Big pill

Long known as copycat, Indian pharma industry seeks to change its profile by focusing on niche segments. Will it work? Read on...

Big pill
An unkind, but accurate, description of the pharmaceutical industry is that it profits from other people’s ill health. As long as there are people (and animals: drug firms make medicines for them too), they will fall sick. In that sense, the industry – if not the companies that constitute it -- is perennial.

Right at this point, the Indian drug industry is making the most of the health problems of not only Indians, but a decent chunk of people elsewhere too. Our industry makes cheap medicines, sells them the world over, including the US, the home of some of the world’s biggest drug companies. In generic drugs -- those with no brand name and whose patents have died -- the Indian industry is the uncrowned king.

India makes about a fifth of all generic drugs produced in the world. About 15 per cent of all generic drugs sold in the US, the world’s biggest drug market, are produced in India. We export $13.2 billion worth of medicines and hope to double this volume two years from now.

Indians have worked hard towards this from not a very honourable position when our firms copied with impunity medicines that had been developed abroad by big global companies at huge costs.

Indians produced drugs through reverse engineering, as product patents were not recognised in India, but processes were. And processes were tinkered with to create ‘Indian’ drugs. We were hugely successful.

It was as late as 2005 that India recognised drug patents, ignoring Indian firms which had raised a hue and cry. But by then, India was a master at the game of copying. Today, our drug companies are only reaping what had been sown before. Generic drugs, thus, became the mainstay of Indian drug firms. In terms of effectiveness, generics are no different from the originally patented drugs. They are made of the same chemicals.

Generics or no generics, we are getting pretty good at playing doctor to the world. India has the most medicine factories approved by the Food and Drug Administration (FDA) of the US – outside the US itself, that is. We are so good that some of our firms are thinking of differentiating themselves by trying to offer better and niche drugs. This has not come too soon: in the next three years, a whole platter of drugs will see their patents expire, and Indian companies are sure to turn out their generic versions. Experts say the Indian generics, growing fast as they are, have the potential to become a $40 billion business soon.

But that will need some realignment of their product portfolios, not just because new and cheap drugs will be increasingly needed (in India in particular), but because markets like the US will demand niche drugs more and more (this category has the potential of bringing in huge, ‘exclusivity’ revenue). Also needed and being looked at are geographic diversification and improvisation of manufacturing techniques. And they also need to look over their shoulders and see what China is doing. China, our biggest competitor, produces drugs at much lower costs, but suffers from poor quality perception. But it too is trying hard to improve its quality record.

Some results can already be seen emerging from our efforts. Our drug makers today have product baskets with an increasing number of non-traditional medicines. New products for lifestyle diseases (diabetes, hypertension, cardiac) that afflict urban people anywhere are in focus.

In India the disease profile that drug makers are interested in is gradually shifting towards chronic diseases. A sedentary lifestyle, higher disposable incomes and changing food habits lead to a high incidence of lifestyle related diseases. So much so, India is threatened to become the diabetes and cardiac capital of the world. We are behind only China in the number of diabetes cases. Diabetes drugs are seeing double-digit growth and will reach $1.49 billion by 2016.

Navroz Mahudawala of Candle Partners divides the market as 65 per cent acute and 35 per cent chronic. “But in another 10 or 15 years, it could be a half and half situation,” he says. Drug companies are looking at a growing share of “chronic sales” where margins and prize realisations are higher, he adds.

Chronic ailments include lifestyle-related ailments, often needing life-long medication. The ‘acute’ segment includes anti-infectives, painkillers, respiratory drugs, malaria and gastro medication, where medication is administered for a short duration.

As doctors can be categorised into ‘specialities,’ so can drug firms be. For example, Sun-Pharma, Lupin and Glenmark are seen as chronic illness-focused. Experts say they will continue to see strong growth in business. As a greater segment of the Indian population, the treatment pool for type-II diabetes in particular is expected to grow; this will see increasing use of non-insulin therapies. “The market for new non-insulin and insulin therapies is gaining ground, as treatment outcomes improve,” says a Frost & Sullivan analyst.

Companies focused sharply on the markets abroad too are realigning product portfolios. One of them, Aurobindo Pharma, hopes to release a niche range of new oral injectables. The company is looking at oral contraceptives, opthalmics and penance injectables, drugs administered only in advanced stages. This is expected to give the company good growth after 2016 because, according to an official of the company, the concept is only at a brick-and-mortar stage now.

Others, too, are looking at products that require more complex manufacturing processes. By mastering those they can stay a step or two ahead in the competition. “This is more or less a part of the generics business. “It is difficult to do products that could be characterised by dosage form or a release pattern… We will also look at a better product category that has limited competition,” says Umang Vohra, CFO of Dr. Reddy’s Laboratories.

