Building resilience to regulatory risks

In September this year, Alkem Laboratories sharpened focus on its API business, branding it as Alkem Activa. Promoter-MD Sandeep Singh’s ambition “to propel Alkem Activa into the forefront of the API market” no doubt echoes the sentiments of many API contract manufacturers in India.

The logic is simple. API makers across the world are rebounding from COVID-related disruptions in 2020. A report from Fortune Business Insights projects a CAGR of 6.6 per cent from 2021 to 2028 for the API manufacturing sector.

In fact, the API makers of the Asia Pacific market could be in a sweet spot: the Fortune Business Insights reports projects that the Asia Pacific API market is set to outpace the North America and European markets, as more pharma players in mature geographies outsource API manufacturing to pharmerging markets to reduce overheads.

Moreover, the report analyses that API makers in mature markets are focusing on the more lucrative, difficult-to-make biological APIs, while API makers in India and the Asia Pacific are focusing on developing generic APIs.

Contract manufacturing and export of APIs is just one part of the portfolio of India-based contract development and manufacturing organisations (CDMOs). But as a CareEdge (CARE Ratings) report cautions, the Indian pharma sector will have to navigate some challenges while it sets sights on an 8 per cent export surge.

On the positive side, the sector has bagged almost half of the total Abbreviated New Drug Application (ANDA) approvals in CY22. Another positive is the upcoming patent cliff. As the CareEdge report highlights, patented products with a cumulative value of $224 billion are set to lose their patent protection from CY2022 to CY2026, representing an opportunity in the range of $4-5 billion. However, India will have to compete with the rest of the world for a piece of this pie.

While India has the largest number of USFDA-compliant pharma plants outside of the US, this also means that the agency’s increased inspection rates of pharma manufacturing facilities, and subsequent adverse audit observations, will have a significant impact on the sector’s performance.

The CareEdge report points out that several pharma companies in India have already received Form 483 observations in CY2023. Spelling out the consequences, the report cautions that the increasing frequency of audit observations by the USFDA will impact compliance costs and, consequently, adversely affect the profitability of the pharma sector, with delays in the launch of new products, and disruption of revenue streams a further possibility. As the report sums up, it is clear that future profit margins and growth strategies of Indian pharma companies will hinge on their ability to navigate regulatory inspections successfully.

Besides the patent cliff opportunity, an analysis from CareEdge Ratings’ Credit Quality Assessment report for H1FY24 projects that operating margins are expected to expand by 100-150 bps to 22 in per cent as raw material prices are stabilising, freight rates are normalising, and pricing pressure in the US generics market is easing. Both exports and domestic pharma markets are expected to grow at 7-8 per cent in FY24. The long term prospects for the sector remain good, thanks to increasing demand for healthcare services, aging population, and rising incomes in emerging economies. The caveat to this rosy picture is concerns with respect to adverse observations if any from regulatory authorities.

Indian pharma companies seem better prepared for increased regulatory scrutiny. The CareEdge pharma specific report refers to the proactive regulatory risk mitigation measures taken by large pharma companies which include transferring production to compliant sites in cases where regulatory issues arise, filing ANDAs from two separate locations, or identifying contract manufacturers for outsourcing which might reduce regulatory risk to some extent. Only time will tell if these measures will be enough to maximise the opportunities at hand.