pharma's shifting paradigm in india

IMS HEALTH INDIAWHITE PAPER

DECEMBER 2014

Pharma’s Shifting Paradigm in India Becoming a multi-channel market

PHARMA’S SHIFTING PARADIGM IN INDIA 2

To date, the Indian pharma market has been dominated by the trade/retail segment, which has contributed up to 85% of the market’s value. This is unlike most mature markets globally which usually operate in a multi-channeled business model involving not only trade outlets, but also hospitals, over-the-counter (OTC) and retail chains. However, in light of the increasing demand for quality care in hospitals, as well as increased government spending and recent regulatory changes, India is slowly evolving into a multi-channel market. The most striking aspect of this shifting paradigm is the increasing dominance of the hospital segment.

And so there is a strong need for pharma companies in particular to rethink their business strategy in order to tap into the maximum value of this growing opportunity. But to do that, key questions must be addressed and the potential of this growing market segment must be clarified:

1 IMS Hospital Census 2011, IMS Prescription Audit and IMS Health quantitative Primary Market Research and, IMSCG Analysis

• WhyisthehospitalsegmentbecomingincreasinglyattractivetoIndianpharmacompanies?• Dopharmacompaniesneedtorethinktheirbusinessstrategyinlightoftheevolvinghospitalsegment?• Isthepharmamarketreadyandequippedtocrackthehospitalcode?

Figure 1: Projected evolution of India into a multi-channel market

IMS MIDAS, Market Prognosis

Currentlandscape

81%

9%

10%

Developedmarketsmodel

19%

8%

28%

48%

Trade Pharma OTCHospitals Retail Chains

Pharma consolidation Retail sector consolidation Emerging corporate hospitals Regulatory changes Insurance coverage Lifestyle changes

3PHARMA’S SHIFTING PARADIGM IN INDIA

The Indian hospital segment today represents a high potential market to pharma companies primarily due to five key factors: market size, growth rate, investment climate, ease of targeting and certain ‘behavioral’ factors.

Market size: India has over 25,000 hospitals, both private and government-owned. These hospitals span all town classes and represent a total opportunity size of approximately INR 22,000 Crores (~USD3.66 billion) for all therapy classes.1

WhyisthehospitalsegmentbecomingincreasinglyattractivetoIndianpharmaceuticalcompanies?

Growth rate: The hospital segment has grown steadily at a rate of 25-30% in the last 5 years across metro and tier 1 cities, fuelled by the emerging private, specialty & corporate sectors.

“PULL“ FORCES • Increasingpatientsophisticationandawareness, resulting in higher demands for quality care

• Increasingpreferencetobetreatedathospitalsforchronicdisorders, a result of new awareness campaigns and free health checkups run by hospitals

“PUSH” FORCES: • Regulatorychanges, allowing the distribution of free generics in hospitals and increased government health care expenditures for hospitals

• Expandedprivateinsurancecoverage and government programs such as RSBY, Aryogyashree etc.

2 IMS Hospital Census 2011 3 IMS Sales Audit

The majority of the potential lies in urban hospitals and outpatient treatments (although it is important to note that the contribution of outpatients varies by hospital type, from 60% in nursing homes to ~80% in private hospitals).2

Figure 2: IMS Health estimates on trends in the private hospital segment

Private Hospitals (Metro)

Nursing Homes (Metro)

Private Hospitals (Tier I)

Nursing Homes (Tier I)

Charitable Hospitals

Corporate Hospitals

Number of Hospitals

Potential Offered

81%

81% 6%

14% 8%

4%

3%

1%

3%

2%

2%

6%

Outpatients

Inpatients

Private Hospitals (Metro)

Nursing Homes (Metro)

Corporate Hospitals

Charitable Hospitals

Private Hospitals

(Tier I)

Nursing Homes (Tier I)

81%

19%

75%

25%

56%

44%

78%

22%

56%

44%

60%

40%

IMS MIDAS, Market Prognosis


Ease of targeting: The geographic concentration of hospitals in Tier 1 and Tier 2 cities also increases the feasibility of entering such a market. IMS Health estimates that approximately 80% of the hospitals with over 100 beds are concentrated in the top 20 cities, and that hospitals in the top 40 cities contribute to around 90% of the total urban hospital business potential.5 In addition, easier accessibility to doctors across specialties in larger hospitals makes targeting for a wider portfolio of products even easier.

