The long tail of companies in the domestic pharmaceutical market will see consolidation over the next few years, since the triggers are in place, says an executive from investment bank Avendus Capital, explaining their latest report that maps the changing landscape of the Indian pharmaceutical market.

There will be some fundamental shifts in the $25-billion domestic pharmaceuticals market, driven by government policies among other things, and companies will have to make changes from the way they have done business all along, says Anshul Gupta, Managing Director and Head - Healthcare Investment Banking with Avendus Capital.

There will be consolidation in the pharmaceutical segment and of the 3,000-odd companies, the long tail will shrink over the next five-odd years, driven by factors including generational change, Gupta told businessline.

Other shifts outlined by the report include “a gradual transition from a primarily doctor-branded-prescription model to an alternative marketing and channel mix, aided by more stringent quality compliance, which would lead to a rationalisation of supply chains.” There remains significant under-penetration in the domestic market, especially in tier-2/3 towns and rural areas, the report noted. And as the country progresses, “the resultant economic prosperity will bode well for continued growth of this sector,” it said. The report projects that the Indian domestic formulations would cross ₹5.5 lakh-crore by 2034 at a CAGR of 10 per cent.

Attracting investments

Prasshanth Hari, Director - Healthcare Investment Banking, Avendus Capital, points out that the domestic formulations sector had attracted large strategic and private equity investments in deals worth $14 billion-plus over the last six years. “We estimate that the market would continue growing at 9-10 per cent CAGR over the next 10 years,” he said.

With the expansion of trade generics (TGx) and the Centre’s Jan Aushadhi network (that sells medicines at lower prices), “we expect about 30 per cent volume contribution from these channels over the next decade. Despite this shift, BGx (branded generics) is still expected to be 65-70 per cent of the market by value with a CAGR of 8 per cent over this period. This channel shift could result in a moderate EBITDA margin contraction, potentially offset by cost optimisation measures such as MR rationalisation, reduction in free samples and reduction of doctor-related expenses, each of which could potentially result in 100 bps of cost savings,” he said.

Further, the report says the industry’s dynamics and margins would adjust to the new generics reality. “Pharma players are likely to expand their portfolios by either shifting focus to new chronic/lifestyle therapies or expanding into adjacencies like Over-the-Counter (OTCs), Point-of-Care Diagnostics, MedTech and nutraceuticals,” the report said, adding that the pharma companies have already launched OTC divisions.