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Is It The End Of Pharma’s Dream Run?

Unless the Indian pharma industry — not long ago touted as the pharmacy of the world — strives to be more than just a plain generics player

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Mankind Pharma, a domestic pharmaceutical firm with a turnover of over Rs 5,000 crore, has already shelved plans to go public. “We won’t be able to get the desired subscription considering the dull health of the pharmaceutical industry in India,” R.C Juneja, CEO of Mankind Pharma, said in a high pitched, irritated tone over a call. “I can see the domestic as well as the export market will go down further.” Though unhappy, Juneja is confident about the bleak future.

Last year, almost all top 10 drug makers faced bans or had third-party audits slapped on their manufacturing plants. The collective impact was quite upsetting — for both companies’ financials and brands’ reputation. Between January 2016 and now, the pharma index has slipped 17 per cent. It slipped, first time in 2015, after many years, by 18.3 per cent.

The leading pharmaceutical companies in India, which together make India the world’s largest supplier of generic drugs, have reported one of the worst earnings in the quarter ended on 30 June 2017.

India’s largest drug maker Sun Pharmaceutical Industries reported a 13.6 per cent year-on-year drop in its consolidated net profit to Rs 1,223.71 crore in the quarter ended March.  The drop was attributed to lower sales in the US — Sun Pharma’s biggest market. “The US generic industry is facing rapidly changing market dynamics. Increased competitive intensity and customer consolidation is leading to pressure on pricing,” Dilip Shanghvi, managing director of Sun, said in a post-earnings conference call with analysts. Alongside, several other generic drug makers are seeing high single-digit price erosion due to consolidation in distribution and increased competition.

The dismal performance was also due to the speedy approvals of generics by new entrants from countries such as Taiwan, South Korea, China, New Zealand and Japan.

Plus now, the market needs are changing from vanilla drugs to complex generics. According to a Fitch Ratings report, new product launches in specialty therapies have been higher than in traditional therapies, due to substantial unmet needs in the US.  The needs are similar in United Kingdom and Europe too.

The net sales of Indian pharma companies are dwindling (see Highs & Lows). Optimism on flooding the world market with ‘Made in India’ drugs is also affected as investors are fleeing the sector alarmed by the news of drying revenues, inspections, warnings and import alerts at Indian pharma firms. So now the question is, how long can India lure the developed world with its cheap generic drugs?

The Game Of Generics
Indian medicine makers picked up the art of making cheap copies of patented drugs long ago and the domestic laws permitted it as long as their production method was different from that used in the patented process.

After the economic liberalisation of 1991, companies such as Ranbaxy, Dr. Reddy’s, Sun Pharma and Lupin entered the US generic market, which until then was dominated by Teva, Mylan, Actavis and Sandoz among others.

In 2001, Hyderabad-based Dr. Reddy’s generic version of anti-depression drug Prozac secured exclusive marketing rights for a limited period in the US. It was a highly successful launch.  

On the other hand, Cipla’s Yusuf Hamied, a Cambridge-educated multi-millionaire, started manufacturing perfect copies of many of the world’s best and most important medicines. He sold drugs for AIDS in Africa at prices 20 to 30 times less than that of branded medicines.

By 2006-08, Glenmark and Cadila too joined the generic rush, in the next wave. And by 2009, drug makers including Torrent, Alembic, Ajanta and Strides made a beeline for the world’s largest drug market, the US.

Pharmaceutical exports to the US jumped from $0.3 billion in 2005 to $5.9 billion in 2015, according to a report by industry lobby Indian Pharmaceutical Alliance (IPA), which cited data from the US Department of Commerce and the US Bureau of Census. India’s run to become the pharmacy of the world started there, and it soon conquered the globe with its cheap generics.

Run-ins With Global Regulators
After India established itself as a destination for generics, there came a phase when questions were raised on the quality of drugs manufactured in the country.

From being a poster boy to a problem child, India’s fate turned quickly. It all started with Ranbaxy Laboratories. In 2008, the US FDA banned 30 generic drugs produced by Ranbaxy at its Dewas and Paonta Sahib units in India. In September 2013, it further blacklisted Ranbaxy’s Mohali plant. Soon after, the European Union banned 700 generic medicines for alleged manipulation of clinical trials conducted by Indian company GVK Biosciences. UK’s regulator of medicine Medicines and Healthcare Products Regulatory Agency also flagged quality concerns.

After Ranbaxy, the US FDA came after Wockhardt. Three of its plants in India are already under an import alert. Inspections rose from 108 in 2009 to 290 in 2015.

Between 2013 and 2015, at least seven Indian pharma manufacturers were issued warning letters and import alerts. In 2015, India ranked fourth on the list of warning letters and import alerts raising questions on the efficacy and manufacturing practices of domestic drug makers.
Unfavourable Growth Environment  
Selling drugs in India was never a profitable deal. Here, the prices are the lowest under drug price watchdog National Pharmaceuticals Pricing Authority’s control. Sales at home, including of branded drugs, account for only 20 per cent of the industry’s revenue.

Companies have tried to tell the government that capped prices will not ‘make’ healthcare affordable, however, the government is extending the price control. “The industry is waiting for announcement of new drug price control order by the government. We are almost certain that it will erode the profits further,” says Juneja.

