When much of India Inc was grappling with the slowdown, pharma companies bucked the trend by sustaining healthy growth. The profits of pharma majors constituting the BSE Healthcare Index grew over 27 per cent in the last three years, compared with an 18 per cent rise for Sensex constituents.
This has led to premium valuations for pharma stocks, with the BSE Healthcare Index now trading at 17 times estimated 2014-15 earnings. Sensex stocks trade only at 12 times.
But quite a few challenges are now surfacing for pharma companies. How will these impact their prospects, and which companies are best placed to tide over these testing times?
Regulators step in
Pharma multinationals, which have always charged a stiff premium for their branded drugs in India, are facing a new threat from hyperactive patent regulators.
Competition is being forcibly brought in. In March 2013, for instance, Natco Pharma was granted a licence to sell the generic version of Bayer’s anti-cancer drug Nexavar.
The Intellectual Property Appellate Board permitted Natco Pharma to sell a month’s dosage at Rs 8,800, while Bayer’s patented brand Nexavar sold at Rs 2.2 lakh.
This has not only impacted Bayer’s volumes but also forced it to slash prices to retain market share. The Bayer case may not be an isolated instance. For, the Controller of Patents in India has begun to grant compulsory licence (CL) to competing companies, to manufacture and market cheaper generic versions of patented life-saving drugs.
Though the multinational (innovator) is entitled to receive a share of the licensee’s profits as royalty, these receipts seldom compensate for the huge loss of profits for the innovator.
Even now, the Government is examining a proposal by the Health Ministry to issue compulsory licence for a cheaper generic version of Roche’s breast cancer drug Trastuzumab, currently sold under brand name Herceptin.
While moves such as this are a big negative for multinationals, companies which have filed for generic version will gain from this proposal.
Simultaneously the country’s IP Appellate Board has also been foiling efforts by multinationals to extend the life of older patents, referred to as evergreening.
Patents have recently been revoked on a fairly long list of ‘innovative’ drugs — Novartis’ anti-cancer drug Glivec, GlaxoSmithkline’s breast cancer drug Tykerb and Allergan’s glaucoma drugs Ganfort and Combigan.
Novartis’ Glivec patent was rejected on grounds of ‘obviousness’. This means that the mere discovery of a new form of a drug, without any material improvement in its efficacy, cannot be patented.
Pricing curbs
Generic drugs are not free from bother either. The recent policy move to curb pricing freedom has been a big dampener. After discussions with various stakeholders for over a year, the Cabinet finally approved the New Drug Pricing Policy in December 2012. This policy proposes to cap the selling prices of drugs containing 348 essential molecules forming part of the National List of Essential Medicines (NLEM). Under this, the average price of all brands with a market share of one per cent or more is taken as the ceiling price for each drug.
Drug makers with brands priced above the ceiling price will have to slash prices; they are also required to recall and re-label products already available in the market.
This exercise was to be completed within a span of 45 days from the date of notification of the ceiling price. However, following representations made by the industry, the Government has extended the deadline by an additional 30 days.
Yet, recalling all the drugs from the channel and re-labelling them is cumbersome and time-consuming.
Further, given the size of the market, it may even take longer than six months to complete the exercise, which could hurt their numbers in the interim.
Also, selling such recalled drugs may land Indian companies in trouble. For instance, regulations in the US do not permit companies to sell drugs that have been recalled from the market.
Hence, companies manufacturing drugs for the domestic market from US FDA-approved facilities may run the risk of regulatory action by the US drug regulator if they sell these recalled drugs. On the other hand, these companies may have to lose sizeable revenues if they have to destroy the inventory in the channel completely.
Even as pharma companies have sought legal remedy and the matter is sub judice , domestic sales for most pharma companies have taken a significant beating in the latest June quarter. Further, reduction in the prices of essential drug brands is expected to impact drug sales in 2013-14. While the revenue impact for the industry is expected to be around 3 per cent, multinational companies who have priced their drugs at the upper end of the band may be affected more severely.
In the listed space, Wyeth’s revenues may be impacted the most, an estimated decline of over 14 per cent, due to pricing curbs. The other MNCs which may see significant decline in revenues include GlaxoSmithkline (over 9 per cent) and AstraZeneca Pharma (over 7 per cent).
However, the impact may not be material for Indian companies with a diversified portfolio. Companies such as Sun Pharma, Lupin, Glenmark Pharma and Zydus Cadila may see less than 2 per cent impact on revenues.
Big brother is watching
Then, there are the increasing instances of global drug regulators such as the US Food and Drug Administration issuing warning letters and restricting export of drugs from specific facilities. For instance, the total number of warning letters issued by the US regulator increased from 620 in 2010 to 749 by 2012.
Indian companies have been facing the heat of regulatory tightening. The recent regulatory action on Wockhardt’s Waluj facility which was issued a warning letter is an instance. The company was charged with withholding truthful information thereby delaying and limiting inspection.
During interactions with the production head, it came to light that unofficial data entries were being used for internal visual inspection; which were not shared with the inspector.
In addition to this, the regulator also claimed non-conformance to good manufacturing practices. Export of drugs to the US from this facility has been banned since late May 2013. The stock price tumbled over 78 per cent, post the ban, to Rs 381 currently.
Though import alerts and warning letters are quite common among pharma companies, investors may consider investments in companies with a good compliance track record.
While pharma majors such as Sun Pharma (for its Cranbury facility in New Jersey, US), Lupin (Mandideep, Madhya Pradesh) and Zydus Cadila (Moraiyya, Gujarat) have received warning letters in the past, they have succeeded in resolving the issues within a reasonable period of time.
And these companies have since stepped up efforts to ensure better regulatory compliance.