India continues to be one of the fastest growing pharmaceutical market of the world with its over 40 percent of the total pharmaceutical produce is exported around the world. Over half of the total exports constitute of formulations, and the balance comprises of bulk drugs. India has been consistently maintaining its supremacy in the formulation exports since my salad days.
According to Export Statistics (2014-15) published by the Pharmaceutical Export Promotion Council of India (Pharmexcil), United States (US) is the largest market for the India’s pharmaceutical exports with a share of 27 percent of the total, followed by the United Kingdom (UK), South Africa, Russia, Nigeria, Brazil and Germany.
A red flag raised:
Up until recently, it has almost been like walking over a bed of roses in this front for Indian pharma exporters. However, it does not seem to be so now, and at least in the foreseeable future, for a number of reasons.
The Press Release of ‘CRISIL Research’ dated May 17, 2016 has also raised a red flag in this area. The report foresees growth in pharma formulations (in US dollar terms) declining sharply to 10-12 percent annually over the next 5 years, as compared with a growth of ~19% seen in the last decade.
This adverse impact will be felt mostly in the US – the largest export destination of India, followed by the UK.
I reckon, there are three basic reasons for this changing scenario, namely, pricing, quality and lesser number of branded small-molecule blockbuster drugs going off patent.
The ride on the ‘gravy train’:
Pharma companies across the world consider that doing business in the US market would provide them a lot of money without facing any head wind, fundamentally driven by the drug pricing freedom in the country, as compared to any other market of the world.
This unfettered freedom of charging a hefty price premium in the largest pharma market of the world, on an ongoing basis, has been a critical factor of attraction for many pharma players to do business in the US, coming from various corners of the globe, including India, just as honey attracts the bees, as it were.
Thus far, it has been an incredible ride on the ‘gravy train’, as it were, for most of them.
However, ongoing activities of a large number of drug companies, dominated by blatant self-serving interests, have now given rise to a strong general demand for the Government to initiate robust remedial measures, soon. The telltale signs of which indicate that this no holds barred pricing freedom may not be available to pharma, even in the US, any longer.
In this article, I shall focus mainly on this point, drawing both global and local examples, as this development has a strong potential to add more to the existing miseries of many Indian drug exporters, of course in tandem with many other large MNCs.
Some recent developments:
The April 21, 2016 issue of ‘The Financial Times’ quoted Joe Jimenez, the Global Chief Executive (CEO) of Novartis, where he said that pharma companies can no longer count on the “hockey-stick” trajectories for new products in the US. This is primarily due to the aggressive control of the drug expenses by the insurers and other healthcare payers, besides lawmakers and the public at large, of this most lucrative pharma market of the world.
As Jimenez said in the report, yesterday’s business model that pharma companies have followed since long, has now changed, slowing the pace of growth of innovative patented products in the US.
This trend is now heading north, primarily driven by the consolidation among the US insurers and healthcare providers. Consequently, the payers are making effective use of their greater bargaining power over the drug companies, especially to avail new incentives for cost savings, as provided in President Barack Obama’s Affordable Care Act, the article highlights.
To give a feel of it, I am quoting the example of a Novartis drug from the same ‘Financial Times’ article. It states, “Entresto, a treatment for heart failure, launched last year on the back of stellar clinical trial results, has so far sold more quickly in Europe than the US, marking a reversal of usual patterns in the pharma industry.”
A key differentiator in global ranking:
In this emerging scenario, all global companies will be adversely impacted for increasing pricing pressure in the US market.
This factor remaining the same for all the pharma players in the world, one of the key differentiating factors that would now play even more important role, is the richness of the advanced stage R&D pipeline of each innovator company.
For example, according to ‘Evaluate Pharma World Preview 2016, Outlook to 2022’ report, the overall R&D pipeline value of Roche is US$ 43.2 billion, far ahead of the same of Novartis’ US$ 24.1 billion and AstraZeneca’s at US$ 23.2 billion, followed by Eli Lilly, AbbVie, Pfizer, Sanofi, Celgene, Biogen and J&J and in that order. As a result, Roche is expected to overtake Novartis and Pfizer in the ranking by 2022, just when the global pharma industry would possibly cross as US$ 1Trillion mark.
Currently Novartis, though quite a small player in the Indian Pharmaceutical Market (IPM) holding the rank of 23 (AIOCD Pharmasofttech AWACS retail audit report, MAT August 2016), is number three in the global ranking, just ahead of Roche.
