Post-Brexit, a strategic realignment can help India emerge as a significant partner for pharmaceuticals in the both the EU and the UK By Usha Sharma and Lakshmipriya Nair
Britain’s decision to break away from the European Union (EU) plunged the world into uncertainty and turbulence as evidenced by the plummeting global financial markets, fear of an economic slowdown, political turbulence and increasing clamour among other member nations such as France to exit EU.
Its ripple effects have been felt in India too. As a knee jerk reaction to the referendum’s result, share prices of various leading Indian firms with sizeable businesses in the UK took a severe hit (Check table 1). Predictably so, as our ties with the EU and the UK have grown considerably in the past few years. India’s bilateral trade with the UK stood at at $14.02 billion in 2015-16, of which, exports contributed $8.83 billion while $5.19 came from imports. (Source: Commerce and Industry Ministry). India has emerged as the third largest investor in terms of number of projects in the UK. The total turnover of Indian businesses from the UK has grown from £22 billion in 2014 to £26 billion in 2015. (http://indianexpress.com/article/business/companies/brexit-referendum-fears-in-india-inc-with-business-based-in-uk-and-eye-on-eu-market-2874422/)
Yet, the sentiments have undergone a significant change. The immediate panic has given way to cautious optimism, especially for certain sectors like pharma. The stock markets have rallied around and experts foresee several silver linings for India’s growth. Sectors like IT and automobiles may have to face some adverse effects, but the pharma sector seems to be insulated against the fallout of Brexit.
Bucking the trend
So, why is Indian Pharma Inc immune to Brexit blues? The figures speak for themselves. India’s pharma exports grew from $11.66 billion to $12.54 billion in 2015, recording a growth of 7.55 per cent, as per Commerce and Industry Ministry data. However, pharma exports account for only 12 per cent of the total exports to EU from India, of which just 3.5 per cent is UK’s share. As a result, experts and the industry both feel that India’s pharma sector will not have to face long lasting damage due to Brexit.
Sameer Walia, Managing Director, The Smart Cube, avers, “Majority top Indian pharma companies—Aurobindo Pharma, Cadila, Cipla, Dr Reddy’s Laboratories, Glenmark, Lupin and Sun Pharma—have low revenue dependence on the EU, especially from the UK; in fact, the US is the key market for most of them. As a result, these companies are likely to face limited impact of the currency devaluation following the Brexit referendum results.” (Check Table 2) The Smart Cube is a research and analytics firm.
ICRA, an Indian credit ratings agency, also predicts that Brexit would have a very marginal impact on the Indian pharma sector. Subrata Ray, Group Vice President, ICRA, states, “The exposure of Indian pharma companies to Europe is fairly limited (i.e. top-10 companies generate only six per cent of revenues). Accordingly, the impact of Brexit is modest.”
Dr Ajit Dangi, President & Chief Executive Officer, Danssen Consulting holds similar views. He says, “Prima facie it appears that Brexit will have limited impact as India’s exports to the UK are only 0.4 per cent of India’s GDP. Total pharma exports in 2015-16 were $13 billion of which EU was $1.5 billion and UK was $469 million. Whereas our exports to the US were $5.02 billion. So, the impact on pharma exports is minimal, about Rs 400 – 500 crores.”
Most of the Indian pharma majors endorse these views and believe that Brexit would have marginal impact on their growth trajectory.
Ramesh Swaminathan, Chief Financial Officer, Lupin points out, “Since Lupin’s European business contributes less than four per cent of the company’s total revenue, Brexit has seen no impact on our business.”
Venkat Jasti, Chairman & Chief Executive Officer, Suven Life Sciences also reiterates, “It will not affect Suven at all since our exposure (to the EU and UK markets) is less, it is mainly in terms of US dollars.
However, wariness exists due to falling GBP. Jitendra Sharma, Chief Financial Officer, Marksans Pharma, a firm with considerable business presence in the UK says that there would be no impact on business in terms of volume. However, realisation and margins may come down due to weakening GBP.
Glenn Saldanha, Chairman and Managing Director, Glenmark also states, “We have seen an instant weakening of pound, which will have its impact on various businesses, and for the pharma industry in Europe.”
Dangi also cautions, “The profitability in the European markets has been low on account of tenderisation/ price cuts and increasing thrust by governments to reduce healthcare cost. As a result, depreciation of GBP/ Euro may further impact profitability of European business.”
However, this could prove beneficial for companies like Biocon who have significant exposure to the US market and only marginal presence in the UK. As Kiran Mazumdar Shaw, Chairman & Managing Director, Biocon informs, “Biocon does not have any exposure to the pound sterling. Brexit impact has weakened pound sterling, as a result the US dollar has emerged stronger. This will benefit us since we are net USD earners. For euro exposure, we have hedged our revenues for next 18 months at higher rates.”
