Indian pharma should look beyond generics

Players need to step up investment in newer areas such as specialty drugs and biosimilars

The generics segment isn’t quite the goose it once was, or so the trend in the pharmaceuticals industry appears to suggest. Between 2004 and 2014, the global generics industry logged a compound annual growth rate (CAGR) of 16 per cent in revenue. But the steam ran out in 2015 and 2016, and growth plunged to 6 per cent.

The impact was particularly severe for Indian generics players, who saw growth plummet to 2 per cent in the last two years, compared with a staggering 23 per cent in the preceding decade. There are many reasons why growth is unlikely to recover unless the players step up investments in newer areas such as specialty drugs and biosimilars. Indeed, CRISIL Research expects the subdued trend to continue in the medium term, with Indian pharmaceutical exports growing in mid-single digits. 

Indian generics exports to the regulated markets of the US and the UK face multiple headwinds, including shrinking market opportunity in conventional generics, increasing pricing pressure as competition intensifies, and consolidation of buyers in the US wholesale market. To elaborate, the patent-expiry opportunity in conventional generics is expected to halve to $52 billion during 2016-2021, compared with the preceding five. Then, competition is intensifying, with the average number of competitors for large Indian companies rising from 3 per drug in 2012 to 4.6 per drug in 2016. Further, with only 3 wholesalers constituting 80 per cent of the market share in the US, players bargaining power has reduced.

Meanwhile, there are huge prospects emerging in segments such as biosimilars and specialty drugs. Biosimilars are generic versions of a biologic drug, while specialty drugs include complex generics — used to treat chronic or life threatening diseases and branded drugs — versions of already approved drugs enhanced through different dosage or new routes of administration. 

CRISIL Research estimates the market opportunity due to biosimilar and complex generic drugs going off patent at $100-110 billion in the next 5 years. To be sure, close to 60 per cent of the top 50 drugs (by sales value) going off patent during the next decade are biologics. Competition for these drugs is substantially lower because the investment needed is 8-10 times higher and these involve relatively higher level of complexity. A CRISIL Research analysis of 15 major generics players — six Indian and nine global — together accounting for 60 per cent of generic sales in the regulated markets indicate global players have a headstart in investing in the required focus areas. 

For these global players, the specialty segment accounted for 38 per cent of the aggregate revenues in 2016, up from 25 per cent in 2012. While some of this growth has come through the acquisition route, the gap is significant nevertheless, considering the contribution of specialty products to the topline of Indian players is still in single digits. About 42 biosimilars have been approved in the regulated markets during 2013-2016, double that in the 7 years prior to that (2006 -2012). The global players accounted for 24 per cent of these approvals, compared with a paltry 4 per cent for the large Indian players.

These data points indicate a sharper focus of and bigger investments by the global players in newer areas. For example, Teva, the largest global one considered, invested close to $37,500 per employee on R&D annually in the last 3 years, compared with $20,000 by Sun Pharmaceuticals, the largest Indian player. In 2016, the median investment in R&D was around $19,500 per employee for the global players, and around 30% lower for the six Indian players.

These investments have, however, taken a toll on the return ratios of the global players — their average return on capital employed during 2014-2016 was 7.5 per cent, compared with 22 per cent for the Indian companies. What’s more, the gearing has increased for the global players (0.5 times in 2011 to 1.0 times in 2016) but remained more or less stable for Indian players (0.5 times). 

It follows, therefore, that Indian players are well-placed to capitalise on the impending opportunity in biosimilars and specialty segment, either through organic or inorganic means, given their strong balance sheets and healthy cash flows. But much more needs to be done. The battle to expand product lines will require Indian players to strengthen supply chains and improve engagement with stakeholders which will escalate their costs. Also, the marketing expenses incurred in selling a specialty product and biosimilar would be roughly three times the cost incurred in selling a conventional drug. However, it’s a bullet they must bite in order to stay relevant in the regulated markets, and counter the slowdown. Indian generics players spend much less than global peers on R&D.

The author is director, CRISIL Research