A disruptive ‘Patanjali’ moment awaits Indian pharma
There is a Patanjali moment underway in the Indian pharmaceutical industry that is likely hurting pharmaceutical companies and everyone linked to it.
Shishir AsthanaMoneycontrol Research
The fast-moving consumer goods (FMCG) segment was shaken to the core when Patanjali, a company promoted by a yoga guru Baba Ramdev, introduced low-priced products in the market. In a price conscious market like India, the price arbitrage was too much for many consumers to shift loyalty.
The same price differentials are now taking place in the Indian pharmaceutical market. The Indian government is keen on reducing the cost of medicines as well as medical treatment. Government’s intent was clear as it undertook its step to cut prices of stent and knee surgery. The medical fraternity clearly did not like the government’s interference which would definitely have put the interfered with their practice of charging obnoxious prices.
The medical fraternity is taking a hit on various fronts. In particular, ‘incentives’ that pharmaceutical companies were giving them for prescribing their products will stop, if the government has its way. There is a Patanjali moment underway in the Indian pharmaceutical industry that is likely hurting pharmaceutical companies and everyone linked to it.
The government had revived a scheme launched in 2008 and named it Jan Aushadi which promotes the use of quality generic medicine. Initial teething troubles on account of supply-side issues took many months to overcome. But over the last 15 months, the scheme has picked up speed.
The reason Jan Aushadi can have the same destructive impact as Patanjali is that of medicines sold here are 50-90 percent lower than the medicines prescribed by doctors.
CLSA, which introduced Patanjali to the finance world through its report on the inroads that the company was making, has come out with a report on Jan Aushadi. The report points out the increasing acceptance of Jan Aushadi in cities like Mumbai.
Under the scheme, 2,091 stores in 400 districts have already been opened with a target of opening 3,000 stores by end of 2017 in order to cover every tehsil (an administrative block). Around 1,700 stores have been opened in the last 15 months alone. The scheme will gather further momentum as the government has cleared opening of stores at railway stations and petrol pumps.
CLSA in its reports mentions about its visit to a store in Mumbai which has seen its business growth and is currently handling 300 prescriptions every day. Demand for drugs for chronic illnesses (such as blood pressure and diabetes) are in greater demand than those for acute illnesses, says the report. The lower/middle-income group and the retired are its biggest patrons (with 60 percent repeat customers).
Jan Aushadhi has a list of 600 medicines (for chronic and acute illnesses) and 150 consumables. Patented drugs and branded generics are not sold in these stores. For blood pressure and diabetes, it covers the first line of therapies.
Indian pharmaceutical companies are already under pressure from declining sales in export markets, thanks to the aggressive stance taken by US regulatory authorities and structural changes in the US. Domestic markets were supposed to provide the cushion from volatile export markets, but this will be under threat if Jan Aushadi picks up.
Companies who continue to get higher revenue and profit from domestic markets will be the most vulnerable; among those, the ones who cater to chronic illness and diabetes will take the first blow.
CLSA’s study shows that in the case of IPCA, domestic sales accounts for 44 percent of overall revenue and 65 percent of its operating profit. Cipla with 38 percent of revenue coming from the domestic market and 56 percent of its operating profit are the top two Indian pharmaceutical companies with high domestic exposure.
In terms of therapy, chronic products account for nearly 75 percent of Biocon’s domestic sales and 60 percent of Torrent’s sale.While the pharmaceutical companies might be affected on account of lower revenue and lower profits the consumers will get some relief, not from the pain but from the cost of bearing it.