The Indian pharmaceutical industry is highly fragmented with about 10,000 manufacturing units (300 in the organized sector). The top ten companies make up for more than third of the market. India accounts for about 8% of the world's pharma pie in volume terms, but only 1% in value terms.

Will the recently introduced Patent Regime change all that?

Key Positives Exports thrust - Indian companies are following a two-pronged approach. The first approach is weaved around looking for an opportunity to tap an existing patent viz. challenge the patent of existing products or wait for the patent to expire and then launch the generic version in the lucrative markets of US and Europe. The second revenue stream is an even more ambitious. Top Indian companies plan to offer research and development (R&D) services to global majors or carry out work on their own. Consequently, India's pharma exports have clocked a CAGR of 23% between 1993-2004 (Source: ICRA). Cost competitiveness - A new concept that is gaining momentum in the pharma industry is contract research apart from contract manufacturing. Given the low cost high quality advantages, Indian companies are poised to benefit from contract research business on behalf of multinationals. As for contract manufacturing, large global pharmaceutical companies are finding it profitable to outsource production. To cash in on these opportunities, many large production houses in the country are becoming US FDA compliant. Structural changes - The penetration of health insurance is abysmally low in the country. The entry of private players would not only bring in quantum leap in the health insurance business but also increase capital inflows into this sector. It would also bring in the concept of managed healthcare in the country. This would finally lead to overall increase in per-capita usage of drugs. New growth opportunities - In spite of the price war, the domestic pharma industry continues to show decent growth rates, led by the chronic therapeutic (lifestyle) segment like anti-diabetic, cardiovascular and central nervous system. Higher awareness, exposure to newer therapies and aggressive introduction of new drugs at a reasonable price has been the key driver of growth in the chronic/lifestyle segment. This trend is likely to continue going forward. Shift towards product patent regime - One of the positive developments has been the shift towards product patent regime from 2005 onwards. This will lead to a structural change in the industry, which will encourage innovation and greater investment in R&D. While the there would not be any impact in the short term, in longer term this will lead to strengthening and consolidation of the industry.		Key Negatives Lower end of value chain - Indian companies are cost competitive in manufacturing bulk drugs, which has made them an outsourcing destination for the global pharma majors. But this is lower end of the pharma value chain and is basically a commodity making skill due to low entry barriers. Also, the Indian industry still lacks facilities and resources to develop a molecule, conduct clinical trials and then launch the product. Indian companies will thus have to depend on their international peers to undertake the more expensive clinical trials and product launches. Weakness in domestic markets - Fierce price competition has become order of the day for the domestic pharma industry, which has restricted the ability of the domestic pharma market to grow in the value terms. Due to its highly fragmented structure, the pricing power of the players has been pruned. The Indian markets have traditionally been and continue to remain price sensitive and premium pricing of product is extremely difficult to maintain. Stumbling blocks - Indian companies have been trying to enter US markets through para IV filings. However, in recent times the industry has seen certain setbacks. This has reduced the companies' ability to generate strong cash flows to invest in ambitious R&D activities. This might lead to delay in the R&D plans of the pharma majors of the country. Patent regime - New patent regime brings in lot of promises for the industry in India, but it might not be good for the smaller players in the industry, as they will not be able to survive in the environment leading to consolidation of the industry. Government control - This attribute simply refuses to go away, despite all the overall moves to liberalise the industry. DPCO still continues.

This is part of Equitymaster's Budget 2005-06 series. Equitymaster.com is one of India's premier finance portals. The Web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.