Rupee has been on a losing spree; the currency has lost over 11 per cent in the last 12 months.
Contrary to collective gloom, the currency weakness is not bad news for everyone. Even as companies that import a substantial portion of their raw materials have seen their profits wane over the last three years, the country’s pharmaceutical industry has been laughing all the way to the bank.
Reason: India is the world’s third largest exporter of pharmaceutical products, in term of volume. So, drug makers who have been garnering a lion’s share of the revenue from sale in other countries, are a happy lot.
Large share
India supplies almost 40 per cent of the generic and over-the-counter (OTC) drugs required by the US. Pharma companies that have expanded their footprint across the globe have been a big beneficiary of the currency weakness, particularly those which have a sizeable business in large markets such as the US.
In the last three years, rupee has lost over 25 per cent. During this period, pharma companies that derive a meaningful portion of their revenues from the US, such as Dr Reddy’s Laboratories, Sun Pharma, Lupin and Cadila Healthcare, have seen a healthy ramp up in revenue from this market.
Numbers don’t lie
The share of revenues from the US for pharma majors has increased significantly over the last four years. Take Dr Reddy’s for instance. The company’s revenue from the US market has more than trebled from ₹1,900 crore in 2010-11 to ₹6,472 crore in 2014-15. From 25 per cent then, the share of US in the company’s consolidated revenues has swelled to almost 44 per cent in 2014-15.
So is the case with Lupin as well. The company’s revenues from the US have risen from ₹2,080 crore in 2010-11 to ₹5,658 crore. Likewise, Cadila Healthcare’s (Zydus Cadila) revenues from this market have grown three fold from ₹ 966 crore in 2010-11 to ₹3,393 crore in 2014-15.
Besides currency weakness, the strong performance of Indian pharma majors in this market was aided by three other factors. First, large pharma companies have upped their investment into building a differentiated portfolio in the US, which enjoys low competition. For instance, Lupin’s revenue R&D spend, that is expensed out, rose from ₹483 crore in 2010-11 to ₹1,099 crore in 2014-15. Cadila Healthcare’s investment in R&D has nearly doubled to ₹524 crore,
The strategy
The benefit of this is beginning to accrue. Beside geography focus, a change in product strategy from ‘me too’ generic products in the oral space to complex generics such as oncology injectables, nasal sprays, vaccines, and transdermal patches, where the competitive intensity is much lower, occurred.
The profitability in these products is expected to be much higher than the regular oral dosage form of drugs. In the US, drug makers, who file for a generic equivalent of a patented drug first, is entitled to exclusive marketing rights for a period of 180 days. During this period, it will be a two-player market with the just the innovator and the first generic company.
Post the six month period, other generic companies which have filed for the product, may be granted approval by the US drug regulator — Food and Drug Administration (FDA). Many Indian majors such as Dr Reddy’s, Sun Pharma, Cipla and Lupin have been successful in challenging innovator’s patents and have pocketed big money by launching the first generic version for a few drugs.
Not all rosy
While Indian pharma biggies have come to speed with the global majors by challenging patents, reverse engineering complex products and launching low-cost generic equivalents, they have had their share of woes too. For one, regulatory tightening by the US FDA and increasing instances of surprise inspections did not work in favour of pharma majors.
In the past year, many of them have been embroiled in a tussle with the US drug regulator. For instance, Sun Pharma’s Halol facility (Gujarat) has been under regulatory lens; Dr Reddy’s Srikakulam (Andhra Pradesh) facility has been banned from supplying to the US. Similarly, Zydus Cadila’s Moraiyya and Zyfine (Gujarat) facilities have also been restricted from exporting to the US.
Regulatory lapses are not giving any comfort and are certainly a cause of concern. Though the stringent action by the US FDA on these large drug companies is clearly a setback, their track record of addressing and fixing such regulatory issues successfully in the past gives one confidence about the company’s ability to handle the ongoing issue.
For instance, Sun was successful in resolving the issues at its Cranbury facility, NJ, in just about a year. Likewise in 2012, Zydus Cadila managed to sort out the regulatory hiccups at its Moraiyya plant in about a year’s time. The fact that most of the large corporations have diversified across countries, is another positive. This should help them de-risk their business and make them less vulnerable to unprecedented events in a particular geography.