The silver linings
Thus, uncertainties have been counterbalanced with opportunities and advantages. The experts and industry veterans are identifying several silver linings in what was earlier seen as a dark cloud on the horizon of Indian pharma sector’s progress path.
Some of the other notable growth areas for Indian Pharma Inc would be:
M&As—Window of opportunity: Falling GBP could signal a good time for Indian firms to expand their footprints through M&As, feel the experts. Swaminathan explains, “This might just open up a window of opportunities when it comes to an Indian pharma company that might be looking at acquisitions to expand in to the EU and Great Britain, as assets might become relatively cheaper because Brexit will lead to weaknesses in these markets in the short or the mid – term.”
Dangi supports this view and says, “Since British pound has sunk to a 30-year low vis-a-vis the US dollar, this is a good opportunity for Indian pharma majors to explore M&A and licensing opportunities with small and mid-size British pharma companies with innovative products.”
Growth in generics prowess: India could also look at becoming a major generic medicines provider to the UK as it looks to expand funding to enhance its National Health Service (NHS).
Javin Bhinde, Managing Director and Chief Executive Officer, SynCore Consulting elaborates, “One of the causes for the strength that the referendum gained was the oft repeated line by the United Kingdom Independence Party (UKIP), ‘We send the EU £350m a week, let’s fund our NHS instead.’ The NHS is one of the world’s largest publicly funded health services and provides healthcare in the UK. The rising cost of healthcare has been a source of concern in the UK. For Indian pharma companies this represents an opportunity as the need for economical generic drugs is being felt.”
Lower operating costs in UK: Mazumdar Shaw identifies another area of benefit for Indian pharma firms. She feels that the possible softening of commodities prices due to Brexit could positively impact us in lowering operating costs for expenses linked to crude oil prices. Sharma also points out this benefit and says that local manufacturing in the UK may become cheaper and export out of the UK may gain.
Emerge as an innovation partner: Mazumdar Shaw also sees an opportunity for India to emerge as a global innovation hub for the pharma sector. She opines, “UK has been an innovation hub for EU, with the complexities emerging post-Brexit, India stands a chance to be the next innovation partner for the global pharma companies.”
Elaborating further, she states, “Indian pharma companies have already sharpened their focus on original drug discovery and are offering high quality, low-cost scientific talent pool and end to end discovery and development services for both small and large molecules. In a post-Brexit era, India can leverage this expertise to tap the global CRO market for discovery services that is expected to grow at a CAGR of 11.5 per cent to reach $23 billion in 2018 up from $15 billion in 2014.”
“UK’s innovation ecosystem will continue to create opportunities for Indian companies to develop new competencies through collaborative research and drug development alliances with companies there. India’s strengths in drug development and UK’s strong innovation ecosystem can be key to realising the vision of addressing unmet medical needs through affordable medicine globally,” predicts Mazumdar Shaw.
Lesser trade barriers to global markets: The UK has traditionally served as a gateway to Indian companies seeking access to the entire EU. However, with its exit, other European nations would see an opportunity to attract Indian businesses that earlier would have chosen to invest in Britain. In fact, countries like Belgium and Hungary have already implemented measures to attract Indian players.
Bhinde informs, “Countries like Belgium have greatly simplified tie – ups and collaborations with Indian companies, including the formation of an exclusive executive body for Indian trade partners to acquire local partners, land, infrastructure, labour, power etc. Belgium has also repeatedly expressed the intent to be a more sizeable trade partner to India and can be a potential hub for Indian companies intending to manufacture in the EU.”
Hungary too has expressed interest in incentivising Indian firms who might chose to leave the UK after the referendum. Peter Szijjarto, Minister of Foreign Affairs and Trade of Hungary, who was in New Delhi recently, informed that Hungary is looking at partners like India for mutual progress and promised incentives, assistance or subsidies to companies choosing to invest in his country.
Improve Indo-UK ties: The UK too is very interested in fortifying its business ties with India. Recently, Sajid Javid, UK Business Secretary was in discussions with Nirmala Sitharaman, Commerce and Industry Minister, India to devise ways to strengthen Indo-UK trade and economic ties. Drawing his inferences, Bhinde says, “In a recent interview, Sitharaman has expressed the desire to discuss the issue of access being granted to Indian generic drugs to the European market in the coming days. The government has already expressed to offer the European trade bodies access to Indian markets in wine, auto etc. to negotiate better terms for the pharma industry. If successfully negotiated, this could represent a whole new market being opened up.”
Scotland and Ireland who were part of the ‘Bremain’ campaign are also eager to minimise the fallout of Brexit. “Scotland voted to remain in the EU and the Scottish Government is now seeking to negotiate with EU institutions and other EU member states to explore all options to secure Scotland’s interests. It is currently firmly in the EU and trade and business should continue as normal to maintain the country’s position as an attractive and a stable place to do business,” clarified Rooma KR Bussi, Country Director, Scottish Development International, India.
