India Healthcare: Assessing the Challenges

India’s healthcare sector has had a difficult two-year period. The BSE Healthcare Index, which primarily consists of generic drug manufacturers (70 constituents, 62 are pharma companies), has declined by 19% over the past two years, softened by a 10% recovery since early August.

Intensified price competition in the US, the industry’s largest market, has been the main culprit while a sweeping antitrust investigation hasn’t’ helped. In addition, demonetization, price reductions/controls on medical implants, and other policy changes have dinged the P&Ls of private hospital chains and other healthcare providers. 

Generic Drug Industry Struggling with a Difficult U.S. Market 

Generic drug deflation in the US started to accelerate last year from 0-5% to 8-10% currently. The USFDA started to reduce the backlog of Abbreviated New Drug Applications during this period. Further, FDA Commissioner Scott Gottlieb, MD, has announced a “Drug Competition Action Plan” to address accidental monopolies and oligopolies that have resulted from prior industry consolidation:

• Publication of a list of over 200 off-patent, off-exclusivity branded drugs without approved generics with a promise to “expedite the review of any generic drug application for a product on this list to ensure that they come to market as expeditiously as possible.” 
• Prioritization of the review of generic drug applications “until there are three approved generics for a given drug product.” 

A study published in the September 2016 edition of JAMA Internal Medicine estimated that 37% of generic drugs approved since 1984 had fewer than four generic approvals, so the opportunity here is not inconsequential. The net effect is that competition will intensify before it eases.  

The generic drug industry globally has been consolidating, but this process needs to continue. In fact, the CFO of India’s Lupin recently commented, “By 2021, we will see levels of normalcy return to most companies, including us.” Industry capacity must shrink. Leading pharmaceutical companies from China and South Africa have stepped up their pursuit of acquisitions of generic drug companies in the US and Europe, but these deals don’t address this need.

Domestic Policy Changes Causing Potholes 

Policy changes and competition in the domestic market have created some bumps in the road for the healthcare sector, but these look acute in nature:  

• Demonetization – In November 2016, the government announced the demonetization (aka “DeMo”) of all ?500 (US$7.80) and ?1,000 (US$16) banknotes in order to curtail the shadow economy, tax avoidance, and other illegal activities. This action caused short-term disruptions in volumes at private hospitals. Outpatient services felt the most impact because most patients would pay in cash. 
• Price caps on stents and orthopedic devices – The National Pharmaceutical Pricing Authority (NPPA) imposed price caps on stents (?7,260 for bare metal stents; ?29,600 for drug-eluting stents) in February 2017 that effectively cut prices by 75%. The NPPA followed up in August with a price cap on cobalt chromium knee implants (?54,720, down from as much as ?250,000). Hospitals reportedly have attempted to offset the cuts with higher service fees, but the degree of success remains unclear.
• GST rollout – The government introduced a Good & Service Tax (GST) effective July 1: 12% on pharmaceuticals, medical devices and equipment; 18% on health insurance; 12-18% on diagnostic services (lab tests, x-rays, MRIs, etc.). Drug wholesalers and pharmacists destocked in advance of the implementation, temporarily dampening demand for manufacturers. 
• Price competition among clinical labs – Dr Lal PathLabs has discussed intensified price competition in the B2B segment of its business, leading to significant reductions in EPS estimates and a 25% YTD decline in the shares. Competitor Thyrocare Technologies has fared better with a modest 2% YTD decline. 

India Offers Substantial Opportunities, But Pick the Right Spots

India spends a “whopping” 2.5% of GDP on healthcare (government component is 50% of that), dramatically below the global average of 10%. The private sector has taken the lead in building hospital capacity and other medical infrastructure, but these companies target the top 15-20% of the population. The Modi government’s recent emphasis on affordability should cycle through over the next year. In contrast, pressures on the generic drug industry are more chronic.

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