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Evolving US generic market to plummet profitability levels of Indian pharma cos: Report

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Indian pharma companies have to dexterously manoeuvre contingencies by expanding their existing pipeline and secure a dominant position in the US market says CARE Ratings in a report. Excerpts from the report

The US contributes about one third of the total Indian pharma exports. Furthermore, Indian pharma manufacturing companies accounted for 34 per cent of the total ANDA approvals by the US in 2016 as compared with 30 per cent in 2015. The total number of ANDA approvals has increased from 167 to 201 during the same period. India has the second highest number of USFDA-approved manufacturing plants outside the US with 2,633 FDA-approved drug products.

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Out of the total exports by Indian pharma companies, sales to the US were about one third in FY2016-17 (refers to the period April 1, 2016 to March 31, 2017). The US also provides significant opportunities for generic players across the globe. However, during last decade, the industry has undergone transition resulting in pressure on the profitability margins of the companies for whom exposure to US market is substantial.

Primary contributors

CARE Ratings has identified four primary contributors for the decline in margins, viz, (i) consolidation of pharmaceutical distributors in the USA, (ii) mergers among major drug players, (iii) significant increase in Abbreviated New Drug Application (ANDA) approvals and (iv) heightened scrutiny by US Food and Drug Administration (US FDA).

Going forward, the Indian pharma companies have to dexterously manoeuver contingencies arising from above events by expanding their existing pipeline and secure a dominant position in the US market through increased penetration along with marking their place in new molecular entity segment.

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With increase in the number of ANDA approvals bagged by Indian pharma companies, its share in terms of volume also has increased in tandem. However, the share in terms of the value has shown the attenuated trend despite the introduction of complex and speciality drugs by the Indian pharma players, the reason behind this being upshot of pricing pressure at the back of increase in competition due to more number of ANDA approvals being granted for similar drugs.

Driving factors

The prime intention and driving factor for consolidation of the pharma distributors is to draw the pricing efficiency from the generic players and extract benefits of economies of scale. The expected benefits derived due to consolidation of the distributors would lead to the savings of anywhere between $100 million and $1 billion. While the aforesaid synergies benefit US pharma industry, the actual adverse impact would be exerted on generic companies which in turn lead to pricing pressure and thus affecting the EBIDTA margins of Indian pharma companies. The bigger generic players are likely to sustain the impact to some extent due to larger scale of operations and diversification into other geographies. However, its impact on the smaller generic players would be felt more acutely. CARE Ratings expects Indian pharma companies to witness decline in margins on account of this consolidation deals from FY18 onwards, although simmering of the same has begun since FY16.

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In order to report robust growth rates, the key strategies deployed by the pharma companies are penetrating marketing network, strong brand recall, wide therapeutic coverage and good number of new products in pipe line which require substantial investments in R&D. Consolidation of the global players has led to broadening the therapeutic segments which reduced the risk for these players as they would be capitalising on their existing strengths while netting off their mutual drawbacks. The need to strengthen the marketing and distribution network also played vital role in consolidation which has led to deeper penetration of the combined entity products thus improving the generated revenue. Consolidation promulgates larger revenue base which helps to support the large R&D budgets required to be spent on developing strong product pipeline. Furthermore, the combined entity will be deriving benefits from mutual skilled and experienced human resources along with optimum utilisation of the R&D infrastructure to explore on developing innovative drugs for various therapeutic segments. All the above factors culminate in improved economies of scale and efficient utilisation of resources while maintaining its operational profit margins amidst competition.

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Change in perceptible dynamics of approval process during last five years has boosted competition leading to pricing pressure in the US market in the medium term, especially on plain vanilla products. Now, the Indian pharma companies have to raise their R&D investment and direct them towards increasing the share of complex drugs, bio-similars, speciality drugs etc, thereby creating high-entry barriers, which results in lower competition and higher margins. Further with the change in operational dynamics especially of global pharma industry, the Indian pharma companies now have to shift on to developing new molecular entities (NME). In view of decreasing number of drugs going off-patent and increasing competition in the generic segment, it is imperative for the Indian pharma companies to focus on developing New Molecular Entities (NMEs) instead of merely re engineering the drugs developed by the counterparts from developed nations.

Heightened scrutiny by USFDA regulatory authority

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With tightening US FDA timelines for ANDA approvals and affordable healthcare being a key focus area, the outlook for generics prices continues to remain subdued in the near future. In the wake of declining drug prices, generic players are likely to witness more mergers and acquisition. It is expected that the generic drug pricing will be moderate in the upcoming year, with speciality pharma and complex generics to be the next support of growth for drug manufacturers as well as for distributors.

Impact of generic prices on top four Indian pharma companies

Indian pharma companies have spent millions of dollars filing ANDAs with the US FDA to gain exclusive production rights for many drugs losing their patent protection in the US. Continued price competition in the US market will mean cheaper prices for generic drugs and greater choice for US consumers. While analysing and observing the EBIDTA margin trends in Indian pharma industry for last six years, CARE Ratings believes that the top players operating in this industry have been affected by the steep price erosion and witnessed decline in the margins.

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The issuance of the import alerts and warning letters for domestic manufacturing facilities have increased significantly over the past years following US FDA’s increasing focus on compliance of guidelines of cGMP. This restricts the manufacturing units to supply drugs to the US market from that facility resulting in the decline of revenue for the companies particularly to the US market and also from other markets subsequently if the issues are not closed out. In turn, the companies, in order to cover their fixed and operational expenses, sell their products in unregulated markets, rest of world markets and domestic markets to book revenue for the year where the competition is fierce and profit margins are unattractive. In the current environment of pricing pressures faced by the companies on account of increasing competition, developments like these are likely to hamper the profitability margins of the pharma companies.

Way forward

The steep price erosion and the increasing scrutiny by USFDA are of concern for the Indian pharmaceutical sector. To drive the growth and profitability margins, the companies must increase its product launches in the US market. In order to tackle the impact of the declining generic drug prices, the Indian pharmaceutical companies must now venture into manufacturing more of specialty or complex medicine and expand their existing pipeline and secure a dominant position in the US market through increased penetration. Apart from that, they also need to venture to mark their place in the new chemical entity zone.

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