Behavioral factors: Above all this, it is the behavior demonstrated by private, corporate and specialty hospitals in their product selection or decision-making that makes them attractive for pharma companies. Hospitals display a high level of risk aversion that naturally opens the door for effective, high quality products from top pharma manufacturers. They place a premium on science and buy scientifically advanced products, driving a high acceptance rate for innovative products as compared to the trade segment. Furthermore, the price points in these hospital segments have witnessed higher growth than their trade counterparts, promising higher value return to pharma companies.

However, the nature of this growth is uneven, varying by hospital type and limited to metro areas and Tier I cities. Such disparities are due in large part to the differences in how funds are released and managed in order to drive outcomes. For example, private, corporate and specialty hospital chains are witnessing a significant influx of funds from the private sector, which tend to be managed efficiently and effectively. Government hospitals, on the other hand, are solely dependent on government allocation and capabilities at the state level.

As a result private, corporate and specialty hospitals in Metro and Tier I cities are growing much faster than government hospitals.

Investment climate: The growing hospital segment has been well noticed by private equity (PE) investors and venture capitalists; Over the last 4 years, more than 70% of PE investments have been channeled towards the growing hospital segment. In the last year alone, of the top 5 deals in each segment of India’s life sciences and healthcare sectors over the past year, 50% of the $500Mn in PE investments were made in the hospital segment. This segment has also seen a great deal of merge and acquisition activities, with almost $30Mn in M&A deals in May 2013 alone.4

4 VCCircle 5 IMS Hospital Census 2011

Figure 3: PE investments in life sciences and healthcare segment

Dea

lValue

(Mn$)

20080 0

5

10

15

20

25

30

35

400

200

600

800

1000

1200

1400

1600

1800

20102009 2011 2012

DealVolum

es

Pharmaceuticals Providers Medical Devices LSHC Deals Providers Deals

Source: VC Circle


The hospital segment may signify great business potential for pharma companies, but it also comes with its own challenges that vary by hospital type. Therefore it is important for pharma companies to truly understand the segment’s unique dynamics, especially in terms of market entry, therapy area and sales strategies, and the changing influence structures for both hospitals and physicians.

Gestation periods of seeking entry can be long: Typically, pharma companies have a waiting period of nearly a year to enter private hospitals in metro cities, and longer for government, railway, and military hospitals. Much of this time is spent convincing a wide range of stakeholders, from doctors and medical superintendents to procurement officers, to agree to list a product in the formulary (the list of brands/molecules to be stocked in the in-house pharmacy). However the complexities can increase depending on the type of hospital targeted and entry is often subjected to varying levels of bureaucracy, approvals, and department specifications (open ICU vs. closed ICU) for which products are procured.

There are significant differences from the traditional trade segment in terms of therapy areas and specialty focus: One of the most basic and critical differences between the trade and hospital segment is the difference in therapy area (TA) focus. While the trade segment is dominated by oral anti-infectives, the hospital segment is dominated by injectable anti-infectives. Pain, respiratory and CNS (neurology) are also of more importance in hospitals than in the trade segment.

In terms of specialty focus, while the trade segment is highly dominated by consulting physicians and general practitioners (MBBS and non-MBBS), hospitals see a different mix. In this market, General Medicine offers the highest potential (accounting for ~60% of outpatient business) due to the large number of therapy areas involved and larger patient base. It is followed by Obstetrics & Gynecology and Orthopedics, both of which are experiencing increasing market share due to an overall increase in patient awareness campaigns. These TA and specialty mix dynamics should naturally compel pharma companies to design their hospital and retail portfolios differently.

