Indian pharmaceutical industry: changing dynamics_An essay by Kirubha Hari

   Introduction
*     Overview
*     Trump’ effect
*     Riding on the good growth wave
·       Changing disease profile and favourable demographics
·       Active participation by foreign Pharma companies
·       Exports to regulated and semi regulated markets
·       Growing alliances in emerging markets
*     Raising focus on R&D
*     Indian pharma export to US, may increase in 2018
*     Impact of GST on pharma industry
*     Changing dynamics of active pharmaceutical ingredient (API) market
*     Improver Government initiatives
*     Pharma gets social
*     Growing security concerns
*     Using “BIG DATA “for new values
*     Road to digital pharma success in pharma
·       Four areas of digital opportunity
·       Data-driven insight: Advanced analytics to increase pipeline and commercial value
·       Real-time responsiveness: Automated processes to improve cost, reactions, and agility
*     Classic problem faced by pharma industry
·       The ‘patent cliff’
·       Increasing government pressure with harsher price controls and taxes
·       Greater collaboration of the regulators across the world
·       Changing marketing and sales model
·       Spiralling healthcare cost

*     Fading glory: Indian pharma in uncharted terrain
*     Game of generic drugs
*     Is the end of pharma’s dream run?
*     Run-ins with global regulations
*     Unfavourable growth environment
*     China catching up with India
*     Future challenges
*     Road ahead
*     Conclusion









INTRODUCTION

The ever changing face of the Indian Pharma industry and its ability to adapt innovatively has reinforced the fact that adaptation is the only way to survive. With every passing decade, a new commercial challenge has emerged; which in-turn has provided the industry with an opportunity to ride the waves to reach newer heights. The Indian pharmaceuticals market is the third largest in terms of volume and thirteenth largest in terms of value, and it accounts for 20 per cent in the volume terms and 1.4 per cent in value terms of the Global Pharmaceutical Industry as per a report by Equity Master. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume. Of late, consolidation has become an important characteristic of the Indian pharmaceutical market as the industry is highly fragmented.
India enjoys an important position in the global pharmaceuticals sector. The country also has a large pool of scientists and engineers who have the potential to steer the industry ahead to an even higher level. Presently over 80 per cent of the antiretroviral drugs used globally to combat AIDS (Acquired Immuno Deficiency Syndrome) are supplied by Indian pharmaceutical firms.

LIKE A COIN HAS TWO SIDES THERE ARE GROWTH INDUCERS AND GROWTH INHIBITORS IN INDIA PHARMA INDUSTRIES, THEY ARE TOUCHING SKY IN DAY TODAY LIFE AT THE SAME TIME FACING MANY CHALLENGES.
OVERVIEW OF CHANGING DYNAMICS IN INDIAN PHARMA INDUSTRY
The pharmaceutical industry is undergoing a rapid change, influenced by multiple factors. The contextin which the industry operates is dictated by the constantly evolving social, demographic and economic factors, which have major implications in the way the pharmaceutical industry markets and sells its products.
Changing lifestyles have meant that the burden of chronic diseases has increased with high incidences of diseases like diabetes and hypertension. With a sustained spend by patients on chronic diseases; the pharmaceutical industry is compelled to rethink the economic value of treatment for chronic diseases.
Growing awareness amongst patients is also influencing prescription trends. With increasing number of patients accessing the internet to find healthcare information, patients assess drugs based on factors such as potency, efficacy, adverse effects and impact on quality of life. By comparing the effectiveness of drugs and the outcomes they deliver against their costs, patients are becoming a major factor in effectively changing prescription patterns across the board.
One of the focus areas in the country today is the affordability and accessibility of healthcare for all its citizens. Price controls and pro-generic policies are becoming key factors in swaying patient compliance and market dominance. Apart from effectiveness and safety, the definition of good medicine will also include a qualitative criterion, defined by value for money.
The evolving market and the challenges being faced by the pharmaceutical industry has resulted in a significant shift in how the industry operates, encouraging the need for creative thinking and innovative solutions. One major area of focus has been provisions for health delivery and infrastructure. A majority of doctors have been using ‘empirical’ diagnosis while prescribing medicines but with a growing focus on safety and efficacy there is an even greater effort to meeting health challenges thus, effectively providing improved diagnosis and focussed care. Challenging as the situation may be, it has also created an atmosphere which has accelerated investments and research into meeting and fulfilling the gaps in the healthcare industry.
At Dr. Reddy’s, the internal strategy has always been on Mega Brands, New Products and Growth Initiatives. While providing effective healthcare will continue to be the cornerstone of our marketing and sales strategy, in FY18 we will rethink our strategies regularly to bring about flexibility and dynamism in our vision. In a move towards keeping up with the fast pace of the market, we willcontinue to adapt and capitalise on the opportunities that the dynamic ever changing market presents.