In this, the way has been shown by Wockhardt. It has already targeted difficult-to-formulate drugs which leverage India’s famed process synthesis skills and allow for jugaad to make cheap products. A common (basic commodity) drug loses a big part of its price on expiry of its patent. But the price loss in case of a drug that is difficult to make is much less. In other words, more profits for the drug maker.

A new horizon is biosimilars. Half of the top selling drugs in 2016 are expected to be biologics – on which Dr. Reddy’s, Lupin, Cipla and a few others are keeping a sharp eye on. In their manufacture living organisms are used. The drugs we normally used are chemicals. Biologics are, as the name suggests, biological and synthesised inside living cells.

Dr. Reddy’s has 11 biologics in various stages of development and hopes to cash in on these in the coming years. Lupin’s biosimilars are mostly focused on oncology and inflammation.

Expanding the geographical market is another strategy governed by costs and profitability. For example, catering to the US market is capital intensive. So a geographical realignment is skewed towards withdrawing from countries that do not generate much cash flows or do not yield any profit at all, according to Jagannadham Thunuguntla of SMC Capital.

But so far, despite the cost of selling, the US market has served Indian drug firms well. Copied processes and good demand there have allowed the firms to beat analyst estimates and rake in significantly higher revenue and operational profits in the first half this year.

But the firms may see their margins squeezed at home, as the newly introduced pricing policy, effective from April, begins to bite, impacting essential drugs by up to 10 per cent in the case of most companies, and by up to 40 per cent in some others. A total of 348 essential medicines (along with 74 already notified drugs) will come under the price control. These, according to the policy formula, are picked taking a simple average of all brands with more than 1 per cent market share.

Estimates are prices of many leading drug brands will come down by up to 80 per cent, hurting the makers’ margins. To maintain profitability they will have to scale up production and improve cost efficiencies in production and distribution.

Top firms look at the regulatory barrier as an opportunity. The readiness for regulatory challenges also differs from one company to another. Companies have to address this, as reaching key advance markets will need a combination of effective planning to raise capacity and productivity. Needing high quality, advanced markets will require differentiated offerings.

Government in developed markets will look increasingly at generics to contain treatment costs and widen people’s access to healthcare. That’s where the larger companies can cash in. The strained fiscal position of many western governments, even Japan, has led their social security-backed medicare to increasingly opt for generics.

Generic drugs also generate more competition, with each drug company trying to outdo the other in lowering prices and increasing volumes. The Indian firms are doing this by positioning their products pipeline in a fashion that ensures higher sales even in a market where their access is limited. “A strong line-up of product launches, especially off-patent drugs with market exclusivity, and growth in regulated markets fetches better growth,” concedes an official of Natco Pharma.

In a report last year, PwC said, companies like Dr. Reddy’s had built a competitive advantage by synchronising their end-to-end supply chain. Another strategy is to forge more partnerships to increase the supply of generics at a lower risk and investment along with lean manufacturing practices.

Piramal Healthcare reduced its raw material and packaging materials inventory from 22 to 20 days three years ago. Managements elsewhere also have taken initiatives in strategic planning, operations, supply chain, and marketing and finance.

An analyst thinks this is a double-edged sword. He says companies with dollar debts need to restate their liabilities. For many mid-sized companies, domestic business brings in more profits than overseas sales.

Generics have to fight hard against brand royalty, especially in Italy, Spain and Japan and, in a limited way, France and Germany too. In Bric countries, however, pricing regulations and concerns about manufacturing practices are a barrier to Indian firms.

Still, India has an edge because it is a cost-effective manufacturing hub. This alone could see more M&A deals in the coming years, specially so because multinationals, finding it increasingly difficult to cope with manufacturing regulations, seek out bases where such regulations are lax. India has seen a number of multinationals join hands with local firms for cheaper supplies to their markets.

“There still is decent business for a lot of companies in generics. A lot of mid-cap companies have taken huge loans to build capacity. Some of them are now struggling. It is however a mixed bag. Companies with proven balance sheets have a good pipeline of niche products,” says the Natco Pharma official quoted earlier.

The Indian firms’ edge also comes from the fact that global drug companies do not have a strong pipeline of new products at the moment. Besides, their R&D back-up for blockbuster drugs is running thin because of the high costs. Being innovative in combating and joining the generics bandwagon could be a forced choice for many of them.

Among the things that dog the Indian drug industry is lack of clarity over FDI in the sector. The government is believed to be working on it. Right now, 100 per cent FDI is allowed in new projects; FDI in existing projects is allowed only on approval of the foreign investment promotion board.

All said and done, the Indian drug sector has done pretty well. Things look better as patents on several drugs are about to expire. Once the patents die, Indian generics will be born.

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