In the bonfire of disruptions across India Inc, triggered by the pandemic, the lattice of the pharmaceutical industry can hardly escape the embers.
The business of medicine-making has for long remained immune to the ups and downs of business cycles, priding itself as a defensive sector that is firmly anchored on the premise that as long as people are sick medicines will be in demand. But the coronavirus, different from the pathogens of the past, has effected some fundamental shifts in the way the pharmaceutical industry is perceived, operates and will build its future growth.
Price erosion to supply security
In the crucial market of the US, which accounts for 30% to 40% of total revenues of most leading Indian pharma companies – the likes of Sun Pharma, Dr Reddy’s, Lupin, Zydus Cadila among others, severe price erosion has been a problem for a few years now. This is now stabilising.
As compared to price erosion running into the mid-teens two years back, it is now down around 3 to 5%. Also, demand for medicines today is guided more by concerns around supply security than on incremental price discounts. Both these, augur well for companies seeking growth at a time when the Indian market (as the table shows) is seeing lower growth rate after emerging out of one of the most severe lockdowns.
While most are still struggling to increase their sales in the US, there is momentum and is being aided by their new drug launches. For instance, in the first quarter of this financial year (FY21), Dr Reddy’s, whose US sales contribute the most at 39% (sales in India were at 14%) of total sales, saw a year-on-year growth of 6% in revenues from the region along with new product launches in the US. Others too like Lupin and Cipla have also launched new products.
“The external environment is quite facilitating now and the demand environment is less hostile and it is up to the companies now to tune their supply and cost engine appropriately to leverage this, as we have done with our product launch in April in the respiratory segment and by now gained a good market share,” said Kedar Upadhye, global CFO at Cipla, an over Rs 17,000 crore company that has a strong presence in the Indian market too.
To him the biggest shift is the migration to the digital medium, which has speeded up response time and reduced costs. COVID-19 has upended all that the sector built itself on – medical representatives seeking doctor connect and business executives busy in face-to-face meetings with suppliers and distributors.
“Simple things like payments by our stockists in India has moved from cheque payments to online bank transfers, which makes it not just convenient for the stockists but also helps us track collections better,” he said.
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China plus one
The pandemic has also triggered a lower acceptance of China as the sole supplier and retaining its world’s factory status. For instance, according to news reports, Mexico is trying to reach out to half a dozen leading Indian pharma companies to help set up its own pharma supply chain.
Today, it is not unusual to find even a squishy-minded business executive extolling the virtues of a “China plus one” business strategy on supply of medicines. This could be a long-term positive development for Indian pharma companies, especially those that produce APIs (active pharmaceutical ingredients or bulk drugs) or the key starting materials (KSMs in short).
India has also embarked on this journey, though some would argue it is rather late having given up the edge to China, especially in fermentation-based medicines such as certain antibiotics (like penicillin G) and select vitamins, for which India is totally dependent on China. While a lot more is desired from the Indian government, it is at least, talking of PLIs (product-linked incentives), aimed at reducing dependence on China for KSMs though Indian companies are all not too happy with some of its provisions.
Representative image. Credit: Reuters
Ringfencing supply chain
But irrespective of what the government does, Indian companies hitherto dependent on China completely for drug ingredients are busy ringfencing their supply chain. Krishna Prasad Chigurupati, chairman and managing director of Hyderabad-based Granules India, which is a leading player in some of the drugs that form the first line of treatment for fever, pain and for diabetes, said, “As a company for several years now we have been investing in innovative technologies to make KSMs and these make for 80% of all our imports. Ideally, we would have liked to make these ourselves but because of COVID we have hastened the process and are giving the technology to other companies within India and entering into long-term supply arrangements.”
Sharing this view is Ajit Kumar Jain, joint managing director of Mumbai-based Ipca Laboratories. “Those companies which are integrated (make both APIs and finished dosages or tablets) want to look at how they will do the backward integration to produce profitably within India with better technologies,” he said.