“Scottish Enterprise’s focus and role remains firmly on the Scottish economy and we are working closely with the Scottish Government to ensure we are able act quickly as the situation becomes clearer. So, whilst we know change is on the horizon, we also know the global appetite for Scotland’s products and services has not diminished, nor has our strengths as a strong and resilient economy and a great place to invest. Our Business Helpline is ready to assist with any immediate advice to business,” states Bussi further.
“We think it is too early to say but certainly this could make the UK less attractive for companies from India or elsewhere looking to establish an EU hub for regulatory affairs and clinical/ commercial activities,” says Tanaz Buhariwalla, Director, India for IDA Ireland.
Highlighting Ireland’s suitability as an EU hub, Buhariwalla expounds, “Ireland is one of a number of potential locations to which the EMA might relocate once the Brexit process is finalised. There will be intense competition from a number of EU countries for the EMA HQ but Ireland’s status as an English speaking country with an extremely strong cluster of biopharma and medical device companies puts it in a strong competitive position.”
She says, “Ireland has for many years been winning a very high market share of mobile FDI coming into Europe in the life sciences space. IDA continuously seeks to ensure Ireland’s value proposition for life sciences FDI is compelling and highly competitive.”
Thus, Brexit could actually churn out several advantages for India and its progress. Yet, leveraging these opportunities would require strategic realignment on varied fronts. There are a few challenges which would need to be tackled effectively to optimise the growth potential such as:
Tackling regulatory tangles: Dealing with regulatory delays and complexities would be one of the major challenges for drug companies, as European Medicines Agency (EMA), which approves treatments for all EU countries, and has its headquarters in the EU may have to relocate post-Brexit.
As Mazumdar Shaw points out, “Since EU regulatory framework will not be applicable to UK post-Brexit, Indian pharma companies have to wait and watch how the UK guidelines and regulatory frameworks emerge.”
Dangi also reiterates, “Regulatory impact is another important issue for Indian pharma companies exporting to the UK. Since European Medicines Agency (EMA) is headquartered in London, which acts as one-stop-shop for the EU approvals, India may lose the advantage of harmonised regulatory policies across the EU for product approval, quality compliance, clinical trials as well as IPR.”
However, steps are being implemented to prevent regulatory delays and tangles. A steering group, comprising global pharma majors and co chaired by Andrew Witty, CEO, GSK; Pascal Soriot, CEO, Astra Zeneca and Life Sciences Minister George Freeman, has been formed to ensure that the UK pharma industry does not have to face bureaucratic hurdles. It could prove beneficial to the Indian pharma companies with presence in the UK as well. Talks between India and the UK for a free trade agreement have already been initiated.
Meeting stringent quality standards: Quality concerns have plagued the Indian pharma industry for quite some time now. It would be very important to lay doubts about the quality of medicines from India to rest for ensuring optimal use of the growth potential offered by Brexit.
Bhinde highlights, “The challenge for Indian companies is to sustain the stringent requirements of the European and British markets to become major players there.”
He recommends, “Companies must focus on creating state-of-the-art products, packaging and services capable of smoothly integrating with European healthcare systems where track-and-trace systems, serialisation etc. are already deployed.
Scout for lucrative EU markets: With the UK no more an entry point to the EU, Indian Pharma Inc will have to build ties with the other member nations to gain a stronghold in the EU. This would mean that the players will have realign their strategies to build bases in other EU countries.
Dangi suggests, “We will have to also start looking at other European countries like Germany, France, Italy etc. to gain entry in to the EU markets as these countries have large pharma markets. (total EU market – €220 billion in 2014). Studies show that countries having large container ports, high level of healthcare expenditure as percentage of GDP and FTAs attract more pharma imports.”
PV Appaji, Director General, Pharmexcil suggests that Germany and Netherlands could be good options as gateways to European markets. He highlights, “Viewing the new composition of the EU, after Brexit, Germany with 17.5 per cent of the share and Netherlands with 12.2 per cent share are top two exporting partners. Both the UK and Germany are pioneers in pharma research and innovation. Market behaviour is almost similar and Germany has recently switched over to international nonproprietary names (INN) from branded generics.”
Fortunately, the pharma industry too seems geared to maximise growth potential arising out of Brexit. Swaminathan informs, “We are looking at standing presence in Europe, specifically in Russia, Poland and Eastern Europe. The company remains committed to growing its existing European businesses in the markets of Great Britain, Germany and its partnered businesses in France.”
The road ahead
Thus, while there are some challenges that the country would have to face as the aftermath of the UK-EU divorce, yet a world of opportunities await. A strategic alignment by the industry players with adequate support from the government could make India a leading pharma powerhouse and accelerate its growth trajectory significantly.
(With inputs from Viveka Roychowdhury)