As game changes, companies need to redraw long-term strategies and focus on innovation
CRISIL Research foresees exports growth in formulations (in US dollar terms) declining sharply to 10-12 per cent annually over the next five years, compared with a growth of ~19 per cent seen in the last decade.
Exports of generics have been the growth engine of the industry for a long while now, but the script is changing because the value of drugs going off patent is declining even as pricing pressures are increasing. For example, annual sales growth of generic drugs in US, the largest generics market, is seen slowing to eight to nine per cent over the next five years, and decelerate even more after that. Therefore, for growth to sustain beyond 2020, domestic companies will have to step up investments in new molecules and draw up a road map to deal with lower generics growth.
In the past decade and more, what came in handy was process chemistry skills — which helped companies clone drugs going off-patent by tweaking their molecules — and low-cost manufacturing. But competition has been intensifying, particularly for the large players, because of the huge number of abbreviated new drug applications (ANDAs) being filed with the US Food and Drugs Administration (US FDA), including by mid-sized domestic ones looking to step up presence in the biggest market.
Furthermore, consolidation of distribution channels in the US could reduce the pricing power of domestic drug makers.
Ajay Srinivasan, Director, CRISIL Research says, “Sharper focus on innovation and R&D has become an imperative. Our analysis of new drug applications (NDAs) approved by the US FDA reveals that Indian companies got approvals for just 26 products between January 2006 and June 2015 – a fraction of the 840 garnered by global pharmaceutical companies. Their global generic competitors such as Teva and Mylan had 48 and 33 NDAs to their credit as of February 2016.”
To be sure, Indian companies have indeed increased their R&D spend; for the top 30, it has shot up to 6.5 per cent of revenue in fiscal 2015 from 3.8 per cent a decade back. However, this pales in comparison with global majors, who spend close to 16 per cent. Typically, a chunk of the expenditure of domestic pharmaceutical companies is for launching generic therapies, changing product mix in generics, and process development.
Some top ones have launched R&D programmes aimed at new drug discovery. CRISIL Research’s analysis indicates that a good 14 companies together have ~39 products in various stages of clinical development. These companies have adopted various approaches — such as in-house development, joint development and out-licensing — to manage the risk-return trade off. However, none has launched a new molecule in a regulated market such as the US.