Introduction
In this article, we will be discussing the Pharmaceutical Industry in India.
Let’s understand why we are focusing on the pharmaceutical industry.
Pharmaceutical Industry
1. As it’s a defensive sector, no matter what is happening in the market or overall sectors, the Pharmaceutical industry’s demand remains the same throughout. The same can be said for FMCG and, to some extent, the IT sector.
2. Secondly, we are focusing on it because you need different skill sets to understand it. You need to understand some additional terms that are not relevant when analyzing another sector. So that is why we are discussing this particular sector.
So we will discuss 4 or 5 unique aspects of this sector.
Let’s begin with the first aspect, which is:
Recurring Revenue versus One-Time Revenue:
Let’s analyze it with a simple example suppose there is a company that sells television sets and another company that sells mobile cell phones.
Which Company will be having a better future, the television company or the Company selling mobile phones.
By now, I completely understand that you all know that mobile Company will win if it is coming up with quality product and yes both in terms of quality in brand value both the companies are of the same level.
Now let’s understand why mobile phone companies will win, as we all know that television buying is a one-time phenomenon in most homes for at least 5 to 10 years.
Suppose there are three members in a family. They’ve got a 2BHK, they will buy one television for their home, but they will buy a minimum of two or three mobile phones, at the same time, so the recurring buying of mobile is one or two years whereas television is there a minimum 5 to 10 years.
There is no repeat sale happening with a television company. So there is more per unit demand for the mobile phone company. And also, the repeat purchase is much more. A similar concept is applied while analyzing a pharma company means what a pharma company does.
Now the question is which segment to focus on. Should we focus on companies that manufacture medicines for lifelong diseases, usually chronic lifestyle diseases, or companies that manufacture drugs for one-time use caused by viruses or bacteria, generally treated in a few weeks or months?
For example, a company is making medicine for malaria, and another company is making medicine for diabetes and blood pressure.
If the flu infects a person, one will take the first medicine and get cured in a week or ten days.
But if someone is diagnosed with diabetes or high blood pressure, that person will be required to take medicine for their entire life.
Hence, if a company is a leader in the diabetes segment, the Company knows that they have a recurring payment coming from its customer vis a vis a company making medicine for flu which is a one-time issue.
This is a significant difference.
Also, it is critical that communicable diseases or infectious diseases usually happen because of a polluted environment, affecting the masses.
Hence, the government puts price restrictions which reduces the profit of the Pharma company.
Whereas in the case of diabetes, thyroid, blood pressure, the situation is entirely different.
These are lifestyle diseases, and it happens to the middle and upper-middle class there by the government does not usually put any price restrictions on such cases.
So in situations case of lifestyle diseases, it has to be taken regularly for a lifetime, and there are no price restrictions from the government.
Also, suppose you look at India or any developed nation; lifestyle diseases are increasing day by day.
India has the most significant number of diabetes and heart patients globally, overgrowing.
So we know as Indians that more and more people will be suffering from these lifestyle diseases rather than traditional diseases like TB or flu in the coming time.
Show any company into lifestyle diseases will eventually grow in this market. Again it doesn’t sound empathetic, but it is very tempting for pharma companies.
So it would help if you looked at such dynamics what will happen and what will not.
Moving on to the next concept, you need to look at how the pharma company derives its profit mainly from OTC drugs or prescription drugs.
OTC vs. Prescribed Drug
For your understanding, OTC drugs are common drugs that you can buy from any medical shop without a doctor’s prescription.
These drugs are used for mild ailments. Such companies are volini diegene extra.
While Prescription drugs are used for severe ailments and are prescribed, taken under the supervision of the doctor.
So both have some pros and cons, which I will explain to you.
Now for OTC drugs, advertisements are allowed. You could have seen an ad for ENO, DIEGENE, and VOLINI. Because these drugs are available without any doctor’s prescription, and we use them for mild ailments.
Advertisement helps create a brand for this pharma company, and we all know that branding helps in repeat sales.
Whereas in the case of prescription drugs, medicine cannot be branded.
You cannot advertise it. You will never see a commercial for a BRUFEN, so these companies are left at the mercy of doctors.
