Pharma and Healthcare Sector – Emerging trends for 2023
Indian pharmaceuticals have time and again proved their prominence, and this time it was developing Covid-19 vaccines which globally saved millions of lives. Domestic pharmaceutical companies which were largely recognized for their affordable manufacturing of generic medicines are now being recognized for its high-quality research and development ecosystem post Covid-19, a remarkable perception shift from being a volume manufacturer to value creator. India is ranked third worldwide for production by volume, accounting for 20% of the global volume supply.
According to IBEF, domestic pharmaceutical market stood at US$ 42 billion in 2021 and is likely to reach US$ 65 billion by 2024 and further expand to reach US$ 120-130 billion by 2030 to become the leading provider of medicines to the world. Some key emerging trends observed within the domestic pharmaceutical companies include,
M&A looks to be a key growth / diversification area
A speciality injectables player with a limited presence in the region acquired a European business to getter better foothold and diversify from a long-term perspective
A top pharma management mentioned that beyond R&D and CAPEX, M&A will be the priority in capital allocation, especially in EMs (India, Russia, etc.) & selectively in the EU/US
Most companies are looking at opportunities in niche markets to provide growth as they look to de-risk from the US; few companies are also leveraging their US product portfolios to tap emerging markets for faster growth
In the US Generics, near term pressures will continue with price erosion at high single digit to double digits
Biologics and Biosimilars remain high focus growth areas in the medium to long term for companies which are at various stages of development and filings
Diagnostics
Diagnostics has undergone structural changes post Covid-19 outbreak like increased home sample collection, focus on preventive/wellness packages etc. In addition, there is also an increased transition towards organized players given their superior quality of services, strong infrastructure and certification, and brand image. This changing landscape has opened up lucrative growth opportunities and some important emerging trends within the space include,
Heightened competitive intensity led by emergence of new companies and business models including digital platforms, marketplace, hospital-based diagnostics labs, and pharma companies setting up testing arms etc.
Growth to be driven by volumes and will come at cost of price as new players especially digital companies have undertaken aggressive discounting strategy to garner high volumes. Presently the elasticity of Indian patients is more towards price and low towards brands, which is impacting profitability of traditional players in this segment. The price war is expected to intensify and risk of margin pressure remains high
Diagnostic companies offering both tests, Routine and Specialized, are placed slightly better as the competitive intensity is higher in routine space
Hospitals and Pharmacies
Hospitals are expected to remain the major beneficiaries of the rising healthcare spends in the country as they account for about 75% of the healthcare spending. Growth opportunity remains robust due to under penetration combined with strong demand for quality healthcare given rising affordability and burgeoning lifestyle diseases and improving medical insurance penetration. Past few years, healthcare sector has exhibited strong growth momentum which is expected to continue as the industry undertakes aggressive capacity expansion post Covid-19, supported by sustained average revenue per bed and improving case mix. Some of the developing trends within hospital & pharmacies include,
Strong growth dynamics for hospitals due to severe under penetration, specially in Tier 1/ Tier 2 cities
Medical tourism is a strong opportunity for hospitals as market expected to rise +65% CAGR during FY21-25
Strong expansion plans across hospitals primarily into brownfield projects; bed capacities to expand by ~30-70% over next 4-5 years, with part of the new capacity likely to be commissioned from end FY24
Occupancies have improved from ~52% during Covid period to reach about ~62% in H1FY23; it is expected to further improve to ~70%-75% over next two years and help drive profitability in the near to medium term
High influx of online pharmacies in the past couple of years driven by the digital disruption
Omni-channel pharmacies better placed vis-à-vis online players led by 1) strong advantage in medicine substitutability, 2) private label sales, and 3) better placed to capture acute medication segment
Customers go towards online pharmacies mainly for better pricing; No stickiness towards a particular brand
Online players have resulted in very aggressive discounting game; although this looks to have peaked out and might not increase much further as order fulfilment cost for online players remain high
India’s pharmaceutical and healthcare industry has grown tremendously in the recent years, and overall outlook remains robust and positive. Better known as ‘Pharmacy of the World’, Covid-19 outbreak brought in a paradigm shift within the sector ensuring high collaboration between the pharmaceutical and healthcare industry with the government to work closely towards strengthening its domestic and global positioning.
Author: Jaspreet Singh, Chief Investment Officer, Research & Ranking
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