TARGET OF TRUMP ON INDIAN PHARMA INDUSTRY
Mumbai: Shares of India pharmaceutical companies fell on Thursday as US President-elect Donald Trump’s strong remarks on high prices of medicines indicated tougher operating environment in the US, which is the largest market for Indian drug makers.
Shares of Sun Pharmaceutical Industries Ltd, Dr. Reddy’s Laboratories Ltd, Aurobindo Pharma Ltd, Lupin Ltd, Cipla Ltd, Cadila Healthcare Ltd, and Glenmark Pharmaceuticals Ltd were down in the range of 1-2% on the BSE, following the decline in pharma stocks in the US on Wednesday.
The pharma industry is “getting away with murder”, Trump said on Wednesday in his first press conference since he was elected.
Trump attacked the pharmaceutical industry for high drug prices and for manufacturing overseas and said he will create new procedures for bidding on drugs for government programmes.
“Incremental impact on Indian pharma as a consequence of the measures mentioned by Donald Trump could be extremely limited,” said an analyst, who did not wish to be named.
Indian generic drug companies are already facing pricing pressure in the US because of consolidation of distribution channel and rising competition and price erosion of 8-9% in base business has been factored in. “There is very little incremental risk to our high single digit price erosion assumptions,” the analyst added.
Pharma companies had cheered Trump’s victory as the President of the US anticipating relatively lenient policies compared to Democratic candidate Hillary Clinton but the latest statements of Trump have come as a negative surprise.
“The comments indicate the US is becoming protectionist, which is hurting market sentiment,” another analyst said.
Drug pricing has become a sensitive subject in the US in recent times with the government bearing down on pharmaceutical companies for increasing prices. While most of the clamour has been around increase in prices of branded products, generics have also come under scrutiny with the antitrust division of the US Department of Justice (DoJ) probing sharp increases in prices of certain generic products and the possibility of drug makers acting as a cartel.
RIDIND ON THE GOOD GROWTH WAVE
The Indian Pharma industry has been consistently growing at a CAGR of more than 15% over the last five years. The healthy growth reflects the inherent strengths of the industry and improving healthcare standards in the country. If this trend continues, the Indian Pharma industry is likely to be one of the top 10 global markets by value by 2020.
Growth in the market will be driven by the following factors:

1. Changing disease profile and favourable demographics
In India, socio-economic changes and urbanisation along with sedentary lifestyle are leading to rapid epidemiological transition. As a result, the Indian population is becoming affluent, living longer and increasingly suffering from lifestyle related ailments such as obesity, heart disease, stroke, cancer and diabetes. The number of Indian people suffering from these diseases is set to double by 2020. This change in patient demographics will fuel the demand for quality and affordable treatment in the domestic market.

2. Active participation by foreign pharma companies
Over the years, foreign pharma companies have tapped the Indian pharma market through a series of major acquisitions, launches of new products (especially in the branded segment with India-centric pricing) and expansion of field force. Further, MNCs have adopted India centric strategies such as differential pricing strategy to strengthen their presence in India and address the issue of affordability. MNCs are launching patent-protected drugs in India at lower price points than those in developed markets. Drugs such as Diovan (Novartis), Januvia (Merck, Sharp & Dohme), and Galvus (Novartis) are being sold at 20% of global prices.

3. Exports to regulated and semi regulated markets
Exports have made significant contribution to Indian pharma industry’s growth story, with the critical market of US generics driving the growth. 148 billion USD worth of patent expiries are expected between2012 and 201819. In addition, the healthcare reforms initiated by the US government, aimed at reducing healthcare spending and covering a larger proportion of population under public healthcare, are also likely to provide impetus to growth in thegenerics market. Apart from the developed markets, the Indian pharma companies have strengthened considerable presencein some of the other fast-growing semi-regulated markets of Russia, South Africa and some in Latin


American countries (Brazil, Mexico, etc.) and


South-East Asia. These emerging markets offer strong growth prospects for Indian players given that some of these are branded generics markets, with high out-of pocket expenditure on healthcare (unlike developed markets). Some markets have relatively easier regulatory pathway.

4. Growing alliances in emerging markets
Indian companies have also been partnering with MNCs in emerging markets. Such alliances benefit from the R&D (formulation development) and manufacturing capabilities of the Indian partners and the extensive marketing and distribution footprint of the MNCs in those markets. There is also an increasing trend among MNCs for partnering in the domestic market, where marketing and distribution footprint of Indian companies and the product portfolio of MNCs is being leveraged upon. Hence, going forward, India should leverage its strengths in the supply of low-cost, quality medicines across the world and partner with foreign companies to drive growth and play a larger role in global pharma market.


RAISING FOCUS ON R&D


Indian pharma companies are constantly innovating and adopting international standards to stay relevant in the competitive global market. In fact, Indian pharma companies are known for their strict regulatory compliance with international market norms. It is, therefore, not surprising that the Indian pharma sector received close to 40 per cent of all Abbreviated New Drug Approvals (ANDA) approvals from the US Food and Drug Administration (FDA) during January-July 2013. At the same time, Indian pharma companies are making high investments to ensure absorption of modern procedures and practices for operational efficiency. The two trends, viz, a growing focus on research and development (R&D) coupled with fast paced growth in health information technology (HIT) are emerging as critical drivers of the Indian pharmaceutical industry.


