Year in review: In 2019, Indian pharma battled regulatory scare, and won

The year 2019 has been an eventful one for Indian pharma. Apart from regulatory scares from its key export market, the US, and the lookout for opportunities in new territories like China and Japan, the domestic market saw a fair share of swing in growth rates. The industry also battled concerns around a cancer-causing substance being present in some of the most common pills like antacids and diabetic medicines. The year, however, ended in some breather coming from the Indian drug price regulator allowing a one-time ceiling price hike for some of the key drugs facing input cost pressure. 

If stock prices are anything to go by for measuring the performance of companies, big pharma firms like Sun Pharma, Lupin, and Cipla have seen their shares take a beating this year, slipping from their year before price points. There has been a surprise performer in Divi’s Laboratories. The Hyderabad-based maker of active pharmaceutical ingredients saw an over 22 per cent jump in its stock prices in 2019. Despite the regulatory challenges, cost optimisation measures and a promising US pipeline did well for another Hyderabad-based drug major, Dr Reddy’s Laboratories.

On the whole, rating agency ICRA maintained a stable outlook on the Indian pharmaceutical industry. In its latest note on the sector, ICRA said: “The abating headwinds from pricing pressure in largest regulated markets USA, stable growth for the Indian market driven by increasing healthcare spend and better accessibility are likely to drive healthy growth for the Indian Pharma companies, coupled with comfortable balance sheet structure.” The FY2019-22 compound annual growth rate is expected to be 10-12 per cent for domestic pharmaceutical companies, ICRA said.

Increased regulatory scrutiny

The year 2019 has been a tough year for Indian exporters as far as US Food and Drug Administration (USFDA) scrutiny goes. ICICI Securities noted in its latest report that the sector underperformed the broader market due to regulatory issues, volatile US business with lack of growth visibility, and high price erosion in H1CY2019.  “Indian plants have received 15 warning letters in CY19 vs 7-10 in previous years as the number of plants and filings from India has been significantly increasing,” it noted. 

Analysts feel as Indian firms increase the number of complex drug filings in the US, the number of USFDA inspections is set to rise. 

Did exports to the US take a beating as a result?

The Pharmaceutical Export Promotion Council (Pharmexcil), a Ministry of Commerce outfit, however, pointed out during the first quarter of FY20, India’s pharma exports grew by 11 per cent. During the June quarter, according to the data from Pharmexcil, exports to the US saw 28 per cent growth. This is because most companies have de-risked their business models by developing alternative sites or plants for their key products in the past few years.

Moreover, big players including Sun Pharma have indicated their intention to focus on the regulated markets of Japan and China. Some firms like Lupin, however, sold their Japanese subsidiaries for generic drugs and said they would focus on partnerships in specialty drugs. 

Domestic market saw demand swings

India’s Rs 1.3-trillion domestic market too has seen a fair share of ups and downs this year. In the June quarter, the domestic market’s year-on-year growth (at 7.9 per cent) was the lowest since the one of June 2014. Then market growth picked up in monsoons and sales of categories like anti-infectives grow. During the July-September quarter, the market clocked 11.5 per cent growth, buoyed by increase in both volumes and prices. However, immediately after, the growth rate again slipped to 5.1 per cent in October, picking up again in November.

The domestic market is going through a churn in terms of volumes going down, with strict price control pushing companies to focus more on profitable brands. With input prices going up, manufacturing certain products had become unviable. The Centre took note of the situation, and, in a first, it invoked Paragraph 19 of the Drug Price Control Order, 2013, to raise the ceiling prices of 21 formulations by 50 per cent. This was a long-pending demand from the industry because the prices of active pharmaceutical ingredients (APIs) had gone up in the range of 10-88 per cent in the past two years owing to Chinese supply disruption.

The Centre is working on developing bulk drug manufacturing parks to boost local production and reduce dependence on China, which now accounts for almost 70 per cent of our API imports. The ball has been set in motion to develop four such parks, one each in Andhra Pradesh, Telangana, Himachal Pradesh, and Assam.  

Scare of carcinogen in common drugs

Apart from swings in domestic demand and US regulatory concerns, Indian pharma majors had to also grapple with the issue of the presence of a potentially cancer-causing substance in the bulk drugs (or ingredients) of a common antacid Ranitidine and a diabetic drug Metformin. After the USFDA issued advisories, several companies including multinational player GlaxoSmithKline Pharma recalled its Ranitidine products globally. The Indian regulator too sprang into action and did thorough checks around the presence of the carcinogen (called NDMA) in these drugs. 

Outlook 2020

Analysts, however, are optimistic about 2020. ICICI Securities said: “We are positive on pharma sector for next year as we expect growth in India to sustain at 10-11 per cent, cost control measures to aid margins and positive growth in US sales on corrected base with normalisation of price erosion. Pharma companies under our coverage witnessed an average 11 per cent decline in stock prices over the past one year largely due to increased FDA issues and muted US sales.” 

Regulatory hurdles such as frequent FDA inspections, currency volatility, and including more products in the National List of Essential Medicines (the prices of which are controlled by the government) in India, are key risks for the sector.

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