Sunrise at sunset point
To win the battle of perception, the Indian pharma industry should focus on capital allocation choices and capability building
The Indian pharma model has depended on a few fundamentals. It capitalised on a strong domestic base in India through rapid product introductions, the Hindu rate of price increases, a large army of medical representatives and a benign regulatory and intellectual property system. Indian pharma companies chose pockets in Africa, Asia and the Middle East as natural expansion outposts. They leveraged India’s formulation expertise to address the world’s largest generics market, the US, fully exploiting the advantages it offered. All that is changing. The industry faces a battle of perceptions. Despite being the supplier of over a third of the world’s requirement of medicine, and with over 20,000 companies competing in the domestic market, there is still a perception that the Indian patient is paying high prices for drugs. The remedy — more drugs under price control.
Trade channels in this industry take nearly a third of the retail price a patient pays. This share of the patient price may be one the highest in the world. With 500,000-700,000 chemists and stockists, distribution channels remain fragmented and the cost of distribution reflects this. The remedy — a higher cap on these margins.
Indian medicines are identified by “brand names”. The doctor uses the brand name to identify the drugs he is choosing for his prescription. Under the belief that all drugs with the same ingredient are identical, we may move to an era where doctors prescribe the generic names of medicines, and it would be left to the chemist and/or the patient to choose the company whose drug she wishes to use. But are similar drugs from various companies identical? They should be by law, but they aren’t. Inspectors and analysts, who work with national and state regulatory agencies, follow the same law, but only in theory. Their implementation varies from office to office, state to state. Unless the drug regulatory laws are implemented in identical fashion across every state and city of the country, any doctor by prescribing a generic drug is putting his reputation at risk, as he is at the mercy of the choices that an ill-trained chemist and/or patient might make.
Indeed, the national regulator has a formidable task at hand — to engage, reskill and train several employees across the country, bring them to a common skill level and then hold them accountable to one common national standard. Who will fund the increased drug policing costs? If they come back to the industry, in some way, they might result in price hikes.
What happens to the several thousand companies? Will they be able to cope with these changes? One estimate is that not more than 500 companies will survive this.
The industry employs 700,00800,000 medical representatives. What is their fate, if the industry turns “generic”? Are they going to become an extinct species? The reps, through the years, toiled hard, to be the knowledge interface between the doctor and the industry. Will their role change if the nature of the industry changes? Quite possibly: Digital technology and social platforms are providing myriad ways of reaching doctors. What shape will the human touch take in this era?
Many companies use multi-brand marketing strategies to cover the vast expanse of the Indian terrain, for the same drug. At the most simplistic level, a company could have two brands of a given drug — one for the hospital sector, the other for the retail sector. Over time, in pockets, it may have led to some distortions in pricing and trade margins. Often, these are manufactured at contract sites. The contract manufacturing industry in India serves a useful purpose — to provide bridge capacity, especially for those focused on high-volume exports from their own plants. “One brand at one site” could jeopardise a sub-sector that employs a few hundred thousand people and turns over probably ~20,000 crore.
Such “remedies” are some of the sweeping changes suggested in the Draft Pharmaceutical Policy, 2017. If implemented, while quality and affordability will improve, the policy will unwittingly strike at the core of the business model of the industry and disrupt it in fundamental ways.
The US market — the largest generic market in the world and where Indian drugs fill three to four out of 10 prescriptions — is seeing three big trends. Channel consolidation has led to 90 per cent of the buying power concentration in three big companies. The Food and Drug Administration along with increased scrutiny has been approving the backlog of drugs aggressively, leading to hyper-competition. This double whammy is causing prices in the base business to fall by high single-digit to low double-digit rates. Buyers have tightened the screws and are increasingly vigilant about even legitimate price increases.
The combined effect has wiped out nearly 40 per cent of the core industry’s market cap in the last few months — a whopping value destruction of over ~5 lakh crore.
So what should the industry look out for? Three simple things — innovation, calibrated diversification and consolidation or ICDC in short.
The industry needs to diversify the geography risk beyond the US and India, invest in innovation beyond traditional generics and acquire more global scale. Aurobindo is doing just that. In contrarian style, it is going to Europe, when others have recalibrated their ambitions there.
India does not need more than 500 companies to have a reasonably competitive market. The rest must perish or be acquired. Of the dozen or so large and mid-sized companies, some should merge and acquire global scale. Two Ahmedabad-based companies are reportedly in discussion to do just that. Some more will surely follow suit.
Those with scale must invest in innovation — US specialty, global biosimilar, science-validated NCEs and digital. Zydus Cadilla is invested in a diversified portfolio — vaccines, animal health, bio-similars —beyond core generics. Dr Reddy’s, Cipla, Sun, Lupin, Glenmark, Biocon are exploring these themes. Success would depend on capital allocation choices, capability building and ring fencing for focus. The investing community must probe the latter two to be more informed.