‘’Growth is impressive, generic opportunity is shrinking’’

Utkarsh Palnitkar

The Indian pharmaceutical industry has performed consistently despite the global slowdown. The industry has witnessed a Compounded Annual Growth Rate (CAGR) of ~15 per cent over the last five years and is currently the third-largest market in the world by volume. India’s growth in this market is not only indicative of its acknowledged strengths (generics) in pharma but is also a reflection of a thriving healthcare sector and improving healthcare standards in the country.

Emerging countries continue to play a key role in the global pharma market and are firmly placed in the growth strategies of global players. India too, is high on the global pharma agenda, and its contribution to the growth of the global pharma market in absolute terms is pegged at a cumulative $10 billion between 2010 and 2015.

India’s growth story has been primary fuelled by exports. Indian pharma companies have capitalised on export opportunities in regulated and semi-regulated markets and pharma exports from India grew at a CAGR in excess of 20 per cent from 2006 to 2012. Currently India is the third-largest exporter of Active Pharmaceutical Ingredients (APIs). Indian pharma exports are expected to bring in an estimated $25 billion by the end of 2014.

While the growth is impressive, the generic opportunity is shrinking. The addressable opportunity from Para-IV filings, in revenue terms, has declined from a peak of $24 billion in 2007 to $3 billion in 2012 compelling Indian companies to revisit their strategies to maintain the current growth trend.

This article is an attempt at identifying and defining a few strategies that pharma companies could adopt to ensure growth amidst the various challenges that are an inherent part of the pharma landscape. In essence, these strategies are pointers towards leveraging India’s competitive advantage to sustain growth. The article aims to capture the opportunities (product-related, business model related and market-related) that companies can capitalise on. The objective of the article is also to highlight the challenges that companies will need to encounter and address as they devise and execute these strategies.

Remodeling the product pipeline

• Biosimilars: The global opportunity in the area of biosimilars is estimated at $5 billion by 2015. India currently accounts for only three per cent of the global biosimilars market after China and South Korea. A few Indian companies currently have a strong biosimilars pipeline and the untapped potential in the segment is significant. However, clarity on the US regulations governing biosimilars will be key to capitalising on the biosimilars opportunity. In the current regulatory environment, the significantly high cost of trials dilutes the cost savings, therefore, reducing the potential of the segment
• Niche products: Indian companies are increasingly focusing on niche segments and products that involve a higher level of technology and complexity. Glenmark, for example, continues with its strategy of focusing on niche filings in areas such as dermatology and oral contraceptives, which face less competition and command relatively higher value
• New Drug Delivery Systems (NDDS): Indian companies can capitalise on the opportunity presented by delivery-based drug systems. Technology-intensive products such as extended-release tablets, patches and inhalers may help companies create a more differentiated portfolio
• Emerging therapeutic areas: With increasing healthcare awareness in the country, new needs are emerging, leading to new opportunities. Areas such as geriatrics, sports medicine and neutraceuticals are gaining impetus and giving rise to new segments for pharma players
• Value added generics: While niche and complex molecules are a part of the diversification strategy that companies can adopt to build a sustainable portfolio, value- added generics are a means to enhance present offerings. Indian companies must innovate and look at generating value from ‘super-generics’, which can deliver additional benefits – increased efficacy, improved ADME characteristics, etc. – to patients

Exploring untapped outsourcing (widening offerings portfolio) and licensing potential

India’s position as an attractive outsourcing partner has placed it favourably on the global pharma map; however, outsourcing remains concentrated in areas of manufacturing, chemistry and clinical research (though clinical research in recent terms has seen a dramatic downturn). With growing strengths in biology, and building on our chemistry strengths, drug discovery services present an opportunity that can be leveraged. Bioinformatics, protein expression and in-vivo pharmacology studies are various areas that can be explored for building possible outsourcing competencies. Developing capabilities and infrastructure in these areas may help Indian players become preferred outsourcing partners for pharma research.

Other than the outsourcing angle, Indian companies can also look at capitalising on licensing opportunities presented by MNCs as they increasingly invest in emerging economies in accordance with the ‘Look East’ policy.

Seeking new export markets to sustain export revenue

Companies with a high dependence on the US/EU for export revenues have been facing various compliance-driven challenges in the recent past. Tightening scrutiny in these geographies is threatening export revenues and Indian companies would have to look at risk mitigation strategies. Markets such as Japan, Oceania, GCC and CIS remain untapped and can be explored. For instance, India’s exposure to Japan – the second-largest pharma market in the world and also one of the most difficult pharma markets to access – is a mere one per cent. However, Lupin’s success in establishing significant presence in Japan shows that building a footprint in this market is not impossible. Indian companies can also look at establishing foothold in other managed markets such as South East Asia and Africa. Liaisons in these developing markets can be facilitated more efficiently by collaborating with international agencies or via government intervention.

