015

Significant incremental population covered every year

Government-lead insurance programmes can

transform access (much beyond the 20% coverage)


20/21

20

Exhibit 17

McKinsey & Company

Talent gaps in niche R&D skills

1 R. Maiti and M. Raghavendra, Clinical Trials in India, Pharmacological Research 56: 1-10

2 MD Gupte, epidemiologist, Indian Council of Medical Research

SOURCE: Interviews; FICCI; HRI; Frost and Sullivan; literature search

Degree of

bottleneck Rationale Impact

Principal

investigators

High Only 700 ICH/GCP trained physicians

Investigators required for pharma companies

to do trials

Causes delay in patient

recruitment up to 8 months

Affects quality of data

Clinical ResearchAssociates (CRA)

Three institutions train CRAs

1

; howeverquality is average

CRAs trained in theory, less in practice

Medium

Pharma companies have to traininternally

Affects quality of data

Biostatisticians Small number of institutes

Limited career opportunities

Migration to higher value industries

Medium Reduces ability to establish

research or pharmaco-vigilance

facilities

EpidemiologistsMedium Severe shortage of epidemiologists:

at least 1,000 required2 Reduces pharmacos ability to

establish PV facilities

ToxicologistsMedium Not enough institutions provide

this training

Talent attracted to other areas

Reduces pharmacos ability toconduct research

BiologistsHigh Lack of talent and experience in key R&D

processes (e.g., mammalian expression

systems)

Hinders ability to compete in

biologics

Medical device

specialists

High USD 200 billion industry in which India has a

very small presence and is behind China

Reduces attractiveness for

global device companies


21/21

November 2009

Copyright McKinsey & Company

Capturing the India Advantage

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