Jain, whose company also makes hydroxychloroquine or HCQ – the first talked about drug to combat COVID, also said, “By and large for most of our big products, we produce the intermediates ourselves and in the next level, the products we are focused on making ourselves will help us ringfence 20 to 30% of the total intermediates that we currently import.”
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Aggregation Of demand
One distinct feature of the current market is the aggregation of demand taking place which is leading to companies gaining greater foothold in their core products. A senior official of a leading pharma company, who tracks the sector closely, spoke on condition of anonymity, and explained: “The efficiencies of companies have dropped and this has been further impacted by supply chain challenges and they have started focussing on their core business and products. This is leading to consolidation of market share among key molecules where a company is strong and this is true in both the domestic and global markets.”
If in such a market, some have found a sweat spot with products in categories like immunity boosters, which today are in greater demand. Hari Natarajan, founder and managing director of Pronto Consult, an independent consulting company specialising in doctor perception studies and market insights, said, “Our studies in July showed that multivitamins containing zinc like Zincovit, the leading brand of Apex Labs showed fastest growth in terms of units sold during the month and is today a nearly Rs 300 crore brand that has grown by 80% in the last few months. Same was the case with Zinconia from Zuventus or Alkem’s AtoZ NS.” This was also the case with vitamin C where, he said, brands like Celin from Koye Pharma, Limcee from Abbott were some of the hottest selling brands.
The COVID-19 market
The COVID-19 market in India, Natarajan said, based on market sources, is today worth around Rs 2,700 crore. These include medicines like azithromycin, paracetamol, hydroxychloroquine, methylprednisolone, remdesivir and favipiravir. This is even as more Indian companies are dipping their toes in new COVID antidotes. The pureplay pharma companies Dr Reddy’s taking to vaccine-making is a case in point.
Data collated by AIOCD AWACS, for the 12 month period ended September 2020 show a growth rate in the Indian pharma market down to 3.5% from 9.7% posted in the 12 month period ended March 31, 2020.
Explaining the numbers, Rakesh Dave, president at AIOCD AWACS, a leading Indian pharmaceutical market research organisation, said the acute therapy segment – medicines for cold, cough, anti-infectives or antibiotics and related medicines that make up for nearly 50% of the total Indian pharma market sales, took a big hit and saw a sharp decline in growth between these two periods led by slipping growth rate in the anti-infectives from 10.3% for the 12 months ended March 2020 to a de-growth of 0.7% (-0.7 %) for the 12 months ended September 2020.”
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He attributed this to a sharp fall in new prescriptions in this segment as the past few months have shown most people, working out of home, trying to stay healthy, tending to eschew visiting a doctor unless it is absolutely essential. Added to this, there is a decline in anti-infectives use in routine and elective surgical procedures, which have all taken a backseat in times of the pandemic.
The data (as the tables show), throws up some more insights: usually along with anti-infectives/antibiotics doctors also prescribe some gastro intestinal medications, pain-killers/analgesics and some vitamins. All these co-prescriptions have also, in tune with the trends in the anti-infectives, posted slower growth.
As a result, those companies that are strong in the Indian market have seen decline in their growth rate. These include the likes of GSK Pharma, Alkem, Cipla, Mankind, Dr Reddy’s, Zydus Cadila among others.
The governments across the globe seem to have at least recognised the value of research. It is one reason, many argue, the focus of the narrative has shifted from price cuts to drug availability and research. The results of these will take time to show as much also depends on the way the state wants to walk-the-talk in its support for new drug development and how innovator’s rights on its patents are respected while at the same time evergreening of patents by innovators is discouraged.
Or as Y.K. Hamied, the scientist entrepreneur who leads Cipla as its non-executive chairman, has maintained for long, “scientists and innovators need to be suitably rewarded according to each country’s needs but in essential medicines there should not be any monopoly.” It may all be worth tracking now. After all, the pandemic has shown things do change.