INDIAN PHARMA EXPORTS TO US, MAY INCREASE IN 2018
Despite many hurdles, pricing pressures and competition from other major pharma producing countries, India’s pharma exports to the US will in all likelihood increase in 2017-18.
Drugs worth $50bn are expected to become off-patented this year giving enough room for pharma exports to get a boost, a report by Care Ratings revealed. 
The Indian Pharma industry is likely to face stiff competition from other countries to get Abbreviated New Drug Application(ANDA) approval. Other than this the pricing pressure is likely to increase in the generics market due to the consolidation of distribution channels and increase in competition the report detailed. However due to gain in the sales of generics drugs with branded drugs going off patent during 2017-19, will create an opportunity for Contract Research and Manufacturing Services (CRAMS) segment, Care said. "The pharma export volumes from India to the US, however, are expected to rise. This will be backed by about $55 billion expected sales gain to generics drugs on account of branded drugs going off patent during 2017-19 which will create an opportunity for CRAMS segment. We expect growth rate for CRAMS to be higher compared to average growth rate of the industry. These factors are likely to support pharma exports from India," the report specified. 
India’s pharmaceuticals industry earns more than 70% of its revenues with the sale of generic drugs and more than 50% of its revenues come from exports. According to IPI (Indian Pharmaceuticals Industry), pharma exports registered around $33 billion in revenues in 2016, of which a huge chunk of 50% was due to exports alone. 
Of the total pharma exports of $16.8bn during 2016-17, exports to the US commanded 40.6%, exports to Europe was 19.7%, Africa 19.1% and 18.8% was taken up by Asia.


IMPACT OF GST ON PHARMA INDUSTRY
GST is expected to be good for the pharmaceutical industry in long run. With the simplification of pay tax due to GST, now the pharma companies has not to pay 8 different types of tax to the government. Apart from this there are several other things that will change after the implementation of GST here they are:
• After GST the impact pricing if drugs is said to be natural that is up to 12% tax rate.
• The pharma companies now have to re design their supply chain in order to minimise the impact of GST.
• The tax rate of 5% which was on the life saving drugs is slightly expected to increase.
• Post GST there will be a 12% tax rate on formulations and 18% on APIs
• There will be a good relief for the pharma companies due to overall transaction costs with the withdrawal of CST
• GST will surly lower down the manufacturing cost
The cost over the technical machinery and equipments which are used for the manufacturing and imported from other countries will also reduce.

CHANGING DYNAMICS OF ACTIVE PHARMACEUTICAL INGREDIENTS (API) MARKET

Active Pharmaceutical Ingredients is an active substance in drug with biological activity intended for diagnosis, treatment or prevention of disease by altering physiological condition. APIs are synthesized by chemical synthesis, fermentation, biotechnological methods or enhanced from natural source. Globally, there are more than 3,000 firms and over 5,500 manufacturing plants, a large number of them are concentrated in emerging regions due to low cost models and availability of manpower thus the region is leading in export of API products to various parts of the world. The prevailing trend in API industry is off-shoring the production to low-cost regions with simultaneous advances in product development and manufacturing technologies.
Presently, major pharmaceutical companies are focusing in manufacturing both generic and branded drugs due to erosion of product pipeline and patent expirations of prominent drugs which led to increased pricing pressure among low-cost generic manufacturers in developing countries, particularly in Asia Pacific regions such as China and India pertaining to decline in number of API facilities in industrialised countries. China is one of the leading API suppliers with GMP certifications but safety & quality of the product is of major concern, rising competition among existing players, consolidation and development of low-cost APIs with enhanced quality are key trends in Indian market.
IMPROVED GOVERNMENT INITIATIVES
The implementation of the Goods and Services Tax (GST) is expected to be a game-changer for the Indian Pharmaceuticals industry. It will lead to tax-neutral inter-state transactions between two dealers, thereby reducing the dependency on multiple states and increasing the focus on regional hubs. It is expected to result in an efficient supply chain management, which is expected to reduce its cost considerably. The cost of technology and investment is expected to reduce on account of tax credit which can be availed now on the duties levied on import of costly machinery and equipment.
Some of the initiatives taken by the government to promote the pharmaceutical sector in India are as follows:
·    In the Union Budget 2017-18, the Department of Biotechnology (DBT) received Rs 2,222.11 crore (US$ 333.31 million), an increase of 22 per cent, to continue implementing the department’s national biotech strategy.
·    In an attempt to revive the active pharmaceutical ingredient (API) and bulk drug market in India, the Government of India has proposed peak customs duty on the import of APIs and also plans to set up mega drug parks to give a boost to domestic production.
·    The Government of India unveiled 'Pharma Vision 2020' aimed at making India a global leader in end-to-end drug manufacture. Approval time for new facilities has been reduced to boost investments. 
·    The government introduced mechanisms such as the Drug Price Control Order and the National Pharmaceutical Pricing Authority to deal with the issue of affordability and availability of medicines.
·    Mr Ananth Kumar, Union Minister of Chemicals and Petrochemicals, has announced setting up of chemical hubs across the country, early environment clearances in existing clusters, adequate infrastructure, and establishment of a Central Institute of Chemical Engineering and Technology.
PHARMA GETS SOCIAL
Over the years, social media has been a highly sensitive area for life sciences companies, which are often bound by strict marketing and FDA regulations.  But some companies are beginning to experiment with the new medium. For example, drug maker Sanofi has emerged as a social media leader by building a Facebook community for diabetes sufferers who connect online to share their experiences with the disease.