China Catching Up With India
China leads the market in active pharmaceutical ingredients (API) manufacturing. India, in fact, imports over 80 per cent of APIs from China. The concern is, it is now getting stronger in manufacturing finished medical products called formulations too. “Earlier, China lacked environmental compliances and manufacturing capabilities. However, it seems to be gearing up steadily (see India vs China). It will soon catch up with India as it has faster approvals, authorisation and registration processes,” says Sameer Sah, associate partner at legal firm Khaitan and Co.

Ranbaxy whistle blower Dinesh Thakur believes the Chinese are investing in building formulation skills and will come after our dosage form business sooner than later. “We have already lost a large part of our API business to China.”

Earlier China wasn’t good in cracking US FDA, but now it has got a handle on it. It is gaining know how by acquiring companies across the globe. “We had language advantage in terms of ANDA (abbreviated new drug application) filings and regulatory process, but China is importing talent. And undoubtedly, it is the master in squeezing costs,” says Sah. Hence, depending on vanilla generics for growth will not be very prudent.
Bidding Adieu To Generics
In 2016, the US FDA granted approvals to 800 generic drug applications across the globe — the highest-ever in a single year. In the next two years, ANDA — application for a US generic drug approval — approvals are expected to go up from 650 to 1,000.

With new firms entering the US market, competition has increased, and prices are being squeezed. While there is higher competition from more Indian companies in the US, Chinese firms are also increasing their presence. Selling generics is no more a cake walk as companies are unable to maintain their market share. Besides, Swiss multinational financial services holding company Credit Suisse expects price erosion in generics to soon increase to 10-12 per cent from 7-8 per cent currently.

A recent report by brokerage firm Edelweiss Securities said that while the US generic drug market expanded at a compounded annual growth rate (CAGR) of 15 per cent between 2010 and 2015, it is expected to slow down to 5 per cent CAGR between 2016 and 2020 due to the lower value of patented drugs expiring during this period.

Hence, domestic drug majors that earn 40-50 per cent of their revenue from the US, are now amping up their investments in specialty and complex drugs with better margins.

Inflection Point
The question at this point is, what will drive future growth? How to offset pricing pressures in the generics market?”

The Indian pharma industry is at a critical inflection point, say experts. “Since the generic business for Indian pharmaceutical companies has become so large, and the opportunities on generic business are dwindling because of patent cliff and increasing competition, the Indian pharmaceutical industry is at a crossroads,” opines Glenn Saldanha, chairman and managing director of Mumbai-based Glenmark Pharmaceuticals.

“In the next five years, it will be imperative for the Indian generic industry to transition itself to a specialty, innovation player or a strong biosimilar organisation,” he cautions.

But this transition won’t be easy. India doesn’t have the skills required to build an innovative or specialty business.The process has begun though. Many companies have increased their R&D investments (see Growth Trend). “We used to spend 3-4 per cent of our sales on R&D earlier, which today stands at approx. 8 per cent. By next year, our R&D expense will be in the range of 8-9 per cent,” says Kedar Upadhye, global chief financial officer of Cipla.

In the biosimilar space, the overall expertise of Indian drug makers is very limited, but they are trying nonetheless. Last year, Sun Pharma made a deal that was not in trend with its usual business strategies. It bought an exclusive licence to a new dengue vaccine developed by Navin Khanna at the International Centre for Genetic Engineering and Biotechnology.

The bet shows Sun’s will to step out of its comfort zone of chemistry-based generic drugs. With this new vaccine now, it needs to work hard to get all the regulatory approvals globally.

Data shows that not many companies are pro-actively investing in complex generics. According to a July 2016 report by JM Financial Institutional Securities, Indian companies have been slow in making investments in the complex generics and specialty drugs space.

But it’s time they diversify their product range, adopt differential strategies and focus on evolving as innovators. It may be easier said than done as running a specialty product company is much more difficult than a generics company. The product development cost for a complex generic is around $5 million compared with $1-2 million for a simpler final dosage form, Dr. Reddy’s said in its annual report for 2015-16.

Another report highlighted another concern. “The companies that have invested, find the investments return-dilutive in the short-to-medium term, given the complexities and long-gestation period for developing and bringing these products to the market,” pointed out the report by JM Financial Institutional Securities quoted earlier.
What’s Next?
The generic business model was simple; it involved fiddling with chemistry and producing copycat drugs. It was cheaper and plenty of innovators’ drugs were around to copy, hence faster too. But not anymore.

The global life sciences industry is gradually moving from chemical-based drugs to biologics. The global sales contribution of biologics is expected to increase from 24 per cent in 2015 to 27 per cent in 2020.

“It is highly probable that the next wave of growth will come from biosimilars. While India’s presence remains negligible in this area, the future could be dominated by this field,” says Sujay Shetty, leader of life sciences at PWC.

Investments for biosimilars are huge. So entering through partnerships is the only viable way to kickstart the process. For instance, Biocon, with partner Mylan Inc., is the only company that has succeeded in filing applications for biosimilars in the regulated markets of the US and Europe.

“Having made its mark as a generics powerhouse, India can replicate that success in biosimilars, — more complex to make but offer a large global opportunity. The global biosimilars market in 2020 is projected to be between $25 billion and $35 billion,” says Biocon chairperson and managing director Kiran Mazumdar-Shaw.

Companies need to brace up for tough times ahead as not just profits from generics are getting affected, heavy investments going into the making of specialty drugs, including biologics and biosimilars, can further impact the margins.

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