After a commendable performance that extended over eight years (until 2015), the Indian pharmaceutical sector fell out of favour with investors following multiple challenges in the domestic and global markets. Since 2016, pharma companies have been caught in regulatory tangles and their earnings have been under pressure after prices of primary drugs fell in key markets.
Companies focussing on the US market have been hit hard because of stringent action by US drug regulator Food and Drug Administration (FDA). Structural issues — such as rising competition following an increase in abbreviated new drug application (ANDA) approvals, consolidation of channel partners leading to less bargaining power, price erosion and lack of new opportunities — have taken a toll on revenues.
Over the last few quarters, many companies have registered low growth and profitability. In this article, we look at the key issues that have impacted Indian pharma companies in the US.
FDA hindrance
Companies exporting to the US face issues with the FDA on compliance with current good manufacturing practice (CGMP) guidelines. As per the US’ Generic Drug User Fee Act, companies (foreign or domestic) that participate in the US generic drug market must follow the CGMP guidelines and maintain high quality standards.
There has been an increase in the frequency of FDA inspections at Indian phama factories. The regulator either issues a Form 483 or a warning letter to entities that do not meet the set requirements at the end of an investigation. An unsatisfactory response from a company may lead to the imposition of an import alert or other legal actions. Such issuances delay drug approvals and launches.
There have been CGMP violations at key facilities of Sun Pharmaceuticals, Glenmark, Lupin, Aurobindo and Cipla, and these companies have received Form 483 observations. Recent instances — where the FDA has issued warning letters to Lupin’s Goa and Indore Unit II facilities, a repeat ‘official action initiated’ status to Dr Reddys Srikakulam facility, and a Form 483 to Glenmark’s Baddi, Aurobindo Pharma’s Unit IV, Sun’s Halol and Biocon’s Malaysia facilities — have dented investors’ confidence in the sector and led to significant correction in stock prices.
Price erosion
As the US is the world’s largest generic pharmaceuticals market, it offers Indian pharma companies a good opportunity to grow in this segment, especially since many branded drugs will go off patent in the next few years. The patent challenges, made through Paragraph IV filings in the US, provide a million-dollar business opportunity to generic companies.
But the consolidation of pharmaceutical supply chains — where wholesale and retail drug suppliers have teamed up to procure generic medicines — has led to erosion in the prices of existing products. This has affected the EBIDTA margins of Indian companies. Currently, there are three buying consortiums that control around 90 per cent of the generic drugs in the US.
The competitive landscape for Indian players has also intensified in recent years, given that FDA’s higher ANDA approval rates have added to the pricing pressure on existing drugs.
With many new pharma companies entering the scene, the number of filings and drug approvals has risen sharply. For instance, the recent key generic launches — Renvela (from Aurobindo), Lialda (Cadila Healthcare), ToprolXL, Nexium, Habitrol and Dacogen (Dr Reddys), Zetia (Granules), and Minastrin (Lupin) — have seen growing competition in their respective markets.
Proper execution
These structural headwinds are unlikely to ease soon. Several big companies have understood that the turnaround will require better execution on both regulatory compliance and pipeline execution.
To overcome these hindrances, companies have invested in improving the quality of systems at manufacturing sites and have worked extensively with third party consultants. Many of them have seen significant progress in their efforts. Some companies are pruning their presence in the US and focusing, instead, on expanding into the European markets.
Indian generic makers are now looking for limited-competition drugs which are either complex generic or innovative speciality drugs that require a higher spend on R&D and command better pricing power. Firms such as Dr Reddys, Lupin, Aurobindo, Cipla, Glenmark and Wockhardt have started focussing on these drugs. This will increase the R&D spend as well as capital expenditure for advanced manufacturing facilities.