Strategies need to move beyond just selling:The traditional model for pharmaceutical companies has been restricted to selling drugs, rather than solutions, to doctors, nurses and other hospital staff. However, as hospitals are now playing a larger role in communities, and also wishing to differentiate themselves from competition, the expectations have changed, and stakeholders are demanding a more holistic, solutions-based approach to their partnerships.

This means that to stand out, pharma companies are increasingly being asked to offer services along with products. Examples might include targeting patients through education programs, targeting paramedics and physicians with newer perspectives on disease management, providing general healthcare statistics, or simply providing other value-added services using technology.

There is a shift in power from physicians to hospital administration: The above factors are only a small portion of a much bigger puzzle. The pressures of changing physician behaviors and the increasing influence of hospitals in defining prescription behavior is perhaps the most significant dynamic in determining the strategies, and ultimately the performance, of pharma companies in this segment.

To understand the changing relationship between physicians and hospitals, IMS Health has developed a “control framework” that looks at the physician’s freedom to prescribe brands or molecules and the hospital’s role in influencing such prescriptions. Interestingly, the level of control differs by the type of hospital and between different specialties in the same hospital (see Figure 4).

IstheIndianpharmamarketreadyandequippedtocrackthehospitalcode?


So where do these levels of control come from? Below are some of the nuances driving the varying level of controls across hospital types and specialties.

HOSPITALDYNAMICS: Prescription controls: Private and corporate hospital chains tend to focus on defining their formulary to attain SKU rationalization and to operate at competitive operating margins. To implement more restrictions on their formulary, and to force physicians to adhere to the system, hospitals tend to track doctor prescriptions, for example by using e-prescriptions to monitor doctors and penalize them in the event of non-compliance. For outpatients, hospitals can force doctors to prescribe only only certain molecules, and can restrict which brands are dispensed from the pharmacy. While private/ corporate hospitals dominate in this behavior, charitable hospitals and nursing homes have initiated similar controls for select specialties and TAs.

Staff controls: Hospitals often do not allow doctors to practice in other hospitals and can sometimes increase the proportion of salaried doctors to visiting doctors in order to safeguard their patient pool and dictate terms.

Purchasing controls: The formation of a central purchasing committee to keep a strong check on the procurement process often leads to the increasing influence of medical superintendents/or purchasing department heads in driving purchase decisions and thus further limiting physician influence. Additionally, hospitals often indirectly force patients to purchase drugs from in-house pharmacies by using “non responsibility” language to imply penalties for not purchasing drugs (even prescribed brands) from in-house pharmacies.

PHYSICIANDYNAMICS: General practitioners are increasingly entering hospitals’ networks for referrals in order to increase their margins, but in turn often find themselves forced to follow the hospital’s mandates. Consulting physicians, gynecologists, and orthopedists with 5 years of experience are among those who prefer to practice in private or corporate hospitals due to higher salary packages, and subsequently give in to the hospitals terms such as prescribing drugs only listed in their formulary.

However, specialists such as cardiologists, neurologists, etc. are usually able to dictate their own prescription behavior, beyond the hospital’s control. This is primarily due to the complex nature of the treatment they provide and their limited number. Specialists are also highly sought after in a hospital, and hospital management tends to not exert high control so as to retain them on staff.

A low level of control implies that the physicians can exercise their own choices. Institutions on this end of the spectrum include:

• Hospitalswithhigherpayingcapacities(e.g. corporate and private hospitals with > 100 beds) • Centralizedinstitutions(e.g.armyandrailways)

• Generalspecialties(e.g.Consultingphysicians, General Practitioners, Ear Nose & Throat physicians, Gynecologists, Orthopedic physicians, etc.)

• Governmenthospitals • Charitablehospitals

• Privatehospitals(<50beds) • Nursinghomes

A high level of control implies that the hospital dictates the prescription behavior. High levels of control are often seen in:


Of course there is a difference in the end objectives for hospitals and physicians. While physicians focus primarily on the quality of treatment and their patient base, hospitals have stiff cost/revenue targets to consider, often leading to a clash of interests. IMS Health has plotted the different segments based on their level of control on prescription behavior and the strength of the relationship between pharma companies and practicing doctors. This matrix approach can help pharma companies identify the segments in which they wish to operate and navigate the associated cost and benefits.