Increasing R&D efficiency and incentivising innovation

Innovation is inextricably linked to the economic growth of any country and India is no exception. Improving R&D efficiency is imperative to sustain growth in the pharma industry. However, R&D units across therapy areas in many mid-sized pharma companies are disconnected, leading to inefficiencies. Indian companies will have to work towards building R&D units which are integrated, efficient and are capable of managing risk. Effective best practice sharing and continuous information exchange can help maximise returns on R&D investment.

To ensure that R&D investment is channeled optimally, it is also important that companies formulate robust processes and frameworks that help them gauge risk and measure returns. Biocon, for instance, has devised an innovation-risk matrix, which determines the optimal investment in specific areas based on the risk proposition of the endeavour.

Indian companies must focus on the following three pillars to foster R&D productivity and harness innovation: Leveraging enabling technologies, harnessing core competencies to unleash synergies, ensuring adequate funding and incentivisation Indian companies/institutes could focus on funding boutique firms/start-ups to harness domestic innovation. The Manipal Group for example has partnered with Stempeutics Research, which is engaged in developing stem cell-based medicinal products.

Capitalising on emerging distribution channels

There has been a noted rise in the number of distribution channels emerging in the Indian pharma industry:

• Organised pharma retail is emerging fast in India. Estimates suggest that the penetration of organised drug retail increased from a mere five per cent in 2011 to ~20 per cent by the end of 2012.
• Drug distribution channelised via government tenders is also on a rise with increasing evidence of Government involvement in drug procurement in states such as Tamil Nadu, Andhra Pradesh and Karnataka.
• The hospital procurement channel is another distribution channel that is gaining ground and can be leveraged

These channels are characterised by their organised nature and inherent legalities. Companies may have to remodel their current commercial channels to leverage the opportunity that these new channels offer.

Building brand credibility

An important component of success is to build a credible brand. The pharma industry has often been brandished as a profit-centric industry with relatively low regard for public welfare. Companies should work towards uplifting the image of the industry and dispelling negative stigmas associated with it.

• In light of increasing healthcare awareness and literacy, launching patient programmes to connect directly with patients may help create a positive image of the industry
• The large volumes of counterfeit drugs that find their way into the market play an instrumental role in diminishing the credibility of the Indian pharma industry. With recent allegations of falsified generic medicines manufactured in Nigeria and China carrying the ‘Made in India’ tag, the situation is likely to worsen. It is imperative that the Government of India and pharma companies implement initiatives to tighten and secure supply chains and prevent such occurrences

While the above-mentioned strategies could play an important role in propelling India’s pharma growth story, there are a number of challenges that continue to affect the industry. These challenges require careful deliberation by players as they contemplate strategies in the pursuit of growth.

• Pricing policy: The Drugs Price Control Order (DPCO) 2013, which replaced the DPCO of 1995, seeks to reduce the prices of 348 drugs that are deemed to be essential medicines, leading to an erosion of Rs 1,600 crores from the industry’s topline.
• Compulsory Licensing (CL): The implications of CL have far reaching consequences for the industry. While triggering of CL in the case of pandemics is readily understandable, the criterion of affordable pricing is today a reality. Resistances to introduction of new products by innovators as well as the perception of CL as a new channel to market by generic producers are two aspects that will need to be balanced. Perhaps an amicable agreement on market access by licensing and marketing partnerships could possibly be a way out. Early and continuous engagement with the Government is an imperative in this regard.
• Non trade barriers from US/EU: Various non-trade barriers existing in the US and the EU, which are primary export destinations for Indian pharma companies, have impacted the growth of the industry:
• Generic Drug User Fee Amendments (GDUFA): On July 9, 2012, the US Government passed the GDUFA 2012. This policy, which is being considered a historic first, has been drafted in a bid to accelerate the review of applications for generic drugs. In effect, the policy is expected to facilitate the accessibility of safe and efficacious drugs to the larger population in a shorter time frame and at a lower cost to the industry. However, the GDUFA may impact the margins of a number of large and mid-sized pharma companies that will have to pay the proposed fee for selling their products in the US. The fee for re-inspection of FDA-approved facilities and on DMFs is a further burden that these companies will have to bear.
• EU Quality Protocols: The new quality guidelines imposed by the European Medicines Agency (EMA) for drugs being exported to Europe create further compliance issues for Indian manufacturers exporting drugs to EU countries.

Conclusion

The Indian pharma industry has witnessed continual growth and has the potential to reach an estimated $45 billion by 2020 (from the current $22 billion). Increasing disease burden, coupled with the rise in disposable income and heightened healthcare awareness are driving the industry forward. However, to succeed in the long term, companies will have to modify their current business models and make adequate changes to leverage the opportunities that will present themselves in the near future. It is important that companies give due regard to compliance and quality and move up the value chain to remain relevant globally.

Disclaimer

The views and opinions herein are those of the authors and do not necessarily represent the views and opinions of KPMG in India. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.