Under The Weather - part 1 | Outlook Business
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Lead Story

Under The Weather- Part 1
The domestic pharma industry, which is already battling the US FDA, has now to contend with regulatory challenges at home

Krishna Gopalan

Mitesh Shah has made a quiet fortune over the last decade. As a chemist in Thane’s sprawling Hiranandani Estate, he has a steady clientele of patients and doctors that keep his cash registers ringing. Three years ago, he spent a steep 2 crore in buying a large apartment in the township. Even with new chemists entering the area over time, his business has remained largely unaffected.

On a good day, Shah gets about 500 prescriptions from doctors and based on these, he dispenses medicines to his patients. With his experience and his D.Pharma degree, it is a job he has mastered—from the intricacies of each drug to being able to substitute one for another when the stocks run out.

Kiran Mazumdar Shaw, chairman, BioconIn the third week of April, 30-year-old Mitesh was slightly surprised to see a prescription from a doctor without a brand name. Instead, it made a mention of just the generic name (or the chemical name of the drug) with the suggested brand in brackets. “It was the first time this had ever happened and it was for a diabetes drug. Since then, we have had about ten such prescriptions each day,” he says. This happened just about a week after Prime Minister Narendra Modi said that doctors will not be allowed to prescribe a brand, but only a generic drug.

This could possibly be a huge concern since the brands that pharma companies have built for many years could potentially count for nothing. At a tidy 100,000 crore, of the branded generics market with handsome profits, was a great place to be in for the biggies. Suddenly, that equation has changed.

Shah is not too thrilled either. “We cannot replace the doctor in any form. While margins may increase and companies will woo us, we will be in trouble if we prescribe a wrong medicine,” he says.

Hemant Bakhru, Director-Equity Research, UBS.

Uneasy implications
The announcement from the Prime Minister could not have come in at a more inopportune moment for the Indian pharma industry, even as the players are reeling from constant scrutiny by the USFDA (US Food and Drug Administration) making a dent on their overseas business. In one stroke, the domestic story too comes under pressure. It is a scenario that the industry would have given anything to not be a part of.

“Brand differentiation will not exist and medicines will become a commodity. There will be no value for high-end products and India will become a cheap-cost market,” says Hemant Bakhru, director-equity research, UBS. This means the numbers of players will also drop leading to what one fears could be a drop in the industry size. By any yardstick, this is a disruptive move for the industry. “It has come at a time when there is already margin erosion on generics sold in the US and growth in the domestic market is hard to come by. In that sense, this really is a double whammy,” he says.

While the intent is to ensure that consumers have greater access to affordable drugs, there are practical challenges. “The government’s proposal to make it mandatory for doctors to prescribe generic medicines is laudable in intent as it seeks to give patients the choice to buy the cheapest version of a drug available in the market,” says Kiran Mazumdar Shaw, chairman, Biocon. “However, implementation of the policy is going to be challenging because India’s drug regulation system, in its current form, makes it difficult to determine whether each generic drug sold in the country has been made at cGMP compliant facilities, passed uniform quality checks and offered similar safety and efficacy to the patient. Most doctors in India currently opt for branded generics as they are assured of the quality of medicines they are prescribing.”

At least three doctors Outlook Business spoke to, on the condition of anonymity, expressed high levels of concern since they were unlikely to be in control of the medication. One went on to say that he would add a footnote in each prescription stating he is not in control of it and also not responsible for any positive or negative effects.  “The worry is how to absolve myself if something goes wrong. I have no role to play in the price of generics and I am responsible only for the patient’s health,” he emphasised.

The contours of the announcement are still unclear.  While it is mandatory for doctors to prescribe generic drugs, it doesn’t say they can’t recommend a brand in addition. The hope that most companies are living in is that patients may prefer to see the brand and may force the doctors to suggest what to buy. “Even today, if a doctor writes the name of a brand, the chemist can still override it. Their main objective this time is to reduce the prices of drugs, this is inevitable if generic drugs are made compulsory,” says Dr B M Hegde, an eminent cardiologist and medical scientist. “The nexus between the industry and doctors will continue to remain but a substantial part of the excessive profits will be seriously corrected,” he thinks.

