GLOBAL PHARMACEUTICAL INDUSTRY1

The global pharmaceutical industry is showing signs of recovery, with several positive factors projected for the next five years. Global spending on medicines is expected to reach US$ 1.4 trillion by 2020, an increase of US$ 349 billion from 2015.

Spending will be concentrated in developed markets and focused on non-communicable diseases. Specialty therapies will continue to be more significant in developed markets than in pharmerging markets#.

Global demand for pharmaceuticals will be driven by:

• Demographic trends

• Rise in diagnosis and treatment of chronic conditions

• Ageing and growing global population

• Improved access to healthcare

• Increasing per capita income

The key contributors of the US$ 349 billion in growth over the next five years will be:

1. Improving access to modern medicines in pharmerging countries;

2. Enhanced use of more expensive branded medicines in developed markets; and

3. Use of cheaper alternatives when loss of exclusivity happens

TABLE 1
Region Spending1 US$ billion
Regions 2015 2011-2015 CAGR 2020 2016-2020 CAGR
Developed Markets 684 4.8% 870-900 3-6%
Pharmerging Markets 249 11.9% 345-375 7-10%
Other Markets 135 5.2% 150-180 1-4%
Global Pharmaceutical Market 1,069 6.2% 1,400-1,430 4-7%

Spending and Growth to 2020

The developed markets will contribute 63% of the spending, driven by the US. Original brands will represent 52% of spending and 85% of global spending will be for medicines to treat non-communicable diseases. These distributions of costs belie the very different perspective on a volume basis where lower-cost/higher-volume medicines dominate the overall use of medicines.

Specialty and traditional medicines

A rising proportion of medicines are specialty medicines. In 2020, 28% of global spending will be for specialty medicines, up from 26% in 2015. Spending will be more focused on specialty medicines in developed markets, accounting for 36% of spending in 2020, compared to only 12% in pharmerging markets.

The use of traditional medicines (non specialty) account for the majority of medicine spending globally, but there are very different patterns of usage and spending in developed markets compared to pharmerging markets. In developed markets, some of the major classes of medicines will experience reduced spending due to patent expiries, whereas differences in disease morbidity and the adoption of innovation drive the remainder of differences.

GLOBAL GENERICS3

The patent cliff has passed its steepest point, and a steady flow of patent expiries continues to offer opportunities for generics, as cost-conscious governments and other healthcare payers increasingly endorse generic drugs. The global generics market was valued at US$ 168 billion in 2013; and is expected to reach US$ 283 billion by 2018, registering an 11% CAGR.

Generic drugs account for around 70% of the US drug market by volume. In Europe they account for around 50%, although the proportion differs significantly by country. To a large extent, the magnitude of savings from generics that each country achieves depends on the utilisation levels and price differentials between the generic and branded versions. In the US, generics use is almost 90% within the off-patent (unprotected) market. However, in some European countries, potential savings are not fully exploited due to lower utilisation of generics in key therapy areas.

Japan, Italy, Spain, Poland and France have adopted pro-generic policies that encourage doctors or pharmacists to substitute generics for branded products. The transition to generics in these markets is gradually increasing.

Key Demand Drivers

Ageing population and life expectancy3

Populations across large parts of the world (Western Europe, Japan, China, Argentina, Thailand, among others) are ageing. This scenario is expected to bolster healthcare spending; and the demand for pharmaceutical products in 2016 and beyond.

Ageing population and growing life expectancy — up from an estimated 72.3 years in 2014 to 73.3 years in 2019 — will bring the 65-plus age category to over 604 million, or 10.8% of the total global population. This number is anticipated to be even higher in Western Europe (nearly 21%) and Japan (28%). Among the factors contributing to increased life expectancy are, declining infant mortality, enhanced living conditions, improved sanitation, better prevention of communicable diseases and growing access to medicine.

Rising income2

Population expansion and rising wealth should be strong drivers of health spending in developing markets, particularly in Asia and the Middle East. By 2019, the number of high-income households (those earning over US$ 25,000 a year) will likely rise to over 540 million globally; Asia is projected to generate more than half of that growth.

