This decade is looking very different for India’s champion generic drug industry which went out and conquered the US and the rest of the world. The safe haven sheen now is off the Indian pharma sector with the whole sorry tale laid out in the share prices. The market has been on a thunderous bull run with the Nifty hitting new daily highs. It’s up by over 24 per cent on a one-year basis. By contrast, returns on the Nifty pharma index have plunged by 15.8 per cent over one year and 21.20 per cent over two years.
While analysts insist long-term prospects are solid for the sector, the present is looking decidedly gloomy. The pharmaceuticals industry woes were exemplified by two companies on Monday. Racing upwards was Andhra Pradesh-based Divi’s Labs which at one point in the day had soared some 20 per cent before retreating on profit-taking. Heading in the opposite direction were shares of Bengaluru-based Biocon which fell over nine per cent and then recovered some ground to close with a 4.1 per cent loss on the day, swept higher by the overall market surge.
For both companies, it was an encounter with international drug control regulators that triggered the share movements. Divi’s Labs got the good news that the US Food and Drug Administration (FDA) was dropping one charge that it had refused to allow FDA inspectors into its plant. Biocon’s slide began after news that French regulators had found deficiencies at its plant at Bommasandra in Bangalore.
Multiple complications
Why is the pharmaceutical industry ailing? Frequent run-ins with regulators is one reason. But the brutal diagnosis is that the industry is suffering from multiple complex ailments.
The fact is that Indian pharmaceuticals, just like India’s other fallen star – the infotech industry – are heavily dependent on the US market. And in pharmaceuticals, the going has suddenly got tough in a host of ways. For starters, there are the buyers who have teamed up and are putting the squeeze on sellers. One example is the retailer Walmart which has a chain of pharma stores and has tied up with a drug distributor McKesson.
Regulation blues
Also, the industry has wilted in the face of tightening regulations and inspections by FDA inspectors. Even India’s biggest pharma companies such as Sun Pharmaceutical Industries, Dr Reddy’s and Wockhardt are taking time to resolve flaws thrown up by FDA inspectors. Credit rating agency ICRA says the FDA rebukes to these companies “have also contributed to lower revenue growth from the US”. US sales at Lupin, which till recently, was India’s second largest pharma firm, plunged 12 per cent in the last quarter ending March. And at Sun, India’s biggest pharmaceutical company, shares have slumped 27 per cent over 12 months. (Sun’s Dilip Shanghvi has seen $14 billion knocked off his fortune since the company’s shares peaked in 2015).
One major firm that has just escaped from the US regulatory overhang is Cadila Healthcare, which got its first US FDA notice of concern in 2014 about issues at its main plant in Moraiya, Gujarat. Moraiya accounts for some 60 per cent of the firm’s US revenues and also 60 of the company’s 200 pending Abbreviated New Drug Applications (ANDAs). The problems meant no new US approvals for products made at the factory. But on June 21, Cadila got the thumbs up from the regulator for Moraiya and its shares instantly shot skyward on the clean bill of health. In the process it became India’s second-most-valuable drug-maker.
Cadila is suddenly on a roll and has other reasons to celebrate. It recently received FDA clearance to sell a generic version of a drug Lialda or mesalamine used to treat chronic inflammatory bowel disease that has an addressable annual market size of $1.15 billion. Cadila’s version of Lialda is the only generic so far to have received the go-ahead from the FDA. With first-to-file status, it should have a 180-day exclusive sales window. And that’s not all. Cadila suddenly received FDA clearance for a string of other products aside from the copycat Lialda.
But Cadila right now is the exception rather than the rule. Indian companies’ US field day is over. One reason, paradoxically, is because the FDA has responded to criticism and streamlined its processes. It’s now fast-tracking approvals for new generic drugs. That might sound like a good thing for the pharma industry but, in actual fact, it means that competition in the marketplace has stepped up dramatically. Indian pharma firms have about 13 per cent of the US generics market and are the second largest players after Canada.
And more
The entry of more players and consolidation of US buyers have meant that prices are being squeezed. If these negative factors weren’t enough, India’s pharma companies are also in a bind because of a factor that’s unique to their industry. In the coming year, relatively few blockbuster drugs are coming off-patent, and thus few huge-buck opportunities are coming up.
There’s also the Trump factor, but unsurprisingly, nobody’s quite clear if it will work in favour of Indian companies or not. Trump has loudly proclaimed that he’s going to bring down the cost of healthcare and pharmaceuticals. But at the same time he has thundered about manufacturing in America which would make products more expensive, not less.
Given this concatenation of factors, the Indian companies are conscious they have to quickly get off the bottom rung of the industry, out of the plain-vanilla generic model, and start making more niche creations that will give them better pricing leverage. So, they’ve stepped up spending on R&D and are looking at making complex generics and biosimilars. R&D spending for the top seven pharma firms, according to ICRA, has risen from 5.8 per cent in 2011-12 to 9 per cent in 2016-17. In their favour is the fact that most pharma companies have strong balance sheets which reflect the fact that they had a rich harvest between 2011 and 2015 and saw revenues rise at a 33 per cent compounded annual growth rate.
Will Indian pharma companies be able to keep their leading place as the competition hots up globally and new firms from countries like Turkey enter the game? They’ve got the experience and have hiked R&D spending to move up the value chain. But they will need to be more nimble-footed — and perhaps lucky — than ever before.
(The article first appeared in The Hindu BusinessLine.)