It’s not clear how finished dosage combinations (FDCs) will can be prescribed with only the generic names mentioned. FDC is the usage of two or more active drug ingredients in a single dosage form. FDCs accounts for more than 45% of the Indian pharma market in terms of value. Some FDCs such as multi-vitamins consist of more than 4-5 ingredients, so it might be impossible for doctors to write prescriptions mentioning all the generic names.

 There were signs that the government was going to tighten the noose around the pharmaceutical industry in March last year when the FDCs came under the scanner. At that point, 344 of these FDCs were banned on the grounds of health risk and the lack of therapeutic justification. Most companies had to eject their brands from the market.

Though the Delhi High Court overturned the government’s ban in December which allowed the brands to get back into the market, companies did suffer a setback. For instance, Pfizer, voluntarily discontinued the manufacturing of Corex cough syrup, its top selling brand. Corex had a combination of chlopheniramine maleate and codeine syrup, which were among the list of banned drugs and had a turnover of close to 250 crore then. Pfizer re-launched Corex with a new formulation, but the brand in its new avatar could only garner monthly revenues of 10 crore as the company has scaled back on distribution. 

The FDC issue, meanwhile, has moved to the Supreme Court. In the Union Budget this February, Finance Minister Arun Jaitley said that the government planned to amend the Drugs & Cosmetics Act to ensure drugs would be available at reasonable prices apart, from the use of generic medicines. This was quickly followed up by the Prime Minister’s announcement in April.

Who stands to lose
Multinational companies appear the most vulnerable as they have invested significantly in brands and derive a chunk of their revenues from a handful of brands. Typically, a large Indian pharma company will have a portfolio of 300+ brands. By contrast, an MNC will have no more than 50-60 brands, with about 10-12 brands driving a large part of both revenues and profitability. During the process patent regime, most MNCs were reluctant to launch new products in India as they started losing market share to Indian pharma companies which quickly built their product portfolio thanks to their reverse engineering skills. Today, Indian companies make up 78% of the domestic market while MNCs make up for the 22% balance. Given that they had a limited product portfolio compared with the Indian companies, MNCs turned their focus on building big brands. In fact five of the top ten brands belong to them. This kind of disproportionate dependence on a few brands has worked well for the MNCs so far. For instance, the largest selling drug in India, according to data from QuintilesIMS, is Mixtard, an Abbott brand. This alone had a turnover of 576 crore last fiscal, on company revenues of 7,500 crore. Janumet, a brand owned by MSD Pharmaceuticals, made 332 crore for a company with a topline of 1,100 crore. 

However, this also makes them a little more vulnerable to the changing dynamics in the domestic industry where the premium on brands now hangs in balance. For instance, MNC heavyweights GSK and Pfizer have nearly 74% and 82% of their revenues coming from the top 200 brands in India (see: On a shaky ground). Even by the most conservative estimate, 60-70% is accounted for by prescriptions. So far, it has worked well for the MNCs since the chemist will have to sell what is prescribed even if it results in lower margins. 

Today, a large part of the selling price of any medicine includes the promotional budget and special discounts to the trade, which could be as much as 40% of the maximum retail price. Often enough these promotions extend to gifts and foreign holidays for the doctors and the move is seen as one that would break the nexus between the pharma industry and some doctors to promote branded generics which are priced higher. Thanks to the aggressive brand promotion, larger pharma companies are able to get significantly higher realisations to substantially higher realisations for the same drug (see: Branding gains). While the consumer will now be provided with more options that are available for a generic drug, there are concerns about the quality of the cheaper drugs given that India has a relatively weaker drug regulatory system in place. “For the new policy to work, the government will need to align the central and state regulatory frameworks to ensure a uniform quality monitoring system. This will need an empowered regulatory body with competent and adequate staff to enforce consistent compliance,” says Shaw.

This is the first of a two-part series. You can find part two here

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