)
The Indian pharmaceutical industry is in the midst of several changes that will require many companies to realign their business model. For the past several years, companies have benefited from the large number of drugs that have gone off-patent. Due to the steady stream of drugs going off-patent, companies focused on submitting dossiers and drug master files (DMFs) so they could take advantage of this temporary phenomenon. Although companies were increasing sales and profits, their manufacturing operations were not prioritised and became inefficient. Companies could hide their inefficiencies because even as margins fell for a particular product as the market became saturated, they could always jump onto the next product that was in the pipeline. While this model worked in the past, it is no longer sustainable because the number of drugs going off-patent is dwindling.
Many companies that enjoyed success in the past several years are left with bloated portfolios, inefficient facilities and minuscule market share. Since there is no longer an influx of products in the pipeline, the deficiencies of the current model will be exposed and will be exacerbated by two trends that are occurring in the industry. Companies need to downsize their product portfolio and focus on boosting margins by improving operational efficiency. Going forward, many successful pharmaceutical companies will adapt the mindset of manufacturing companies and will prioritise process innovation. This will ultimately lead to stronger companies that have a competitive advantage, which can offer sustainable margins.
Companies will need to focus on boosting margins because the industry is facing two broad trends that will increase costs. The first factor is the increasing emphasis on quality. Over the past year, quality within the industry has come to the forefront of the conversation due to a spate of bad publicity for some of the industry's largest companies. While the focus on quality has been an unwelcome surprise for some companies, the industry needs to prepare for increased scrutiny. The US FDA will be auditing foreign facilities to the same extent that US-based facilities have been accustomed to due to the passage of the Generic Drug User Fee Amendment (GDUFA). The act requires all companies to pay for filings and services that were previously free. This includes paying an annual charge of $235,152 for a foreign finished dosage facility and $49,515 for a foreign API facility. In addition, submitting a DMF will cost $31,460 while an abbreviated new drug application (ANDA) will be $63,860.
These fees will be primarily used to hire workers to clear the application backlog as well as increasing the frequency of audits. In the FDA's last fiscal year, it hired 231 workers across various functions due to funding from GDUFA and intends to hire 650 more workers over the next two years. The FDA has already bolstered its presence in India and is conducting audits with minimal notification instead of providing a notice period of several months like it used to. This means companies cannot be complacent and must be vigilant when it comes to quality.
Quality standards in the semi-regulated markets are also changing. There is a misconception that quality is only valued in the regulated markets. However, companies in the semi-regulated markets are bifurcating. Leaders in the semi-regulated markets have quality standards that are just as stringent as what are found in the regulated markets. These companies are gaining market share because consumers have become aware of quality issues and because government tenders are requiring high quality material.
In addition to spending more money to comply with increasing quality standards, companies will need to bolster environment, health and safety (EHS) standards. Environmental standards have been increasing over the past several years and companies have become accustomed to stricter enforcement. While companies have been preparing for tighter pollution control, many have been caught off-guard by the push for better health and safety standards.
In order to succeed, companies will need to change their mindset; instead of offering a broad portfolio, companies will be better suited by reducing their products and focusing on a core product portfolio. If a company has a focused portfolio, they can boost margins, improve quality and reduce EHS issues. This will require realigning goals including setting new targets. For example, instead of aiming to launch a certain amount of products in a year, management needs to prioritise operational metrics such as yields and cycle times. As companies improve efficiency, manufacturing variations should go down to reduce future quality issues. Also, an improvement in yield can reduce effluents which will help with EHS.
While the focus on process innovation can start relatively quickly, a focused portfolio presents compelling long-term options as well. Many companies currently produce multiple products in a single production block since they do not have a significant market share. An option to boost efficiency would be to retool a facility for a specific product which would result in better line-balancing as well as reducing downtime due to changeovers. Companies can also further automate processes in dedicated facilities. Automation will not only reduce employee cost but will minimise manufacturing variations in order to improve quality as well as safety.
A smaller product portfolio will also let companies develop a more effective bond with customers. As the markets for some products consolidate, companies will be able to nurture this bond and allow them to shift from a transaction-oriented relationship to a partnership approach. A more meaningful relationship might provide opportunities to offer more value-added services. This can be the key differentiator when competing with other pharma companies, in particular, competition from Chinese companies.
The past several years have been bountiful for the pharma industry but the industry cannot rely on the growth drivers that had fuelled it. Many companies have bemoaned about the increasing regulations in quality and EHS. However, instead of fighting the new realities that it faces, Indian pharma companies should channel their energy into redefining their models. Successful companies should adapt the mindset of manufacturing-intensive industries such as automotive and electronics for a better focus on efficient manufacturing processes.
Companies might initially be reluctant to pare their product list because of the mistaken belief that it will increase risk. However, a focused product portfolio can reduce risk because it would allow companies to dedicate limited resources to develop a competitive advantage that is sustainable for its core products. Due to increasing cost pressures, a sustainable marginal improvement in efficiency can be the difference between a leader and laggard. The focus on manufacturing efficiency will ultimately bolster the Indian pharmaceutical industry and will give the industry a chance to continue growing.
Vijay Ramanvarapu
head, Procurement, Granules India
head, Procurement, Granules India
