The Great Pharma U-Turn

It’s that time of the year when the chickens are coming home to roost.

The quarterly result season is upon us. The post result analysis has been prescriptive for listed pharma companies, many of whom have had an awful run at the stock market so far. In a quiet disclosure to analysts last month, Lupin said it had added nearly a 1000 people to its field force, taking the total count to 5500. Another large pharma company is going to make a similar hiring announcement in the next quarter, say sources.

Did we not get to understand, just a few years ago, that most Indian pharma companies were cutting down medical representative hiring and “adopting technology to minimize the cost of marketing and promotion”? Whatever happened to that?

I guess desperate times call for desperate measures.

The spotlight is back on India. “Expect more Indian companies to invest in India because they are getting battered in the regulated market where price erosion is likely to reach low double digit from high single digit,” says an analyst with an international brokerage firm in Mumbai.

Too many cooks

Let’s back up a little.

In 2012, in the midst of a conversation at Cipla headquarters in Mumbai, Yusuf K Hamied, the affable chairman, blurted: “Most companies have already abandoned India…the government is pushing us out”. That year, Cipla’s revenue from exports was nearly 50%. By 2016, Hamied predicted it would go up to 75%.

Instead, exports only grew to 55% this year.

Cipla under Hamied was conservative in global expansion. But others were not.

Starting mid-1990s, in the first wave of entering regulated markets, Ranbaxy, Dr Reddy’s, Sun Pharma and Lupin entered the US generic market, which until then was dominated by companies like Teva, Mylan, Actavis and Sandoz. By 2006-08, Glenmark and Cadila too joined the generic rush, in the next wave. And by 2009 onwards, the so-called “late entrants” like Torrent, Alembic, Ajanta and Strides had entered the world’s largest drug market.

Two waves were a company, but three had become a crowd.

While the late entrants have benefited from the US regulator granting more approvals, most of these are in the low competition drugs. This means more generic makers per drug which then translates into US buyers extracting better prices. And with the consolidation of pharmacies, insurance companies and wholesalers on the cards in the US, a recent Credit Suisse report predicts an even bigger squeeze for run-of-the-mill generic drugs.

Simply put, while more and more Indian companies managed to benefit from the lucrative US generic market, the best days for milking mediocre generics are behind them. Only hard-to-make generics will now command a premium.

Predictably, market watchers are wary about Indian companies with high exposure to regulated markets.

And such is the irony. Cipla is now considered a “safer” bet because India’s contribution to its revenue is higher.

In search of whitespaces

India is still the fastest growing pharma market in the world at Rs 1,11,022 crore and growing at 12-14%, according to IMS Health.

Experts, like Sujay Shetty, Partner at PricewaterhouseCoopers consider India to be a “well-exploited” market, yet concede that there’s room for creativity.

Let me cite two examples, from two ends of the spectrum.

Last week, Sun Pharma, India’s largest pharma company by market cap, made an unusual deal. It bought an exclusive license to a new dengue vaccine candidate developed by Navin Khanna at the International Centre for Genetic Engineering and Biotechnology (ICGEB) in Delhi. Unlike the existing dengue vaccine from Sanofi or others undergoing clinical trials, this vaccine is a recombinant and ‘designer’ molecule that acts against all four strains (serotypes) of dengue. So it will benefit a wider population in comparison to other vaccines. In addition to taking exclusive rights to all the markets, Sun will also fund Khanna’s lab for next five years so that he takes care of any improvement or troubleshooting required.

Now, why is this ‘unusual’?

For Sun, which makes chemistry-based generic drugs, a vaccine is a completely different product if you consider just the manufacturing side. This vaccine will be made in yeast. Add to it the fact that this is a brand new molecule, which means it will involve fresh, and Herculean, efforts, to get all the regulatory approvals globally.

 

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