 "pharma companies")
The past 10 years have been eventful for pharma. The domestic market has grown to Rs 1.1 trillion from Rs 363 billion in 2008. There have been 97,240 brand launches, and exports, led by the US market, almost doubled from $8.7 billion in 2008-09 to $16.88 billion in 2016-17.
It has also been a decade of major mergers and acquisitions, the most noteworthy one perhaps being the Sun Pharma-Ranbaxy deal and the epic hostile acquisition of Israel’s Taro by Sun Pharma.
An industry veteran who was at the helm of a leading pharmaceutical company in India says these are two deals that stand out in the past 10 years. “While the Taro acquisition changed the complexion of the company, Sun is still struggling with the Ranbaxy merger.”
Sun Pharma and Ranbaxy merged in February 2015, a year after the deal was announced, in a cashless share transaction worth $3.2 billion. Despite Sun Pharma founder and Managing Director Dilip Shanghvi’s enviable track record of acquiring and turning around 16 companies (mostly sick ones), Sun Pharma has struggled to improve its Ebitda (earnings before interest, taxation, depreciation, and amortisation) margins to the 2003-04 levels.
US generics: The game changer
From an industry perspective, the US generics business has been the most significant contributor to the growth and profitability of Indian generic pharma companies in the past decade. Exports to the US, however, have been facing a slowdown over the past couple of years. In fact, exports were down by 0.3 per cent in FY17 (and the US accounted for 34.36 per cent of pharma exports from the country, followed by Africa with an 18.62 per cent share).
The US accounts for 44 per cent of the $1.1-trillion global drug market. Pankaj Patel, chairman of Cadila Healthcare, a leading exporter to the US, said that “the US has been the only growth driver for Indian pharma firms in the last decade. The domestic market was initially clocking a healthy growth rate of around 12 per cent or so, but that has come down significantly”.
It was around 10 years ago that Indian companies started to focus on the US drug market and Sun Pharma was an early starter. It entered the US market around 2008-09 by acquiring Caraco. By 2009-10, it had also acquired Taro Pharmaceuticals.
The way Sun Pharma has performed in the US market is a great indicator of the opportunities and challenges faced by other Indian companies in that geography. Sun Pharma saw its US revenues growing steeply till 2013-14 (from Rs 5 billion in 2006-07 to Rs 98 billion in 2013-14). It is from then that its US business growth started going flat as it began to grapple with regulatory issues.
Warnings by the US Food and Drug Administration (USFDA) and fast-increasing regulatory challenges for Indian manufacturers, coupled with rising competition in that market and the consolidation of channel partners in the US, have changed the export environment for Indian pharma in the past few years. There were 272 inspections at Indian manufacturing sites in 2015 and the country had a 50 per cent share of the FDA warning letters.
The Indian Pharmaceutical Alliance (IPA), a group of leading Indian pharma companies, had formed a quality forum (with technical help from McKinsey) led by six chief executive officers in May 2015. This forum developed guidelines for data reliability, investigations, process validation, good documentation practices, among others.
The guidelines appear to have worked. The year 2017 saw 192 FDA inspections, with India's share of warning letters coming down to 29 per cent. A landmark event in India's history with FDA compliance is now famous pharma crusader Dinesh Thakur’s exposure of dangerous practices in the pharma industry in 2013.
He had exposed how his former employer Ranbaxy Laboratories had failed to conduct proper safety and quality tests on drugs and had lied to the USFDA about its procedures. Thakur not only made a name for himself, but also earned $48 million through a whistleblower award from the US.
A story of price control
The domestic market has seen slowdown. In fact, domestic pharma sales growth slipped to an eight-year low in 2017 to 5.5 per cent. As such, price controls and delays in getting product approvals have been pulling down pharma sales growth. In May 2013, the National Pharmaceutical Pricing Authority (NPPA), which was set up in 1997 to implement the Drug Price Control Order (DPCO), announced the DPCO 2013. This was a turning point because not only was the National List of Essential Medicines (NLEM) expanded to 628 formulations from just 74 under the DPCO 1995, the government chose to move to a market-based ceiling price formula (much against the industry’s wish).
A series of price cuts followed in subsequent years — in antibiotics, anti-diabetics, cancer and blood pressure drugs, among others.
The NLEM, effective April 2016, practically brought 18 per cent of the Indian pharma market (by value) under price control. A JM Financial report said that with top five players controlling 27 per cent of the Indian pharma market, it was quite competitive.
The government re-launched the Jan Aushadhi Yojana (aimed at providing affordable medicines through the government channel) in March 2016. In a country where 65 per cent of medical expenditure is borne by individuals directly, the government's efforts to control drug prices are understandable.
Domestic pharma, however, is not happy with the government’s moves. “There is no pro-active policy move by the government to boost the domestic pharma industry. Regulatory hurdles here are far worse than in the US. Lack of a stable policy would hurt the growth of the domestic industry,” said a senior pharma executive who did not wish to be named.