OTC companies can directly connect with the customer through advertisements and branding. But that doesn’t mean that the OTC segment is good or the prescriptions segment is terrible.
I’ll tell you what is good about the prescription segment: the importance of networking pharma companies with the doctor and the Company’s reputation in a doctor’s mind.
Suppose the doctor believes that this particular Pharma company has made a quality drug for 20-30 years. The MR of the Company visits the doctor repeatedly and informs the doctor about the brand value. In that case, the doctor feels connected with the company e and starts recommending the medicine to the patient.
So thereby in prescription drugs, it is essential to have a ground force to communicate with the doctor.
The disadvantage with the OTC drugs is that they have to face additional competition from FMCG players as these are general-purpose drugs.
For example, VOLINI competes with Emami fast relief and JHANDU, good FMCG products competing with OTC drugs companies.
FMCG companies usually have better dealership product baskets. It’s become difficult for pharma companies to win this competition from them, so that is one disadvantage, so you have to keep all these things in your mind while analyzing the two different companies.
Research & Development
Now moving on, let’s consider another factor: the R&D expenditure.
How much money has been spent on researching while making any drug?
Now why this is important, let’s take an example: a company that spends rupees hundred in hiring good people who can do good research buying quality equipment in their lab.
And another company spends rupees 1 lac for the same expenditure means for hiring buying equipment and doing research.
Now my question to all of you is which Company will do better in getting a new product, i.e., a new drug in the market in the case of a pharma company.
The Company is investing more in hiring a better resources and buying quality equipment to develop suitable products, ultimately boosting their earnings.
So now we need to look at one more aspect, suppose a company is is is selling a product worth rupees 1000 out of that rupees 1000 how much Company is spending on research, that will give you an answer where this Company is heading towards.
Suppose if a Company is spending 10% or 20%.
One Company is spending 5% for the Company that is paying more on research to have a better product, and ultimately they will have a better profit and a better market.
This is called the R&D expense budget. The more the budget is, the better the Company. Whichever Company is spending more there, we need to invest in that Company.
Another vital aspect is:
ANDA Fillings
How many ANDA filling a company is doing.
Now understand that out of a hundred percent of medicine consumed globally, 33% is consumed in America, so the USA is the world’s biggest pharma market.
That is the primary reason for all pharma markets, especially for Indian Pharma market USA is the biggest market.
One of the prime reasons I’ve seen Pharma markets not performing well in the last few years is because the US FDA has not approved some Indian medicines.
So whenever the FDA ban any of the drugs of Indian pharma companies, the overall sentiments of Indian Pharma sectors go down, and we can see a downfall in the overall market.
ANDA filing approval process where the Company is filing approval process to USA FDA a to get approval for their medicines to sell in the US market.
So for getting support, you need to file the approval process in the US FDA market through ANDA filing.
Now to check who will get the full approval, it entirely depends upon which Company has filed the maximum ANDA filing;
For example, Company A files 10 ANDA filings, Company B files 200 ANDA filing for their drugs for approval in US FDA, so in this example, we can see the company B has got maximum chance to get more approval because several filing is much much more than Company A. Eventually, because of this, they will be able to sell more in the US market and get the maximum share in the biggest market in the world.
CRAM Segment
Another growing segment of the Pharma industry is the CRAM segment, Contract Research, And Manufacturing.
What is happening is hiring talent for research to set up manufacturing facilities in the developed nation.
Making pharmaceuticals is an expensive ordeal, so these companies outsource their Manufacturing and analysis to developing countries.
This is similar to the IT and BPO industry outsourced in the developing nation by the developed country.
Biocon Divis laboratories are two major companies in this. Other companies as well, so you should be looking in the segment as one of the choices in the Pharma industry.
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Conclusion
So I hope you like the overall understanding of the Pharma sector. If there is any question you can please drop down in the comment box, I will surely reply to it thank you I will be back with another article on a different sector.
In the meanwhile, please go through my other article on Cryptocurrency.
I have also written articles on various book summaries, which will help you in your financial success.
Do check my other blog on consumer goods.