Bringing in the moolah
In today’s competitive market, investors have a slew of choices to infuse their money apart from public and private institutions. In a fast-moving, technology-driven society, investors have ample resources to ensure transparency in their dealings by obtaining information on various sectors. In the case of retail investors, they can invest in private and public institutions for short term or long term without venturing into any kind of trading. Whereas, the capital market, comprising the stock market and bond market, offers a single platform to investors to do their trading and get live updates of the Sensex index to understand the market sentiments.
The Indian capital market is divided into the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE). At present, the BSE has 82 industries listed with manifold companies. All these companies have individual scrips which differentiates them from others. 225 pharma companies are registered under the BSE listing of which the current status of 75 listed pharma companies show ‘suspended for undisclosed reasons’. Indian pharma sector is very fragmented yet it has the maximum US FDA approved manufacturing facilities outside the US and leads the race in generic manufacturing. India exports medicines to about 210 countries and vaccines to about 150 countries in the world. These medicines while being affordable are as effective as branded drugs manufactured in the developing countries. US is the topmost destination for exports as far as Indian pharma companies are concerned, followed by Russia, Germany, Austria, LATAM and Japan.
 “Private equity (PE) investors have been keen on investing in pharma sector because of its traditionally defensive approach, but the industry is now fast shedding its defensive approach and becoming growth-oriented.”Dheeraj Aggarwal CFO, Venus Remedies |
Dheeraj Aggarwal, Chief Financial Officer, Venus Remedies mentions, “Private equity (PE) investors have been keen on investing in the pharma sector because of its traditionally defensive approach, but the industry is now fast shedding its defensive approach and becoming growth-oriented.”
Commenting on the Indian pharma companies’ performance, Dheeraj Aggarwal says, “The Indian pharma industry is one of the fastest growing industry worldwide. It is expected to grow at a compound annual growth rate (CAGR) of 17.8 per cent during 2008–16 and reach $36 billion (as per an August 2013 Indian Brand Equity Foundation (IBEF) report). The industry has witnessed a threefold increase in PE investments since 2005.”
This prediction proved to be accurate till 2013. However, during 2013, Indian pharma companies saw many regulatory reforms and faced various challenges on both the fronts, domestic as well as internation. Companies like Wockhardt, Strides Acrolab came under the US FDA scanner, again raising questions about the manufacturing standards of Indian pharma players. This is not the first time that US FDA has raised an issue with regards to the manufacturing practices of Indian pharma companies. Earlier too, companies like Ranbaxy Laboratories which is now Ranbaxy-Daiichi, Lupin, Sun Pharma and Cadila Healthcare, Aurobindo Pharma have received warnings from the US FDA. Some of them like Lupin, Aurobindo Pharma and Cadila Healthcare have been quick to resolve the issues. Ranbaxy-Daiichi have witnessed a long battle with the US FDA, it started in 2009 and is still on. The company had already signed a decree with the US FDA in 2013 which also includes its largest facility at Mohali.
 “The Indian pharma industry has been logging a robust 20 per cent growth in the US markets despite regulatory hiccups and given the cost benefit of the Indian manufacturing.”Sarabjit Kour Nangra VP, Research-Pharma, Angel Broking |
Commenting on the Indian pharma companies’ battles with US FDA, Sarabjit Kour Nangra, Vice President, Research-Pharma, Angel Broking says, “The battle with the US FDA is an overdrawn one and not new to the industry. The companies that have rectified the issues on time have reduced the serve impact of the same on their operations, while companies like Ranbaxy have taken a lot of time resolving their issues and hence have seen their profitability get diversely impacted, in recent times more so, due to lack of any Para-IV opportunities.”
 “Continued R&D effort will help Indian companies consolidate their lead in the US generic market.”Sreenivasa Prasanna Sr Director – Corporates, India Ratings and Research |
Sreenivasa Prasanna, Senior Director – Corporates, India Ratings and Research, gives an insight on the imbalanced regulatory scenario of India and how detrimental it is to the growth of Indian pharma companies, “Many Indian manufacturers have been subject to adverse regulatory action by the US FDA, with 10 ‘warning letters’ issued to Indian companies during 2013 alone. While such regulatory action leads to disruption of manufacturing and loss of revenues for the affected company, these incidences have been few, considering that there are over 500 US FDA facilities in India and are unlikely to affect the sector as a whole.”
 “The sector is expected to continue to benefit from a weak rupee. The Indian pharma players still have the robust pipeline of ANDAs with the US FDA and most of these could be complex and niche generics launches despite the end of the patent cliff.”DK Aggarwal CMD, SMC Investments and Advisors |
Analysing the profitability impact on Ranbaxy’s financial performance after falling under US FDA scanner, DK Aggarwal, Chairman and Managing Director, SMC Investments and Advisors says, “Companies like Ranbaxy Laboratories has been under pressure as it has been dragged up frequently by the US drug regulator. The US FDA has banned its manufacturing plants in India from exporting to the US. Hence its profitable share has been badly hit as the US alone contributed more than one-third of Ranbaxy’s revenue. Now the company has decided to focus on the domestic markets. No doubt the Indian market will also prove to be challenging as competitive intensities are very high here.”
Will it be a ‘U’ turn?
After the US FDA banned drugs manufactured by Ranbaxy-Daiichi’s Punjab-based Toansa Active Pharmaceutical Ingredients (API) plant there were a lot of apprehension in the Indian pharma industry. However, US FDA Commissioner, Margaret Hamburg recently visited India and met with Ghulam Nabi Azad, Union Health Minister, India, to sign the ‘Statement of Intent’ for cooperation in the field of medical products. This move has alleviated the industry’s fears to a certain extent.