Figure 4: Prioritization matrix to identify hospitals to target

Size of the bubble represents the number of hospitals

High entry barrier Low entry barrier Easily Accessible

Government Hospitals not distributing free generics

Nursing Home

Charitable Hospital (<100beds)

Leverage existing relationships to seek easy entry and drive Rx volumes

Build on existing relations and adopt tactical measures (e.g. offering discounts) to seek entry

Invest time and resources to develop relationship with different stakeholders in these high potential hospitals to ensure high recall and seek entryLo

wM

ediu

m

Stre

ngth

of r

elat

ions

hip

with

doc

tors

Hospital’s Level of Control on Prescription Behaviour

Low Medium High

Hig

h

Private Hospital (<50beds)

Charitable Hospital (>100 beds)

Private Hospital (50-100 beds)

Private Hospital (>100 beds)

Govt. Hospitals distributing free generics

Army and Railway Hospitals

Corporate Hospitals


Clearly, the hospital segment is being shaped by changing dynamics between the patient, physician and hospital management. Among these three levers, it is likely that the shifting structure and influence of hospital management will be the most influencial in transforming the way business is done in the future; the traditional strategy adopted by pharma companies to target physicians and drive prescription volumes may not hold ground amidst such evolving administrative dynamics.

Today pharma companies target hospitals in a very similar way to their trade business. And while some MNCs have formed a dedicated team or strategy to target hospitals, the question remains, is it good enough to tap the true potential offered by hospitals?

At IMS Health, we believe it is critical for pharma companies to tailor their strategy to target the unique, complex hospital environment, and focus on answering certain key strategic questions within their organization:

1. Which segment of hospitals should be targeted and where are they located? 2. What is the right product portfolio to enter the hospital segment? 3. What key specialties should be targeted? 4. Who are the key stakeholders to be targeted to ensure optimal product acceptance? 5. What are necessary KPIs, and how can they be tracked on an ongoing basis to drive effective and productive business performance?

By addressing these questions internally, and by reviewing the market insights presented in this paper pharma companies will be able to create robust, sustainable strategies that extract the true potential of this market.

Dopharmacompaniesneedtorethinktheirbusinessstrategyinlightoftheevolvinghospitalsegment?

Figure 5: Summary of forces affecting the Indian hospital segment

• Exerting controls on brands prescribed by doctors

• Forcing doctors to prescribe molecules only in OPD

• Stonewalling doctors to practice in the select hospitals only

• Increasing the proportion of salaried doctors

• Indirectly forcing patients to purchase drugs from in-house pharmacy

• Focus on increasing operational efficiency by SKU rationalization and better margin

• Decreasing influence of physicians in purchasing decision

• Preference of generalists to practice in private/corporate hospitals

• Visiting specialists lobbying against hospitals to decrease control on prescription behavior

• Physicians prescriptions driven by the margins offered by pharma companies

• GPs getting involved in the hospitals network for referrals

• Increasing preference towards hospitals for Chronic disorders

• Increasing insurance coverage leading to higher offtakes from hospital pharmacy

• Increasing awareness and ease in identifying hospitals for treatmentChangingHospitalDynamics ChangingPhysicianDynamics

ChangingPatientDynamics

IncreasingneedforPharmaCostotargetthehospitalsegmentdifferently

HospitalSegment

IMS Health is a leading worldwide provider of information, technology and services dedicated to making healthcare perform better. By applying cutting-edge analytics and proprietary application suites hosted on the IMS One intelligent cloud, the company connects more than 10 petabytes of complex healthcare data on diseases, treatments, costs and outcomes to enable our clients to run their operations more efficiently. Drawing on information from 100,000 suppliers, and on insights from more than 40 billion healthcare transactions processed annually, IMS Health’s 9,000+ expert resources drive results for over 5,000 healthcare clients globally. Customers include pharmaceutical, medical device and consumer health manufacturers and distributors, providers, payers, government agencies, policymakers, researchers and the financial community. Additional information is available at www.imshealth.com

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