India's drug industry remains strong

Pharma keeps dry

09 March 2009 00:00  [Source: ICB]

Low costs shelter India's drug companies from the monsoon of bad news flooding the global economy, but profits will likely suffer

Kumar Amitav Chaliha/Mumbai

The pharmaceutical industry in India is going strong, despite global economic turmoil.

Global ratings agency Fitch said in February that it expects the Indian pharmaceutical sector to remain stable during 2009. Over 50% of the sector's revenues come from exports to the US and Europe, and the weak global economic environment, along with a weaker rupee, is likely to drive increasing exports of low-cost Indian generics as well as greater demand for low-cost contract research and manufacturing activities (CRAMS).

The situation is not without a downside. Fitch analyst Priyamvada Balaji says profitability for Indian firms is likely to fall, owing to pricing pressures, higher depreciation costs, increased interest costs, foreign exchange fluctuations and stricter regulations in developed markets.

"Despite the evidence of demand for Indian pharmaceutical drugs, absolute revenue growth and profitability would remain contained due to intense competition among generic players on the pricing front, expansion in the generic market, and stringent US Food and Drug Administration [FDA] and European Union regulations," Balaji said.

With products going off patent in the developed markets and demand for low-cost drugs rising, competition among Indian and Chinese generic players could become even more intense, resulting in cut-throat pricing pressures and a consequent decrease in operating profits.

Additionally, pharmaceutical firms could face liquidity pressures because of longer working capital cycles. The gestation period for Indian firms in the sector is long, and the time taken to develop a drug averages eight years. Companies with significant foreign currency debt would also remain exposed to refinancing risks in the medium to long term, she says.

THE INDIAN PLAYERS

Two firms - Gurgaon-based Ranbaxy Laboratories and Mumbai-based Cipla - have been battling over the top position in India's pharmaceutical market. In January, Cipla took the crown from Ranbaxy with a 5.32% market share, compared to Ranbaxy's 5.08%, according to Mumbai-based market intelligence firm ORG-IMS. Cipla first overtook Ranbaxy, as well as Mumbai-based GlaxoSmithKline India (GSK), as the domestic leader for the first time in May 2007. Analysts say Cipla's growth has been due mainly to its large domestic product portfolio, especially respiratory products.

Notably, neither Cipla nor Ranbaxy has any top-selling drug brands in the country. ORG-IMS says the cough and cold syrup Corex of global leader Pfizer is the leading drug band.

Ranbaxy's top five brands - amoxicillin antibiotic Mox, with sales of rupees (Rs) 1.093bn ($20.8m), multivitamin Revital (Rs880m), cephalexin antibiotic Sporidex (Rs821m), ciprofloxacin antibiotic Cifran (Rs769m) and cardiovascular drug Storvas (Rs728m) - together contributed Rs4.290bn for the 12-month period ended November 2008.

Cipla's five best sellers - asthma medicines Asthalin (Rs947m) and Seroflo (Rs829m), amoxicillin antibiotic Novamox (Rs733m), abortion drug MT Pill (Rs602m) and asthma/respiratory salbutamol combination medicine Aerocort (Rs583m), together contributed Rs3.694bn during the same period.

Ranbaxy's strengths are new drug-delivery systems and anti-infectants. Cipla is a leader in HIV drugs, respiratory disease drugs and contraceptives. Both firms possess a good portfolio of over-the-counter drugs.

Ranbaxy's success, particularly in overseas markets, attracted Daiichi Sankyo, and in June 2008, the Japanese pharma major acquired a majority stake in the Indian firm for Rs150bn, the largest-ever merger and acquisition (M&A) deal for India's pharmaceutical industry.

However, Ranbaxy has been in trouble of late, reporting a net loss of Rs6.798b for the fourth quarter ended December 31, 2008. In part, the damage stemmed from the company's heavy hedging on foreign currency receivables and significant foreign currency-denominated debt.

But Ranbaxy has also drawn the ire of the FDA. In September 2008, the agency issued two warning letters to the company and barred the entry of all finished drug products and active pharmaceutical ingredients from Ranbaxy's Dewas, Paonta Sahib and Batamandi facilities owing to violations of current Good Manufacturing Practices. And last month, the FDA issued a report stating that Ranbaxy had falsified data and test results in approved and pending drug applications related to the Poanta Sahib plant.

"The FDA's investigations revealed a pattern of questionable data, raising significant questions regarding the reliability of certain applications, and this warrants applying the Application Integrity Policy," said compliance director Deborah Autor at FDA's Center for Drug Evaluation and Research.

Indian firms are not only targets of M&A. Firms like Dr. Reddy's and even Ranbaxy before its M&A have made some big-scale buys, both at home and overseas. Cash-rich Sun Pharma is currently rumored to be seeking an acquisition either within the country or elsewhere.

Besides Ranbaxy, Cipla and GSK, other top pharmaceutical companies include Dr. Reddy's Laboratories, Sun Pharma, Lupin Labs, Zydus Cadila, Sanofi Aventis and Aurobindo Pharma. Players not yet in the top rung yet making forays include Torrent Pharma, Glenmark, and Styrides Arcolab. Even newer firms like Mankind Pharmaceuticals make an occasional entry into the top bracket.

Leading contract research organizations in the country include Syngene, Sai Advantium, GVK Biosciences and Accutest. The top hybrid firms that offer contract services and also conduct their own drug discovery include Dr. Reddy's, Jubilant Biosys, Avra Laboratories, Advinus Therapeutics, Suven Life Sciences and Piramal Life Sciences.

GROWTH STRATEGIES

Indian drug firms are increasingly evolving growth strategies around India's rapidly rising middle class of 300m, with their surging income levels. With rapid changes in the lifestyles of this population, lifestyle-related ailments such as cardiovascular diseases and diabetes are rising at an alarming rate.

According to a report by India's Yes Bank, domestic drug firms like Sun Pharmaceuticals, Sanofi Aventis and Zydus Cadila are increasingly catering to the cardiovascular segment, with each holding around 8% of the Indian cardiac market. The diabetic market in the country is equally divided between the two top players, Abbott and USV.

Meanwhile, the export of low-cost generic drugs to the US and Europe remains a major growth market. Most of the bigger pharma companies have over half their revenues coming in from such exports. According to the Pharmaceutical Export Council of India, the global recession has had a marginal impact on the country's drug exports. It estimates India's medicine exports for the financial year 2008-2009 will come down to $8.25bn, compared to the earlier estimate of $8.97bn.

GLOBAL PHARMA R&D HUB 

India, along with China, is fast becoming a pharmaceutical research and development (R&D) hub. Multinational drug firms are increasingly outsourcing early-stage drug discovery to India. Although intellectual property issues remain, things are getting better by the day.

Several Indian drug firms, including Dr. Reddy's Laboratories, Ranbaxy, Sun Pharma and Piramal Life Sciences, have spun off their R&D units into separate entities from their manufacturing and marketing operations, mainly to catch the interest of Western companies.

Analysts expect the ongoing economic meltdown to affect R&D spending by Indian firms just as it has affected multinationals'. Already, Dr. Reddy's has slashed funds for new R&D. Even firms such as Piramal Life Sciences, Wockhard and Sun Pharma, which have not cut R&D spending yet, may opt for such measures if the financial situation does not improve, the analysts say. But by cutting such costs Indian drug makers could have problems with their R&D tie-up deals with overseas players.

Read Malini Hariharan's India Chemicals blog

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