Beyond the budget

Pharma companies are likely to spend higher on R&D but without the high returns

Once again, after a lot of hype and hoopla, the pharmaceutical sector was like Tom Sawyer, asking, ‘Please sir, can I have some more?’ Of course it was an interim budget and there is still hope that the final budget passed by the next government will have some direct focus on the pharma sector. As of now, the sector will indirectly benefit from the increased allocations to healthcare schemes. The allocation towards Ayushman Bharat – Pradhan Mantri Jan Arogya Yojana (PMJAY) has in fact tripled to `6,400 crore from `2,400 crore in the previous year. These health insurance-based schemes will put more money at the disposal of beneficiaries, some part of which will be spent on medicines. Finance Minister Piyush Goyal has already indicated this allocation is likely to go up in the next budget.

Another set of fixed dose combinations has been banned as per a gazette notification dated January 11. Market research firm AIOCD Pharmasofttech AWACS estimates that as of MAT Dec 2018, the estimated total FDC value under the current notification stands at ` 782 crores, which accounts approximately for 0.6 per cent in the total Indian pharma market.

But while pricing pressures due to banned FDCs and price caps continue at home, exports are slowly picking up. Exports to other parts of the world except US saw an acceleration during H1FY19 growing by 12.7 per cent compared to 4.1 per cent growth during H1FY18. Care Ratings expect the upward momentum in exports to continue in the coming months of FY19 and thus outbound shipments are likely to increase by 8.5 per cent -9.5 per cent during FY19 on a yearly basis.

Exports account for about 50 per cent of the industry’s sales and revenues, with the American continent making up a lion’s share of 37.8 per cent. The sluggish exports in FY18 were a huge drag on the overall performance of the entire sector. Indeed, the industry’s operating margin and net margin had contracted in the range of 327-467 basis points on a y-o-y basis during H1FY18 primarily due to price erosion in the US generic market and increase in scrutiny and regulatory intervention by the US FDA.

Thus, the upward tick in the first seven months of FY19 were a huge relief and very encouraging. A Care Ratings analysis showed that shipments to the US rose by 10.9 per cent y-o-y to $3.2 billion and exports to other parts of the world excluding the US grew by 12.7 per cent to $7.6 billion during April-October 2018. This was backed by a moderation in price erosion environment in US and introduction of new drugs by Indian pharma companies. Total exports from India increased by 12.2 per cent y-o-y to $10.8 billion during the initial seven months of FY19. Though rupee depreciation did play a role in boosting export revenues, increased ANDA approvals  also kicked in. The ANDA approval rate for the top five Indian pharma companies increased to 67.9 per cent for H1FY19 compared to 65.5 per cent for H1FY18 and 65 per cent for H1FY17. In addition to this, the number of approvals received by these top companies during H1FY19 stood at 130 compared to 92 ANDA approvals received during H1FY18. However, investments in R&D, though stable for these top five companies at around 7.6-8.6 per cent in each of the first half during the period FY17 to FY19, were almost half of their MNC counterparts, with R&D investments ratio in the range of 14-15 per cent for the year 2017. Long term, this will trip up the industry as value-driven revenues can only come from new approvals driven by R&D.

A recent article in Nature Reviews, Drug Discovery, point to a worrying trend that although  the US FDA approved a record 59 drugs last year, the commercial potential of these drugs is lacklustre. Only two of the newly approved products are expected to achieve annual sales of $2 billion or more by 2024 or sooner, as per sales consensus cited by the reporter. Another 11 products should reach peak sales of more than $1 billion. In 2017, by contrast,seven of the newly approved products were on track for multibillion-dollar annual sales and another nine had billion-dollar sales potential.

Thus, with the low hanging fruit exhausted, pharma companies are likely to spend higher on R&D but without the high returns. Though pharma companies in India are looking at speciality generics to increase their margins, pure play R&D is looking harder than ever, even for the biggies in the game. All in all, a kind budget or not, pricing caps notwithstanding, the pharma sector in India has proved to be resilient. Pharma companies need to plan strategy beyond budget allocations and look to global trends.