Indian generic players to feel the heat:
According to the Reuters report of September 11, 2016, US Department of Justice has sent summons this month to the US arm of Sun Pharma – Taro Pharmaceutical Industries Inc. and its two senior executives seeking information on generic drug prices. In 2010, Sun Pharma acquired a controlling stake in Taro Pharmaceutical Industries.
On September 14, 2016, quoting a September 8, 2016 research done by the brokerage firm IIFL, ‘The Economic Times’ reported that some large Indian generic drug manufacturers, such as, Sun Pharma, Dr. Reddy’s, Lupin, Aurobindo and Glenmark have also hiked the prices of some of their drugs between 150 percent and 800 percent in the US. This invites even more apprehensions in the prevailing scenario.
As I wrote in this Blog on September 12, 2016, the subject of price increases even for generic drugs has also reverberated in the ongoing Presidential campaign in the US.
The Democratic Party’s presidential nominee – Hillary Clinton has already promised, if elected in November 2016, she would constitute an ‘Oversight Panel’ to protect the consumers of her country from hefty price increases for long-available life-saving drugs.
In the midst of all this, import bans of a large number of formulations and bulk drugs by the US-FDA from several manufacturing facilities of Indian drug manufacturers of various scales and sizes, have further compounded the future risk potential of Indian pharma business growth in the US.
As investors are raising concerns, the following comment of the Co-Chairman and Chief Executive of Dr. Reddy’s Laboratories, reported by ‘Financial Express’ on August 24, 2015, well captures the pharma business risks in this area:
“The U.S. market is so big that there is no equivalent alternative. We just have to get stronger in the U.S., resolve our issues, build a pipeline and be more innovative to drive growth.”
However, this still remains a good intent. It is worth noting, for most Indian pharma exporters, the US is the single largest export market, with a stake, as high as nearly half of most of these companies’ annual revenue, and probably much more in profit, both of which are now showing a declining trend.
Price control coming in the UK:
On September 15, 2016, the Department of Health of the United Kingdom (UK) reportedly introduced a new Bill in Parliament to use its statutory power to limit the price of generic medicines where competition in the market fails, and pharma companies charge the NHS unreasonably high prices.
The Bill would also allow the government to apply penalties for non-compliance and to recover any payments owed through the courts following a right of appeal to a tribunal. The penalties can be a single penalty not exceeding £100,000 or a daily penalty not exceeding £10,000.
UK drug regulatory authorities had also announced import bans of APIs and formulations from some manufacturing facilities of a couple of leading Indian drug manufacturers, but on a lesser scale as compared to the USFDA.
Action in EU:
As reported by Bloomberg on July 22, 2016, The European Medicines Agency (EMA) has called for a halt to sales of hundreds of medicines that were tested in India, after an inspection of a research site found “substitution and manipulation” of the study samples. The affected companies include both large Indian and multi-national players.
According to a PTI report of July 27, 2015, after this incident Pharmexcil estimated that exports worth US$ 1-1.2 billion are likely to be affected, if cancellation of 700 generic drugs by the EU stands.
All these developments, particularly on pricing and mostly in the US, could have a retarding effect on the business growth trend of a large number of global and local pharma companies.
Focusing nearer home, the evolving scenario in the world’s top pharma market, viewed together with what’s happening in Europe, both on pricing and the data integrity fronts, send a strong cautionary signal to the Indian drug exporters, in general.
Inadequate remedial measures could unleash this pressure to reach a dangerous threshold, impacting sustainable performance of the concerned companies. On the other hand, adequate remedial action, both strategic and operational in nature, could lead to significant cost escalation, with no space available for its neutralization through price increases, gradually squeezing the margin.
As I see it, ease of doing pharma business in these top export markets will no longer be quite the same as in the past. Many believe, pharma industry has invited these measures sans perceptible self-control, over a long period of time.
Is it mostly a self-inflicted injury of the industry players? The drug companies, in general, don’t believe so. Will this change be irreversible? Only the future could unravel this. However, regarding the possibility of future US Government legislation on drug pricing, it’s now a wait and watch game for the stakeholders. On a shorter time-frame, the ghost in this area, would keep haunting globally, primarily for business in the US market, at least, till the end of this year.
However, for the Indian pharma exporters, pricing appears to be just one among several other critical issues, especially, in the two most lucrative markets of the world. The overall situation in this area, by and large, remains unchanged till today, besides expression of a plethora of good intents.
Thus, pharma analysts’ quest to ferret out an answer to the Gordian knot on the continuity of Indian pharma exporters’ incredible long ride on the ‘gravy train’, has also not been plain sailing, so far. Further mired by the local manufacturers’ prolonging errors of judgement, the status quo ante is expected to still remain elusive, at least, for now.
By: Tapan J. Ray
Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.