Accessibility and affordability2

The trend towards the adoption of universal healthcare continues, with more countries expanding public or private health care system coverage or deepening it to reduce out-of-pocket spending. In perhaps the most visible example of expanding health care coverage, the US federal and state governments continue to implement health insurance exchanges under the Patient Protection and Affordable Care Act of 2010 (ACA).

Growing chronic diseases2,6

The proliferation of chronic diseases — in part, a consequence of enhanced life expectancy and other factors — is having serious repercussions in both developed and emerging countries. Obesity, cardiovascular diseases, hypertension, and diabetes are now persistent, widespread health problems and will challenge public health systems to meet increasing demand for drugs and treatments.

There are around 387 million diabetes patients globally; and the number is expected to touch 592 million by 2035. China and India have the largest number of diabetes sufferers in the world, at more than 96 million and 66 million, respectively.

Outlook

The global pharmaceutical spending growth will be driven by brands in developed markets and enhanced usage in pharmerging markets, while being partly offset by patent expiries. Brand spending in developed markets is likely to increase by US$ 298 billion in the next five years, driven by new products and price escalation primarily in the US.

In 2020, the US, EU5 and Japan will have important differences in spending and growth dynamics, compared to what it is today. Pharmerging markets spending will grow primarily from increased use of medicines, while China, the leading pharmerging country, will reach US$ 160-190 billion in spending with sluggish growth to 2020.

Developed markets

Pharmaceutical spending in developed markets stood at around US$ 684 billion in 2015. It is estimated to grow at a compound annual growth rate (CAGR) of 3-6% during 2016-20 to reach US$ 870-900 billion by 2020. Developed markets will continue to account for the majority of medicine spending due to both higher prices per unit; and the mix of newer medicines that bring meaningful clinical benefits to patients facing a wide range of diseases.

TABLE 2

Developed market pharmaceutical spending1 (US$ billion)

Region/Country 2015 2010-2015 CAGR 2020 2016-2020 CAGR
US 430 6.1% 560-590 5-8%
EU5 144 2.9% 170-200 1-4%
Germany 41 3.8% 52-62 2-5%
France 31 0.1% 30-38 (-3)-0%
Italy 25 3.1% 30-40 2-5%
UK 28 6.9% 28-38 3-6%
Spain 19 0.7% 20-28 1-4%
Japan 78 2.6% 79-89 0-3%
Canada 19 2.0% 23-33 3-6%
South Korea 13 2.3% 13-20 2-5%
Developed Markets 684 4.8% 870-900 3-6%

Patent expiries in developed markets

The loss of exclusivity for branded products is expected to reduce brand spending by US$ 178 billion in the next five years, a larger amount vis--vis the last five years. The exposure of brands to loss of exclusivity will be higher, at US$ 190 billion, over the next five years; and the impact of those expiries on brand spending will be greater as biosimilars begin to have a larger impact.

USA: The US spending on medicines will reach $560-590 billion in 2020, a 34% increase in spending over 2015 on an invoice price basis. This growth will be driven by innovation, invoice price increases (offset by off-invoice discounts and rebates) and the impact of loss of exclusivity. Spending growth in the next five years will differ from the last four which included the largest patent expiry cluster ever in 2012.

The impact of patent expiries over the next five years, while higher in absolute dollars, will be lower in percentage contribution than the past five years; and no single year will reach the level of 2012. Generic medicines will continue to provide the vast majority of the prescription medicine usage in the US, rising from 88% to 91-92% of all dispensed prescriptions by 2020.

The Affordable Care Act (ACA) will continue to have an effect on medicine spending during the next five years, primarily due to expanded insurance coverage. ACA access expansion will be largely complete by 2020, bringing modest new demand for medicines, but an increasing share of medicines will be paid for by Medicare, Medicaid, and other government funded or mandated programs each commanding substantial discounts from list prices.

EU5: The top 5 (Germany, France, Italy, Spain and the UK) European markets will spend US$ 180-190 billion on medicines in 2020, an increase of US$ 40 billion from 2015, which includes US$ 19.4 billion of exchange rate effects, mostly driven by Germany and the wider adoption of specialty medicines. Germany will increase spending largely as a result of wider adoption of innovation.

