Sales cover direct and indirect pharmaceutical channel wholesaler and manufacturers The figures above include prescription

and certain over the counter data and represent manufacturer prices

Source: ORG IMS Number of employees/stockist

Others (factors influencing inventory) include: Market demand was main influencer in North, East and west zones while among south zones stockist MR pressure and credit period figured prominently. Respondents from North and East zones also mentioned special discounts other than schemes offered by company as an important factor influenced their purchase/stocking decisions.

Stockist in the north has lowest earning since competition compels them to pass on higher concessions to their customers. Stockists from the west have highest earning whereas East and south are similar

In an industry which has strong double digit growth, the expiry/damages at 3% is a matter of concern and should be maintained ideally at <1% Losses incurred by them reduce their net profit margin which is a serious concern for the distribution industry and highlights the gap in the current norms and policies.

In absolute rupee term north, east and west have an average annual bad debt value of <Rs 1 lakh, this is significantly higher in south zone (>Rs 3 lakhs)probably on account of their higher turnovers.

Services includes delivery timelines, proper order booking, meeting settlement claims on time etc. Others include merchandising gifts i.e. carry bags, umbrella etc to support seasonal demands It is apparent that bonus offers are available to the majority of stockists in south zone while it is preferential in north, east and west zones Stockist said that benefits of these special schemes were to increase sales, improve liquidation, build customer relationships and drive early payments. Discounts offered were highest in North zone followed by east zone- indicating the high fragmentation as well as the resulting competition. Scope of improvements in several areas of operations: Optimization of inventory Improvement in payment cycle Containment of overhead costs Providing value added services to customers and vendors to build loyalty Negotiating with companies to improve settlements Optimum usage of infra

Stockist can do this by embracing new information technology by completely automating the process. Anti-infectives largest therapeutic category Gastrointestinal and cardiac are the second and third largest therapeutic categories, respectively Oral anti-diabetics and anti-peptic ulcerants are the fastest growing segments under alimentary and metabolism therapeutic categories

Reason for decline in acute segment were increase competition and price pressure due to commoditization Decline in chronic segment it is due to macro-economic factors like increase in MR strength and as a result increasing competition. MNC are expanding very aggressively in india and have very high aspiration. They are rapidly expanding their field force to extend their geographical reach. MNC are shifting from acute to chronic therapies due to superior growth rate and high entry barriers. In products which are core to their business they are entering with extremely competitive pricing versus Indian companies. All these factors together with weak macro-economic outlook is adding to slowdown in growth.

MNC s are aggressively investing in branded generics and moving into newer therapies like CVS, CNS and anti-diabetes. .MNCs have aggressively priced their products below their indian counterparts. DRL: India business which contributed 15% grew at lower rate of 6% compared to industry rate of 14 % due to on-going issues of DCGI on the companys top selling pain brand Nise

Weakening macro factors impacting Indian pharma growth

Going ahead we believe all the domestic companies who have strengthen the field force to spurt up the growth will eventually witness a slowdown in domestic growth rates. In order to sustain higher growth rates 15-16%, companies will have to increasingly focus on improving MR productivity by expanding to newer therapies, newer markets and newer launches.

During my visit to some of the general practitioner in Mumbai, I found that for most of the infections and general illness, they was prescribing Mankind medicines. E.g., most of the antiinfective prescribed belonged to penicillins and cephalosporins category. During my interaction, I understood that Mankind gives superior incentives for each prescription written by the doctor. If the patients case is very serious, then higher class of anti-infective i.e. penems were prescribed by the doctors and that too only MNC brands. The reason cited was-MNC brand are original research molecules and so doctors comfort level is usually higher when prescribing these medicines.

Growth in anti-infective category is mainly coming from volume growth and new product launches. Industry growth is mainly driven by unlisted players like Mankind.

Mankind has been pricing its product at relatively lower rates as compared to other pharma companies in India. Mankind is particularly strong in commoditized therapies such as antiinvectives, gynaecology, and gastro which together contribute more than 50% of domestic revenues.

In acute category, increase in competition and pricing pressures are affecting the anti-infective therapy and to some extent pain management. However, other therapies in acute category like ophthalmology, gynaecology, hormones, and vaccines which are speciality in nature are not affected by competition. Hence another way to dissect Indian pharma industry is how drugs are being prescribed or sold in the market i.e. addressed to GP, specialist and OTCs. This will be more relevant because competitive companies target drugs that have huge revenue potential and can be sold easily through existing relationship with doctors. Specialist categories have high-entry barriers due to requirement of specialized sales personnels, lower competition, good growth prospects and hence lower price pressures compared to GP category. Therefore, better growth and margins in speciality segments.

Speciality category contributes ~45% of total Indian pharma market. This includes chronic therapies and also some of the acute therapies like opthal, hormones, derma, gynaec, and vaccines. GP category includes Anti-infective, pain, gastro, vitamins and others. Pricing pressures and competition is intense in this category mainly from unlisted players like Mankind. Hence

relationship with doctors is of utmost important for the companies, so that it becomes easier to push newer products into the market. 4 step stress-test on the profile of pharma companies Step1: companies having strong presence in the speciality therapies-less prone to competition

Step 2: companies having fewer top products in the GP category-lower pricing pressure

It is well known that the top brands in GP category face the maximum competition making it difficult for them to grow above the market. Companies having more than top 4 brands falling into the GP category, will be highly susceptible to competition and price pressures

Step 3: Companies having lower dependence on a single therapy- lower concentration risk

Such high dependence on a single therapy is detrimental for the companys long term growth prospects. Step 4: Domestic companies having tied-up with MNCs for launching products in the speciality category-competitive advantage In this step, I have identified domestic companies having tie-ups with MNCs and have access to their expertise & blockbuster drugs. I believe these companies will always have an edge vis--vis competition because of their alliance with the MNCs, which helps them club their distribution strength with a superior product portfolio. Based on the 4 step stress test:

In IPCA labs cut in growth estimates for domestic business stands highest at 7 %. This is mainly led by companys high dependence on the antimalarial and anti-infective therapies. These two therapies contribute 31% of the total revenue and five of the top brands come from these therapies. In case of Dr. Reddy we have cut the domestic growth estimates by 5%. This is mainly led by controversy related to one of its top brand Nice in pain therapy due to which there was a decline in this therapy which brought down the overall growth. The estimate also have been changed for its limited competition product i.e. Fondaparinux due to which earnings downgrade is steeper than cut in domestic growth estimates. Conclusions: Companies like IPCA which are mainly focused on Indian markets are already feeling the heat of competition. The growth are of the company in domestic market are already come down to single digit. In case of Dr. Reddy domestic growth is coming down due to high exposure to the anti-infective category but strong growth will come from US market due to strong para IV pipeline DRL: DRL to witness modest growth of 12% CAGR (FY11-13)in domestic market, due to issues in pain management and anti-infective therapy. New launches, gain in market share in existing products & limited competition opportunities to drove the growth in US