“These types of forums can help our clients better understand their customers’ perspectives, experiences and problems, while also providing information on current treatment trends and patterns,” said O’Riordan. “They can improve and focus on the health and wellbeing of the patients they serve, by engaging with customers and providing better customer service through an online presence.”
GROWING SECURITY CONCERNS
As life sciences organizations begin to adopt cloud, social media and mobile technologies in order to access and share information, they also face potential new security threats and breaches. 
To deal with these complex and ever-changing array of threats, organizations must move from simply monitoring and collecting data to understanding it and visualizing new behaviours and anomalies. As an example, companies could identify a possible internal threat by analyzing activity patterns of a suspect employee’s time spent downloading confidential data, which would in turn trigger a compliance check.
USING “BIG DATA” FOR NEW VALUES
Similar to other major industries, the pharmaceutical industry is learning how to utilize “Big Data,” the catchall term for the explosion of data and technologies emerging to support it. In healthcare, we’re seeing electronic medical record (EMR) data coming together with genomic and genetic data; financial data; and patient-reported data to deliver insight into which therapies provide the highest overall value to patients and healthcare systems at the lowest cost.
This information will be especially vital under healthcare reform and the upcoming move to accountable care organizations (ACOs). ACOs encourage better patient outcomes by reimbursing healthcare providers based on quality outcomes and measures. Using EMR data and e-prescribing information, physicians and insurance companies can better track patient outcomes over the long-term, a critical element for providers to demonstrate their performance and therefore be properly reimbursed.
Pharmaceutical companies will need to collaborate on this front as well and use this targeted data to improve areas such as drug development, meet the needs of insurers and provide compelling evidence of a drug’s benefits.
THE ROAD TO DIGITAL PHARMA SUCCESS IN PHARMA
Pharmaceutical companies are running hard to keep pace with changes brought about by digital technology. Mobile communications, the cloud, advanced analytics, and the Internet of Things are among the innovations that are starting to transform the healthcare industry in the ways they have already transformed the media, retail, and banking industries. Pharma executives are well aware of the disruptive potential and are experimenting with a wide range of digital initiatives. Yet many find it hard to determine what initiatives to scale up and how, as they are still unclear what digital success will look like five years from now. This article aims to remedy that. We believe disruptive trends indicate where digital technology will drive the most value in the pharmaceutical industry, and they should guide companies as they build a strategy for digital success.

Four areas of digital opportunity

Against this backdrop, we believe there are four main areas where digital developments will drive value for pharma companies, building on what we see as the key components of digital success—an ability to deliver more personalized patient care, engage more fully with physicians and patients, use data to drive superior insight and decision making, and transform business processes to provide real-time responsiveness.
Companies do not have to become leaders in all four areas across the enterprise—some will deliver more value than others in relation to any given disease, depending on market dynamics and their portfolio. But to decide where to concentrate their efforts, they do need to develop a point of view on each area's potential to transform their commercial and innovation models. To help in these decisions, we sketch here a picture of how we believe successful pharma companies will operate in each area in the near future.

Data-driven insight: Advanced analytics to increase pipeline and commercial value

Pharma companies sit on a wealth of data, usually locked away in different technical and organizational silos. Some are already linking and mining their data sets to improve their pipelines, products, and strategies. But there remains a huge opportunity to create further value from data and analytics using internal and external data sources to drive superior results. A few examples follow:
·         In R&D, digital discovery and the testing of molecules with advanced modelling and simulation techniques will be commonplace. For instance, physiological simulation will accelerate product development, and 3-D tissue modelling will help assess potential toxicity using computer simulation. In late development, sensor-data streams from in vivo clinical trials captured by wearables will be factored into registration filings and value dossiers to give an early indication of real-world effectiveness.
·         Marketing and sales forces will deploy advanced analytics to understand prescribing behavior and potential patient profiles, enabling more precise targeting of providers and increasing the number of prescriptions filed. For example, a “patient finder” technology that mines electronic medical records to identify sufferers from specific rare diseases will enable sales forces and medical science liaisons to focus on providers caring for patients likely to have those diseases, although they are as yet undiagnosed.
·         Pharma companies and other healthcare players link and analyze data from insurance claims, clinics, laboratories, sensors, apps, social media, and more in order to generate real-world evidence about a drug's efficacy, guiding reimbursement and clinical practices. We envisage a world in which most care is "protocolized"—that is, in which clinical decisions on the best treatment options are suggested to physicians by an automated decision algorithm informed by advanced analytics. In this environment, winning pharmaceutical companies will be those able to influence the algorithm. Payors, meanwhile, will be able to develop new approaches to contracting and risk sharing for specialty drugs. Payment based on adherence or cure-rate data, or even "micropricing" based on the daily measurement of specific outcomes and quality of life, are some of the possibilities.