The UK, is re-examining the organisation of the National Health Service (NHS) and historic pricing agreements with the pharmaceutical industry. Spain and Italy each continue to find their economies challenged by the global economic crisis; and have been slow to recover. Other major European countries will face budget challenges for healthcare funding.

A common lever used by European countries to control spending on medicines is to shift usage to generics and realise associated savings. European governments were the first to adopt biosimilar legislation that enables non-original competition to biotech drugs; and by 2020 such drugs will account for most of the savings in developed markets associated with the adoption of biosimilars.

Across Europe, the adoption of specialty medicines will drive higher spending growth; and whereas 81% of the increase will be driven by specialty medicines, it will also be partly led by recovery in spending on non-specialty medicines.

Japan: Japan’s pharmaceutical spending stood at approximately US$ 78.3 billion in 2015. It is estimated to grow at a compound annual growth rate (CAGR) of 0-3% during 2016-2020 to reach US$ 79-89 billion by 2020. Japan’s growth is expected to return to historic patterns through 2020; and the long-term effects of the new price regime will result in average prices to be essentially unchanged from 2015.

2010-15 saw substantial increase in the average prices of medicines as policies designed to reward innovators were implemented. The incentives to wider generic usage will double generic spending, as generic penetration of the unprotected market is targeted by the Ministry of Labor Health and Welfare (MLHW) to reach 80% by 2020, up from 54.4% for the quarter ending June 2015.

Pharmerging markets: Pharmaceutical spending in pharmerging markets stood at around US$ 249.2 billion in 2015. It is estimated to grow at CAGR of 7-10% during 2016-20 to reach US$ 345-375 billion by 2020.

Growth in spending on medicines in pharmerging markets is driven primarily by wider use of medicines. The per capita escalation in volume and spending reflect the strong commitment to wider access to healthcare from governments; and expanded private insurance markets that many pharmerging countries are experiencing.

The difference in per capita spending growth and overall spending growth over the next five years reflects population growth. The overall high level of per capita pharmaceutical spending growth reflects both access expansions and the rising mix of higher cost medicines being used in pharmerging markets.

TABLE 3
Pharmerging markets pharmaceutical spending1 (US$ billion)
Region/Country 2015 2010-2015 CAGR 2020 2016-2020 CAGR
China 115 14.2% 150-180 6-9%
Tier 2 Markets 57 12.9% 85-95 9-12%
Brazil 28 13.8% 34-44 9-12%
Russia 17 13.0% 29-39 11-14%
India 12 10.9% 13-19 5-8%
Tier 3 Markets 77 8.2% 100-120 6-9%
Pharmerging Markets 249 11.9% 345-375 7-10%

(Pharmerging markets: China, Brazil, Russia, India, Venezuela, Poland, Argentina, Turkey, Mexico, Vietnam, South Africa, Thailand, Indonesia, Romania, Egypt, Pakistan, Ukraine, Algeria, Colombia, Nigeria, Saudi Arabia and Russia)

Global Consumer Healthcare Industry7

The global consumer healthcare market grew by 6% CAGR between 2008 and 2014 vis--vis pharmaceutical industry CAGR of 4% in the same period.

USA and China represent the biggest markets with 40% market share of the US$ 119 billion industry. BRIS (Brazil, Russia, India and South Africa) have 9% share, growing at 8% annually.

The market comprises two sets of competition: global bellwethers having extensive resources, strong brands and economies of scale; and local leaders possessing deep understanding of consumers’ needs and close relationships with suppliers, distributors, retailers and regulators.

From category perspective, Vitamins and Mineral Supplements (30%) followed by Cough, Cold & Allergy (20%) are two biggest categories. Dermatology (14%), Analgesics (13%) and Gastrointestinals (12%) are the other important categories.

Active Pharmaceutical Ingredients (API)4

The Global Active Pharmaceutical Ingredients (API) market accounted for US$ 121.4 billion in 2014; it is expected to grow at 6.4% CAGR to reach US$ 198.8 billion by 2022. Patent expiration of prominent drugs, government initiatives, regional penetration and ageing global population are some of the factors that are driving market growth. Strict validation and safety guidelines stated by WHO and fragmented market are the factors that are hampering the API market growth.

