The Indian pharmaceutical industry is fighting battle on two fronts – domestic and the regulated markets particular the US. Price controls and regulatory uncertainties are major challenges in the domestic market. Better portfolio management, cost control and emphasis on ethical marketing seem to be the risk mitigants for these woes. Price erosion and quality issues are major headwinds in the US market. Price erosion can be taken care of by moving up the value chain. Apart from stringent systems and processes, employee training and focus on transforming culture is essential to manage risks emanating from non-adherence to GMP.
The Indian pharmaceutical industry is going through one of the most difficult phases. Over the last two decades, the industry had witnessed phenomenal growth primarily owing to growth, reported in the grossly under penetrated domestic market and also owing to aggressive penetration in the US and other regulated markets. The US market is the most lucrative market for medicines in the world with mouthwatering gross margins – sales minus cost of goods sold divided by sales and expressed in percentage terms.
India’s standing today in the pharma industry depicted through graphs below:
Revenue growth rate primarily plunged to single digits owing to challenging market scenario in the US and other regulated markets. The industry has managed to maintain profitability levels.
Revenue share of the US remained stagnant in FY 2017 as against robust growth in earlier years.
However, all of a sudden, the industry is finding itself in midst of several challenges that could derail the growth jamboree over the short to medium term. Worse, the challenges have emerged on twin fronts of domestic market and the US markets as well. Fighting on two fronts poses a massive challenge for the industry.
Challenges faced by the industry
In the regulated markets and particularly the US, one of the biggest risks threatening the industry is the quality issues raised by the US Food and Drug Administration (US FDA), the industry regulator for food and drugs in the US. The US FDA had issued observation letters, warning letters and even import alerts to several Indian facilities manufacturing drugs meant for the US market for not adhering to good manufacturing practices (GMP).
Worse, sans few exceptions, resolution of GMP issues in taking several quarters. Such regulatory actions means a direct hit on revenues and profits of companies which have been issued warning letters and worse import alerts. Warning letters and import alerts issued by US FDA put several restrictions on production, marketing and supply of medicines to the US market. Also as restrictions are put on new product approvals, the quality issues translate into significant loss of potential future business or revenues. Additionally, in a double whammy, such companies have to bear remediation costs as well. This includes hefty bills raised by the overseas consultants that specialize in GMP.
Ways to manage this challenge
There are multiple ways to manage the risks pertaining to violation of GMP. Process automation to reduce human errors, strengthening of information technology (IT) backbone to tackle issues surrounding data integrity and ensuring strong process and system controls are significant measures to manage quality related issues. Next and equally important is to handle the issues related to human resources. It is all about inculcating quality culture among employees. In this context, training is the most important tool and input. Appropriate training to employees at regular intervals is essential to ensure adherence to GMP.
In the words of Henry Ford, ‘Quality means doing it right when no one is looking.’ But this to happen, paradigm shift is required in culture. In India, the US FDA had even unearthed instances of wherein employee training related information being manipulated by companies. This is nothing but disasters for the industry.
Price erosion in the US market
Price erosion in the US market on continual basis is another major risk for the Indian generic manufacturers. Channel consolidation in the recent years with three large groups of wholesalers controlling around 90% of the US drug market has significantly eroded bargaining powers of Indian generic drug companies. Price decline in the US that used to be in single digits have climbed up to double digits in 2016-17.
Price erosion is also on account of intense competition among generic players including new entrants, faster product approvals by the US FDA and the regulatory oversight and investigation to curb price manipulation.
Ways to manage this challenge
One of the key ways to mitigate and manage this risk is to carefully evaluate and balance product portfolio. Companies can be seen chasing multi-billion dollar drugs going off patent to mint money. Ironically, this segment had witnessed massive price erosion as competition had intensified manifold. The trick is to build balance portfolio of products in the US. Analyzing emerging trends across classes of therapies, assessing product potential and building scenarios in terms of competition can help in mitigating this risk.
Also opting for complex generics and specialty products is another way out. In fact, many large companies are devoting resources in this direction. It is a long term game. No immediate results would be visible. It requires higher quantum of money and research and development (R&D) efforts compared with commodity generics. As huge amount of money is at stake and many companies are eying this space, careful selection and evaluation products is essential. This space could also get overcrowded. However, this is a long term possibility. In essence, the domestic companies have to focus on high end products rather than remain complacent with commoditized generic products. Bio-similar is another segment to target. But it is an extremely difficult proposition and will be suitable only for medium and large players. To penetrate markets for specialty products, complex generics or bio-similar, companies can explore joint ventures, collaborations and alliances. This approach can considerably reduce costs and can give better and faster access to the markets.
Dependence on the US market
Too much dependence on US market has been one of the other significant risks. Geographical diversification is necessary to tackle this dependence. Indian players can explore countries in Africa to give boost to revenues and profits. This region what India used to be one decade ago. Africa offers tremendous potential and thus this opportunity is difficult to ignore. This region though not as lucrative as the US but can ensure fairly steady stream of income to Indian drug manufacturers. Moreover, as Indian players are already present in this region, the industry is already has repository of knowledge, expertise and network to penetrated the African continent going forward.
Regulatory Risk in the domestic market
Coming to the domestic market, regulatory risk is a prime one at the moment. Ban on fixed dosage combination drugs (FDCs) which was subsequently lifted by the Delhi High Court is one such instance. FDCs contribute significant portion of revenues of companies. The Delhi HC had lifted banned on FDCs on technical grounds like the Kokat5.e Committee banning FDCs have not taken views of certain department. In short, the government could again opt to ban FDCs in future by following appropriate procedures and steps as provided by the Delhi HC in its verdict. Companies with irrational FDCs should tread cautiously and review their product portfolios. It is not only about irrational FDCs. With increasing awareness among consumers, irrational FDCs could end up spoiling brand equity of companies in the market which is a long term negative.
Promotion of Generic Drugs
The governments intent to promote unbranded generic drugs is another threat for the drug makers.
Price Control in the Domestic Market
Drug price controls imposed by the National Pharmaceutical Pricing Authority (NPPA) under Drug Price Control Orders (DPCO) is another risk constantly hanging over the industry. List of drugs under price control is dynamic and NPPA keeps on revising the list periodically. This uncertainty is significant risk to the industry. This risk can be mitigated through various ways like cost control and or outsourcing of certain drugs to third party manufacturers. However, this can only partially take care of the problem.
Ways to manage this challenge
The long term and sustainable solutions would be to focus on specialty and niche products which can fetch better prices and deliver higher gross margins. But this to happen, companies has to put in serious quantum of money in sales and marketing efforts. Essentially brand building will be the core to ensure successful foray into high margin products.
The government is clear in its intent to curb malpractices in the industry. The traditional ways and means of promoting products will be a passé. Companies have to take ethical marketing way too seriously going forward. This is another development that companies have to tackle. This is not going to be easy as it means a cultural shift and change in mindset. As the issues goes beyond monetary factors and involves softer issues such as handling marketing team effectively for desired results. In fact, effective communication with the medical fraternity is of paramount importance.
About the Author
Sachin Khedekar, MBA (Finance) and ICWAI (Inter) is having two decades of experience in tracking various industries including pharmaceuticals and healthcare.