Real-time responsiveness: Automated processes to improve cost, reactions, and agility

Cloud and mobile technology, sensors, and next-generation business intelligence will bring about a new wave of automation in business processes—that is, streamlined, automated work flows with few handovers and end-to-end, real-time transparency on progress, costs, and business value. This will drive a step change in the efficiency, responsiveness, and agility of a wide range of complex, often cross-functional, processes, be they in the back office, the supply chain, R&D, or commercial. Banks have shown that the processing time and costs associated with opening an account or mortgage origination can be reduced by up to 99 percent and 70 percent respectively, with a clean-slate redesign of these cross-functional processes and state-of-the-art digital technology enablement.
In pharmaceuticals, employee on-boarding, sales and operations planning, launch monitoring, and marketing-content approval would especially benefit from streamlined, automated work flows and increased transparency. Clinical-trial management, from recruitment to submission, is another area that will see dramatic change with advanced automation. Targeted online recruitment and remote-monitoring technology (sensors, connected devices, and apps) will increasingly enable clinical trials to take place in "real world" settings so that patients can go about their lives with very minor changes in habits, while participating in a trial. Greatly reducing interventions in clinics or trial sites during the trial of a drug will reduce the burden on patients and make trial conditions more akin to a patient's life when he or she is prescribed the drug outside a trial setting. Increased connectivity and automation in trial-management processes will also enable advanced trial design and monitoring approaches. For example, sites and sponsors can be connected in order to support the data management and analytics required for adaptive trial designs.
NOW LET US SEE THE OTHER SIDE OF THE INDIAN PHARMA INDUSTRIES
Industry continues to face the classic problems:

• The ‘patent cliff
Between 2012 and 2018, generic erosion will wipe an estimated 148 billion USD7 off the pharma industry’s revenues.

Rising drug discovery cost
Developing new medicines is becoming an increasingly expensive business8. Annual output of the pharma industry has effectively flat lined over the past years.

• Increasing government pressure with harsher price controls and taxes
The rules governing the development and manufacturing of medicines are getting tighter. Both the European Medicines Agency (EMA) and the US Food and Drug Administration FDA) now focus more heavily on risk management. The FDA is building an active surveillance system to monitor the safety of all medicines in the US market.

• Greater collaboration of the regulators across the world
Regulators around the globe are working closely with each other, which means that a product rejected in one region is more likely to be rejected in others.

• Changing marketing and sales model
The traditional marketing and sales model is becoming completely inadequate in large parts of the world.

• Spiralling healthcare cost
Healthcare expenditure as a percentage of gross domestic product (GDP) is rising. The steepest rise is seen in the mature markets, where them industry has historically earned most of its revenue.