Post this move, the Indian Health Minister stated that being affordable should not mean that they are cheap and spurious. Efficacy of the Indian drugs should not be judged on the basis of their cost as the input cost in India is much less than that in the developing countries due to less expensive human resources. He further opined that developing countries such as India with a budding pharma industry should be allowed to grow.
According to the official press release issued by the Government of India, Ministry of Health and Family Welfare, Hamburg said, “India is the second largest exporter of drugs to the US, and has a significant contribution in medical equipment and devices. But there is huge expectation and dependence of the public on the regulator to ensure the quality of what people consume through drugs and food, and also whether there are barriers being created to new opportunities.” Hamburg also stated that quality regulation can go a long way in strengthening the robustness of the clinical industries and noted that India has made a very serious commitment to strengthen regulatory framework to enhance transparency. India and the US need to be effective partners and work on transparency as there are common goals and aspirations and both are world leaders in the field of medicines. There should be common set of standards so that people have quality, safe and efficacious drugs, she noted. She said that the ‘Statement of Intent’ will enhance transparency in the field of medicine.
Scrips performance
US FDA commissioner’s recent visit to India indicates their eagerness to resolve the issues with Indian pharma companies and Indian regulators at the earliest. In the past 10 years, India has emerged as the largest global supplier of generic medicines and bulk drugs. Strong product R&D has helped Indian pharma companies to lead the pack of foreign suppliers of generic drugs to the US. Prasanna comments, “Coming as it does when Obamacare policies have given a fillip to generic drug use in the US, continued R&D effort will help Indian pharma companies consolidate their lead in the US generic market.”
The dominance of Indian pharma companies in getting US FDA (ANDA) approvals increased during 2013, with close to 45 per cent of all product (ANDA) approvals given to Indian pharma companies.
Dheeraj Aggarwal says, “The sliding rupee has given more edge to all export-oriented industrial units in India, especially the pharma sector which, along with the IT sector, has benefited the most from the depreciation in rupee. The Indian healthcare sector, including the pharma industry, enjoys a tax-friendly regime, which gives further impetus to investments in this sector. Since India still spends meagrely on healthcare as compared to other countries, there is a huge scope for growth in this sector, which will translate into bigger opportunities for investors.”
DK Aggarwal presents his analysis, “During the year 2013, the Indian pharma stocks such as Ranbaxy Laboratories, Wockhardt, Strides Arcolab and Jubilant Life Sciences remained in limelight despite quality problems, FOREX losses, interest burden and Drug Price Controlled Order (DPCO); the Indian pharma has witnessed 2013 as a year of both achievements and setbacks. He further elaborates, “Due to price control requirement which has been introduced by the Union Government, in May 2013, pharma companies should look to redesign the product portfolio and also need to renew focus on quality manufacturing norms. Also, there is an urgency to modify innovation and R&D efforts in India to move on from the generics model as it is considered unsustainable.”
However, despite several pitfalls, the Indian pharma industry is expected to see strong growth in CY2014 driven by a 20 per cent plus growth in exports. R&D driven products, ANDA approvals in the US are likely to help the Indian pharma exporters to maintain the growth. Capacity utilisation will improve as more and more capacity is used up to manufacture the increasing number of products. Prasanna comments, “Capacities created during the recent past will start contributing to the output, operational leverage would drive up EBIDTA margins, increasing profitability. Exporters with low debt levels or those with only domestic debt will also gain from the depreciation in the rupee against the US dollar. Overall financial risk can also come down if higher cash flows are used to reduce debt intensity.”
Moving forward
Nangra informs, the Indian pharma industry has been logging a robust 20 per cent growth in the US markets despite such regulatory hiccups and given the cost benefit of the Indian manufacturing, the Indian companies can grow robustly in these markets. And a look at the ANDA filings pending with the US FDA, Sun Pharma, Lupin, Dr Reddys Labs and Ranbaxy Labs, appear amongst the top 10 US FDA filers. Predicting the Indian pharma industry’s future and assuring the retail investors, DK Aggarwal says, “The pharma sector is expected to continue to benefit from a weak rupee. The Indian pharma players still have the robust pipeline of ANDAs with the US FDA and most of these could be complex and niche generics launches despite the end of the patent cliff. Further, cost cutting measures in US under healthcare reforms and austerity measures in Europe will boost demand for Indian cost effective products. The multinational companies have already begun with their strategies to join hands with the Indian pharma companies. In the long term, this kind of partnership will enable to inflow the foreign cash in India and will encourage the retail investors sentiment to opt pharma scrips as a safest destination.”
Agreeing with his colleagues, Dheeraj Aggarwal also forecasts, “The Indian pharma industry has already cleared the litmus tests on quality and pricing. This growth story would remain intact in coming years, especially with a slew of patent expiries of top selling brands in the US and European Union from 2011-2015. With the easing of mergers and acquisitions (M&A) regulations and FDI norms, large MNCs are looking towards Indian companies for acquisition or joint ventures, as shown by the recent deals struck by Mylan, GSK and Hospira.
Conclusion
The pharma sector in 2013 has seen a healthy export growth with better top lines due to new product launches, higher investments in R&D etc. but it has been a bumpy ride. Yet, the rough patches have not deterred the investors and India continues to a be a preferred destination for short-term investments.
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