The market is segmented on the basis of API type, manufacturers, therapeutic area and geography.

Asia Pacific is projected to be the fastest growing regional market. The fast growth is attributed to patent expirations of drugs, and favorable investments in medical research.

INDIAN PHARMACEUTICAL MARKET1,5

The pharmaceuticals market in India is the third largest in terms of volume and 13th largest in terms of value globally. Branded generics dominate the market with 70%+ share. The country is the largest provider of generic drugs globally with the Indian generics accounting for 20% of global exports in volume terms.

In 2015, the market size of the pharmaceutical industry in India was at US$ 12.1 billion. Future growth is expected to be driven by increasing consumer spending, rapid urbanisation, and rising healthcare insurance among others.

Going forward, growth in Indian market would also depend on the ability of companies to align their product portfolio towards therapies for chronic diseases (cardiovascular, anti-diabetes, anti-depressants and anti-cancers) that are on the rise.

SUN PHARMACEUTICAL INDUSTRIES LIMITED SUN PHARMA

Beginning in 1983 with a portfolio of 5 products, Sun Pharma has emerged as the world’s fifth largest specialty generic pharmaceutical company and India’s top pharmaceutical company. The Company’s vertically integrated business, economies of scale and a skilled team enable delivery of quality products in a timely manner at affordable prices. It provides high-quality, affordable medicines trusted by customers and patients across the world. The Company’s global presence is supported by 49 manufacturing facilities, spanning six continents, R&D centers across the globe and a multi-cultural workforce comprising over 50 nationalities.

Sun Pharma is an innovation driven enterprise, supported by strong R&D capabilities comprising about 2,000 scientists and R&D investments of over 8% of annual revenues. Sun Pharma is the fifth largest generics company in the US with one of the largest ANDAs pipeline and a portfolio of over 400 approved products In India, the Company enjoys leadership across 13 different classes of doctors with 30 brands featuring among the top 300 pharmaceutical brands in India Sun Pharma is the largest Indian company in the emerging markets (50+ countries presence) with strong focus on Brazil, Mexico, Russia, Romania and South Africa, among others The Company is also present in major markets of Western Europe (6 markets), Canada, ANZ and many others The Company is ranked among the top 10 across four global markets in the consumer healthcare business The Company produces over 300 APIs, adding around 20 APIs annually

Long-term growth strategies

Sun Pharma’s business model comprises four crucial business features to help achieve higher efficiencies, driving sustainable growth.

Creating sustainable revenue streams

Enhancing the share of specialty business globally Achieving differentiation by focusing on technically complex products Focusing on key markets–achieving critical mass Improvising speed to market Ensuring sustained compliance with global regulatory standards

Business development

Using acquisitions and partnering to bridge critical capability gaps Focusing on access to products, technology, market presence Ensuring acquisitions yield high return on investment Focusing on payback timelines

Cost leadership

Vertically integrating operations Optimising operational costs

Balance profitability and investments for future

Increasing contribution of specialty and complex products Directing future investments towards differentiated products

Our strategic moves

Ramping up specialty pipeline

In-licensed Tildrakizumab (a monoclonal antibody targeting IL-23) from MSD for treating chronic plaque psoriasis Entered into a joint venture with Intrexon Corporation for developing gene-based therapies for ocular diseases Acquired Dusa Pharma in US - Enabling access to patented drug-device combination useful for treating Actinic Keratosis, a dermatology ailment Acquired InSite Vision - Focuses on developing new specialty ophthalmic products, has three late stage programs

Branded businesses in the US, India and RoW

Ranked no. 3 branded dermatology company in the US market Market leader in specialty chronic segments in India Among the largest Indian companies in branded emerging markets

Complex generics in the US

Firmly established as the no. 1 supplier of generic dermatology products in the US

Current offerings in the US include many specialty generics across different dosage forms. Future product development targeted at complex generics One of the few companies globally to have farm-to-market capabilities for controlled substances Key focus areas include dermatology, ophthalmic, oncology, controlled substances, among others

BUSINESS SEGMENTS

US Business

Indian Branded Generics Business Emerging Markets

Rest of World*

Global Consumer Healthcare Business Active Pharmaceutical Ingredients (API)