FADING GLORY :INDIAN PHARMA INDUSTRY IN UNCHARTED TERRAIN
Mumbai: At the turn of the millennium when the rich world was fighting the Y2K bug, India’s drug makers were busy plotting a raid.
In a market that began opening up just a decade earlier, they had learnt to make cheap copies of patented drugs. Local laws permitted such copying if it used a production method different from the patented process. These companies had also gained expertise making ingredients for multi-national drug makers.Finally, it was time to step out. Among the first Vikings were Ranbaxy Laboratories Ltd, Dr. Reddy’s Laboratories Ltd and Cipla Ltd.
In 2001, Hyderabad-based Dr. Reddy’s hit the jackpot in US when one of its drugs—a generic version of anti-depression drug Prozac—secured exclusive marketing rights for a limited period. The outsize profits from that one launch attracted many more drug makers to the US.Meanwhile, Yusuf Khwaja Hamied, the scientist-chairman of Mumbai-based Cipla Ltd, started offering medication for AIDS-ravaged Africa at cut-rate prices, while the drug giants sold the same drugs at over 30 times more. For millions of patients in Africa, Hamied was god. For Big Pharma, he was captain of the pirate ship.
Suddenly, the world was the playground for India’s drug makers who had stayed home until the economic liberalization of 1991 set them free. The US would quickly become the largest market for India’s large generic drug companies.
The dream run would continue for many years. Until the engines started stalling.
Then, and now
Fast forward to 2017, and it’s not a pretty sight. Even after surviving tough scrutiny to sell drugs in the US, their profits there are no longer what they used to be. Revenue and margins have been squeezed. Alarmed by news of inspections, warnings and import alerts, investors have fled the sector.
For the first time, India’s largest drug maker, Sun Pharmaceutical Industries Ltd, on 26 May said it expects a single-digit revenue decline this fiscal, shocking investors. According to an official at a Mumbai-based pharma firm, who spoke on condition of anonymity, generic oral solid drugs, which fetched 40-60% margins till about five years ago, now earn only 20-25%. For the sector, the near-term outlook is bleak.
Pharmaceutical exports to the US jumped from $0.3 billion in 2005 to $5.9 billion in 2015, according to a February report of industry lobby Indian Pharmaceutical Alliance (IPA), which cited data from the US Department of Commerce and the US Bureau of Census. However, with the generic growth tapering off, the industry is compelled to tweak its business model.
What spelled the end of the dream run for Indian pharma? Two reasons, mainly: One, prices have fallen with rising competition and distributors buying jointly in the US; two, quality issues.
The US generic drugs market expanded at a compounded annual growth rate (CAGR) of 15% in 2010-15, but is expected to slow down to 5% CAGR in 2016-20 due to the lower value of patented drugs expiring during this period, broking firm Edelweiss Securities had said in its November 2015 report.
Brokerage firm Credit Suisse said in a May report that annual price erosion in generic drugs in the US is likely to increase to 10-12% from 7-8% currently. This is because product approvals are on the rise and consolidation has enhanced the bargaining power of pharmacy chains.
In 2012, big pharmacy chains such as Walgreens, CVS Health, Express Script and Rite-Aid bought 55% of generic drugs in US, while smaller firms bought the rest. Since then, the smaller ones have tagged on to the larger ones, resulting in four large consortia that account for nearly 90% of purchasing in 2016, the report said. Recently, Express Script started participating in the Walgreens consortium, meaning there are three giant consortia with tremendous bargaining power at the negotiating table.
As new companies enter US and existing ones seek to introduce more products, competition has increased, depressing prices and making it tough to maintain market share. While there is higher competition from more Indian companies in the US, Chinese firms are also increasing their presence.
“Historically, the Chinese cornered the API (active pharmaceutical ingredients) market, but they are getting stronger in formulations. India has had language and other skills advantage in terms of ANDA filings and regulatory process, but China is gradually importing talent and they are very good at squeezing costs,” Sameer Sah, associate partner at legal firm Khaitan and Co., said.
ANDA is short for abbreviated new drug applications filed with the US Food and Drug Administration (FDA) for a generic product approval. APIs are the essential ingredients in a drug, while formulations are the final products.
According to company officials and consultants, it’s critical for pharma companies to develop complex generics, specialty products, biosimilars and innovative products, which will drive future growth and offset pricing pressures in plain vanilla generics.
“Indian companies are still focused on a low-pricing approach. However, in a changing landscape where margins are low and pricing pressure is high, companies need to diversify their product range, adopt differential strategies and focus on evolving as innovators,” said Utkarsh Palnitkar, partner and head-infrastructure, government and healthcare, and life sciences-KPMG in India. It is also crucial to resolve compliance issues and raise overall quality.
That is easier said than done, especially while maintaining margins and profits.
GAME OF GENERIC DRUGS
“The Indian generic industry is at a critical inflection point. In the next five years, it will be imperative for the industry to transition to a specialty/innovation player or a strong biosimilar organization. However, this transition is not easy because we don’t have inherent skills of building an innovative/specialty business, which is a completely different ball game,” Glenn Saldanha, chairman and managing director of Glenmark Pharmaceuticals Ltd, said.
    Yet, leading Indian drug makers such as Sun Pharma, Dr. Reddy’s Laboratories, Lupin Ltd, Cipla, Glenmark Pharmaceuticals, Cadila Healthcare Ltd, Aurobindo Pharma Ltd, and Biocon Ltd have made investments to create such products .
“In the past 4-5 years, most leading companies are talking about specialty. It has gone from being nice-to-have to must-have. All of us, I would still say, have taken smaller bites in specialty. We need to get a lot more deep,” Nilesh Gupta, managing director of Lupin, said.
The discipline required to be a specialty company is much higher than a generic company. Plus, the specialty product offerings must have a clear clinical advantage; otherwise, doctors and insurance companies may not cover it.
Specialty drugs are high-value products used to treat complex, chronic conditions such as cancer, rheumatoid arthritis and multiple sclerosis. These products may have special handling and mode of administration.
Nearly half of the medical spend in the US currently goes towards specialty therapies. Moreover, new product launches in specialty therapies have been higher than in traditional therapies, due to substantial unmet needs, Fitch Ratings said in a November 2016 report.
“Specialty margins are significantly higher and much more stable than the generic side. Typically, brand margins are 90% plus, generic margins are 50% or thereabout. So, you can see what it means for the Ebitda (Earnings before interest, taxes, depreciation and amortization). There is no reason why 30% Ebitda cannot be maintained over a period of time,” Lupin’s Gupta said.
According to a July 2016 report by JM Financial Institutional Securities Ltd, Indian companies have been slow to make investments in the complex generics and specialty drugs space, and those that have will find the investments return-dilutive in the short-to-medium term, given the complexities and long gestation period for developing and bringing these products to the market.
The product development cost for a complex generic is around $5 million, compared with $1-2 million for a simpler final dosage form, Dr. Reddy’s said in its annual report for 2015-16. Development spends on an inhalation, complex injectable or a biosimilar product is much higher.
“Different companies are at different evolution stages but all are not going to get there. It is a very tricky battle,” Sujay Shetty, pharma leader India and Asia Pacific at PricewaterhouseCoopers Pvt. Ltd (PWC), said.Biosimilars, a similar version of innovative biologic drugs, is also a big opportunity, but Indian firms are lagging here as well.
“In the branded space now, biologic constitutes nearly 50% of drugs by value. So, I believe the next wave of growth will come from biosimilars. Indian companies are nowhere in this area. None of their biosimilar ventures have actually taken off, but this is an area we cannot miss if India is to be relevant in future,” Sriram Shrinivasan, emerging markets leader for life sciences and global generics leader at EY, said.
The global life sciences industry is gradually moving from chemical-based drugs to biologics.The global sales contribution of biologics is expected to increase from 24% in 2015 to 27% in 2020, Palnitkar of KPMG said.
Some Indian companies are developing biopharmaceuticals such as vaccines, biosimilars, insulin and monoclonal antibodies. In the near term, the biosimilars play for most firms will be confined to emerging markets, including India. As of now, Biocon Ltd, along with partner Mylan Inc., is the only company that has succeeded in filing applications for biosimilars in the regulated markets of the US and Europe.
Biosimilars have huge potential in emerging markets and a lot of Indian companies are looking at it; but as far as regulated markets are concerned, it is going to be a game of deep pockets, Abhijeet Mukherjee, chief operating officer of Dr. Reddy’s, said. He added that investments for biosimilars are huge and, hence, Indian companies would pursue these opportunities through partnerships.
“Earlier, Big Pharma did not care if you were making generics. This has changed in recent years due to less products coming out of pipeline. Due to lower opportunities, they have come very hard on generics and in biosimlars, they are very serious; they won’t vacate the market. This means, the cost of launch and risk of launch will be tremendously high, say $50-100 million. Very few Indian generic companies can afford that,” he said.
For a generic drug maker, transforming to a specialty- and branded drug-focused company will take a minimum of three years. These years will be tough. Also, the key will be to raise quality standards to global levels as it will lead to a steady flow of revenue which can be used for innovation initiatives, consultants said.
IS IT THE END OF PHARMA’S DREAM RUN?

