Pharma-nomenal: Unearthing new possibilities in India’s pharma sector

The Indian pharmaceutical industry is large—valued at about $50 billion—highly profitable (25%+ typical EBITDA margins), expected to grow at 13% CAGR between 2023-28.

Despite such attractive characteristics, we have not seen enough disruption from technology startups in this space except for Pharmeasy, TATA 1mg, Netmeds, etc. 

A large-scale disruption will happen in the pharma industry soon, with several startups innovating to deliver better value to consumers, doctors, and ecosystem players.

Here are some early thoughts on the neo-pharma space. We might be wrong about the specific ideas, but certainly not lacking in optimism about startups looking to disrupt this large, growing, and highly profitable industry.

Characteristics of the Indian market

Several notable features of the Indian market make it ripe for disruption: 

• Limited demand-side tech innovation: Sales and marketing expenses account for nearly 30-40% of pharma revenues (largest cost-head on the P&L). Almost every other industry with a similar cost structure has seen new-age GTM models emerge. However, tech innovation is largely absent in this field force-led pharma sales model—due to legacy issues and because doctors have been gatekeepers of pharmaceutical sales as they prescribe medicines to patients.

• Digital adoption by doctors: COVID-19 increased digital adoption among doctors from less than 50% in 2019 to over 90% in 2023. The erstwhile offline-first doctor-engagement model is ripe for disruption due to this tectonic shift. 

• Regulatory tailwinds: The government has actively pushed for Janaushadhi Kendras across the country to provide affordable generic medication to Tier II and more users. So far, about 9,000 centres are operational, providing customers with 50-90% cheaper medication than branded alternatives. These centres generated Rs 1,236 crore topline in FY23. 

• Increased adoption of trade generics (TG): Over the last decade, TGs have emerged as a fast-growing segment (at about 25% CAGR), comprising a substantial segment ($4.5 billion) of the overall market, following a significant push from the government and pharma companies. TGs have the same chemical composition as generic medicine but are significantly cheaper as they are pushed directly via pharmacies instead of the traditional MR model. An in-house survey conducted by Matrix India revealed that 80% of respondents were open to accepting TG medication over prescribed medication if the latter is unavailable.

• Excess supply: India is a global hub for pharma manufacturing, with over 10,000 manufacturers, each generating over 100 million tablets per month, and most of the manufacturers operate at about 60% capacity.

Possible opportunities

Given these unique characteristics of the Indian market, what models could emerge? We believe the following areas look promising for founders to build in: 

Digitising pharma distribution

Given the significant sales and marketing spend by pharma companies and the spike in tech adoption by doctors, as noted above, new distribution models could emerge in the near future. 

Such models may entail:

• Bringing doctors onto a platform to create sales efficiency for pharma companies and build increased accountability for MRs. It will also create an avenue for doctors to trade learnings. DXY (China) and Doximity (US) are implementing this model globally. 

• A reseller model could be used to reach customers. Companies like Alto and Capsule (US) have built in this space. Such models, however, need to be ring-fenced from a regulatory standpoint since non-medical professionals cannot sell pharmaceutical drugs in India.

Full-stack omnichannel OTC brand

Over the years, India has seen several large OTC pharma brands, such as Moov (Rs 600 crore) and Volini (Rs 400 crore). There is space to build new-age brands that resonate with the millennial and Gen Z consumer base and solve specific pain points, especially for acute conditions, e.g., pain management, acne, etc.

A customer education and community layer can perhaps be built on top, keeping in line with the 21st-century go-to-market approaches global D2C brands have adopted, e.g., US-based Genexa.  

Digital CROs

The deepening global biopharma market has increased outsourced trial spending—50% in 2020; 70%+ in biopharma companies. With access to a large patient pool, a cheap workforce, and greater IP protection compared to China, digital CROs (trials in a box) and CRO++ (research and distribution) clinical trial models can be built in India. 

Digital CROs or clinical trial site model works as a distributed network of small physicians as one large site for clinical trials. Existing trials can be targeted, and new ones from global pharma companies can be brought to India. The CRO++ model enables the co-development of research assets of biopharma companies, enables faster time-to-market through tech-led trials, and creates an avenue for royalty-earning via licensed drug commercialisation. 

The risks involve breaking into big pharma for large contracts (hard to build trust and get the flywheel started). Further, competition from existing global players, complex operations, and regulatory/policy risks need to be navigated to build a large business.

Other models that can be built require leveraging India’s more than 10,000 pharma manufacturers, most operating at about 60% capacity to export high-quality tablets and APIs to the world. While India already has global distribution muscle in pharma, solving for 10X product quality will create a differentiated value proposition for the global consumer base. 

We are excited about startups building in this large, fast-growing, highly profitable industry. We believe there is a clear “why now” in the space, and large value creation will happen in this $50 billion industry over the next decade.

Rajat Agarwal is the Director at Matrix Partners India.

Rohan Parikh is an analyst with the consumer team at Matrix Partners India.