Last year, almost all top 10 drug makers faced bans or had third-party audits slapped on their manufacturing plants. The collective impact was quite upsetting — for both companies’ financials and brands’ reputation. Between January 2016 and now, the pharma index has slipped 17 per cent. It slipped, first time in 2015, after many years, by 18.3 per cent.

The leading pharmaceutical companies in India, which together make India the world’s largest supplier of generic drugs, have reported one of the worst earnings in the quarter ended on 30 June 2017.

India’s largest drug maker Sun Pharmaceutical Industries reported a 13.6 per cent year-on-year drop in its consolidated net profit to Rs 1,223.71 crore in the quarter ended March.  The drop was attributed to lower sales in the US — Sun Pharma’s biggest market. “The US generic industry is facing rapidly changing market dynamics. Increased competitive intensity and customer consolidation is leading to pressure on pricing,” Dilip Shanghvi, managing director of Sun, said in a post-earnings conference call with analysts. Alongside, several other generic drug makers are seeing high single-digit price erosion due to consolidation in distribution and increased competition.The dismal performance was also due to the speedy approvals of generics by new entrants from countries such as Taiwan, South Korea, China, New Zealand and Japan.
The net sales of Indian pharma companies are dwindling (see Highs & Lows). Optimism on flooding the world market with ‘Made in India’ drugs is also affected as investors are fleeing the sector alarmed by the news of drying revenues, inspections, warnings and import alerts at Indian pharma firms
RUN-INS WITH GLOBAL REGULATORS
After India established itself as a destination for generics, there came a phase when questions were raised on the quality of drugs manufactured in the country.

From being a poster boy to a problem child, India’s fate turned quickly. It all started with Ranbaxy Laboratories. In 2008, the US FDA banned 30 generic drugs produced by Ranbaxy at its Dewas and Paonta Sahib units in India. In September 2013, it further blacklisted Ranbaxy’s Mohali plant. Soon after, the European Union banned 700 generic medicines for alleged manipulation of clinical trials conducted by Indian company GVK Biosciences. UK’s regulator of medicine Medicines and Healthcare Products Regulatory Agency also flagged quality concerns.

After Ranbaxy, the US FDA came after Wockhardt. Three of its plants in India are already under an import alert. Inspections rose from 108 in 2009 to 290 in 2015.

Between 2013 and 2015, at least seven Indian pharma manufacturers were issued warning letters and import alerts. In 2015, India ranked fourth on the list of warning letters and import alerts raising questions on the efficacy and manufacturing practices of domestic drug makers
UNFAVORABLE GROTH ENVIRONMENT
Selling drugs in India was never a profitable deal. Here, the prices are the lowest under drug price watchdog National Pharmaceuticals Pricing Authority’s control. Sales at home, including of branded drugs, account for only 20 per cent of the industry’s revenue.

Companies have tried to tell the government that capped prices will not ‘make’ healthcare affordable, however, the government is extending the price control. “The industry is waiting for announcement of new drug price control order by the government. We are almost certain that it will erode the profits further”.

CHINA CATHING UP WITH INDIA
China leads the market in active pharmaceutical ingredients (API) manufacturing. India, in fact, imports over 80 per cent of APIs from China. The concern is, it is now getting stronger in manufacturing finished medical products called formulations too. “Earlier, China lacked environmental compliances and manufacturing capabilities. However, it seems to be gearing up steadily (see India vs China). It will soon catch up with India as it has faster approvals, authorisation and registration processes,” says Sameer Sah, associate partner at legal firm Khaitan and Co.

Ranbaxy whistle blower Dinesh Thakur believes the Chinese are investing in building formulation skills and will come after our dosage form business sooner than later. “We have already lost a large part of our API business to China.”

Earlier China wasn’t good in cracking US FDA, but now it has got a handle on it. It is gaining know how by acquiring companies across the globe. “We had language advantage in terms of ANDA (abbreviated new drug application) filings and regulatory process, but China is importing talent. And undoubtedly, it is the master in squeezing costs,” says Sah. Hence, depending on vanilla generics for growth will not be very prudent.
FUTURE CHALLENGES
In the recent years, global pharma industry has gone through a difficult period where shareholders, regulators, and the market have created high pressure in order to maintain sustainable growth. The Indian pharma market, being an exception to this situation is haunted with a unique and important challenge of delivering affordable health care to India's billion-plus population. Indian pharma industry at present is not only attempting to cater the domestic needs but also adopting new transformations in its business model to make its mark on the global front. Besides the aforementioned resistors, there are several other challenges that can affect the current trends. Table 4 summarizes the SWOT analysis of Indian pharma industry.
Considering the ever increasing public spending on healthcare, the government needs to increase it's spending on the healthcare from a present low of 1% of total GDP to 3%. The government should also focus on increasing penetration and access to health insurance. The government should also execute developmental plans to fulfill basic infrastructure needs, particularly those related to medical, transportation, and education. There is also a need of creating and enabling policies and regulatory framework for the launch of innovator products with the focus on price monitoring rather than price controlFrom domestic companies viewpoint, it needs to think 'out of the box' by refraining from its old copycat producer image and establish itself as the innovator of novel drugs with continuous efforts to develop modern technology in the pharma and healthcare industry.
From the recent court decisions, it is evident that India is a good example of how harsh the situation can be with regard to IP protection. It is now considered that legal system in India supports only domestic companies with justification of providing affordable medication to the Indian population. This support is given even when it goes against existing patent laws and corresponding rules of the World Trade Organization. Under compulsory licensing laws, the government allows Indian company to produce a patented product without the consent of the patent owner on the grounds including non-availability of a patented drug at a reasonably affordable price. High-cost drugs such as those for oncology and HIV have usually been targeted in the recent past and in extreme case, patents for these drugs can also be rejected. The current scenario in India is thus not appealing for foreign companies as far as enforcement of the IP is concerned and it would take them a while to regain confidence in India's IP protection laws and eventually invest more on patented drugs in India.
The future growth of the Indian pharma industry is also getting affected by accelerated growth rate of other pharma markets. In the recent past, China has emerged as one of the biggest competitor of India. The country is one of the largest bulk drug manufacturers in the world and has become favourite contract manufacturing and outsourcing destination which it is offering with the cheap price tag.
ROAD AHEAD

India’s Pharmaceutical industry is on a good growth path, but will have to watch out for the regulatory interventions

The Indian pharma industry is on a good growth path and is likely to be in the top 10 global markets in value term  by 2020, according to the PwC – CII  report titled “India Pharma Inc: Gearing up for the next level of growth”.
High burden of disease, good economic growth leading to higher disposable incomes, improvements in healthcare infrastructure and improved healthcare financing are driving growth in the domestic market, the report highlighted. 
The Indian pharma industry has been growing at a compounded annual growth rate (CAGR) of more than 15% over the last five years and has significant growth opportunities. However, for the industry to sustain this robust growth rate till 2020, companies will have to rethink their business strategy. They will have to adopt new business models and think of innovative ideas to service their evolving customers faster and better.
Pharma companies will continue to grow both organically and inorganically through alliances and partnerships. They will continue to focus on improving operational efficiency and productivity. Developments in the health insurance, medical technology and mobile telephony can help the growth of the pharma industry by removing financial and physical barriers to healthcare access in India, he added.”“The report highlights the different levers that have fuelled the growth of the Indian market, emerging new business models, as well as the key success factors that need to be kept in mind to achieve sustainable long-term growth.”
The Indian Pharma industry has been able to claim a share in the global market by leveraging its strengths and enhancing its regulatory and technical maturity. Formulations manufactured in India constitute 20 per cent of the global generics market by value, and the overall share of Indian manufactured formulations is as high as 46 per cent in the segment in the emerging market.



Indian pharmaceutical market by 2020 (US $ billion)


   CONCLUSION

            India is one of the fastest growing economies of the world, and the Indian Pharmaceutical Industry has been an important constituent to the pharma sector worldwide due to the recent changes in patent laws, the rising use of generics, high cost competitiveness, and availability of large scientific research force in the country. Strong GDP growth and significant cost advantages has resulted in the Indian Pharmaceutical Industry to grow significantly at CAGR of 20%. Participation of India pharma companies in the international pharmaceutical market has increased and with more generic products being introduced in developed economies, Indian formulation and bulk drug exports have grown significantly.
          India is fast emerging as the preferred R&D destination for many companies across the globe, outpacing cut-throat rival, China. Faced with increasing drug development costs and commercialization on one hand and drying pipeline on the other, global companies have now chalked out elaborate plans for India not just because of the low costs it has to offer but also due to faster and cheaper time-to-market opportunities, a larger and diverse patient pool, and the availability of a sizable number of skilled scientists. It has been estimated that the cost to conduct a trial in India is 50% lower than that of a developed market. Thus, India is definitely poised to become one of the leading Pharmaceutical markets in the world.

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