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Business Insight: India's generic drug industry is catching a cold

Companies' missteps exacerbate regulatory hurdles for the $30 billion industry

Employees inspect tablets at a pharmaceutical plant owned by Lupin in Verna, in the Indian state of Goa.   © Reuters

India's pharmaceutical companies are facing a series of regulatory and other hurdles, exacerbated by self-inflicted errors and badly conceived government policies that will hobble the $30 billion generic drug sector. Some companies have started to work together to raise quality and iron out regulatory compliance problems, but others have yet to make serious efforts to help themselves. That needs to change quickly.

The pharmaceutical industry faces a host of challenges. The government is trying to cut health care costs by forcing doctors to prescribe cheaper unbranded generic medicines and extending the range of drugs that are subject to price controls. It is also discouraging high-margin combination drugs and phasing out loan licensing (a form of contract manufacturing) for safety reasons.

All that comes on top of longer-term issues such as the increasing use of nontariff barriers by major importing countries and an erosion of profit margins caused by growing competition between existing pharma companies and new entrants.

In phasing out loan licensing, which accounts for 40% of pharmaceutical production, the government is trying to address drug quality issues, arguing that small subcontractors may not be as quality-conscious as the big drug companies and are more difficult to monitor.

However, many pharmaceutical companies rely on loan licensing for manufacturing, preferring to focus their energies on sales and marketing. Phasing out loan licensing will force them to develop in-house production, which will have significant consequences for their capital expenditure plans. Moreover, the new policy, announced in August, will make historical investment in contract manufacturing production capacity redundant.

In April, doctors were instructed to prescribe unbranded generic medicines, which is likely to reduce demand for branded generics sold by large companies like Alkem Laboratories, Cipla, Dr. Reddy's Laboratories, Lupin and Sun Pharmaceutical Industries, among others.

Top pharmaceutical companies are also troubled by domestic regulatory moves that seek to expand the number of medicines regulated by price controls and to place restrictions on fixed-dose combination drugs -- multiple drugs in single doses, which account for roughly 45% of the industry's sales. This follows a panel finding that 963 fixed-dose combination drugs posed health risks.

The government also proposes to raise import duties on active pharmaceutical ingredients, the key elements of drugs, to boost the domestic industry and reduce India's over-dependence on imports from China for bulk drugs and APIs. This will likely increase manufacturers' costs.

The combination of price-capped finished products and cost increases from higher import duties on APIs will reduce companies' margins on domestic sales.

TRADE OBSTACLES In the face of these challenges, it makes sense for Indian pharmaceutical companies to rely more on exports. However, export prospects have been dampened by a strong rupee and nontariff trade barriers in importing countries that raise the costs of compliance or lead to a denial of market access.

For example, despite a trade pact between India and Japan, India's pharmaceutical companies are struggling to push exports of generics because regulators have been slow in approving drugs. Meanwhile, China supplies two-thirds of India's API needs, but has been reluctant to allow imports of Indian pharma products. China is using protectionism to promote its formulation industry, which is far behind India's.

Export margins are also under pressure because of the consolidation of pharmaceutical retailers. An agreement between Express Scripts Holding of the U.S. and a purchasing group led by Switzerland-based Walgreens Boots Alliance is the latest example. St. Louis-based Express Scripts said the deal will "advance our ability to help reduce generic prescription drug prices for patients."

Quality and safety issues continue to haunt even the top companies, with increasing scrutiny from both domestic and external regulatory agencies becoming the norm. Of 42 warning letters issued by the U.S. Food and Drug Administration in 2016, nine went to Indian drug manufacturing sites. In December, for example, the FDA issued a warning letter to Wockhardt for data integrity violations.

French and German regulators, meanwhile, recently made adverse remarks about the manufacturing practices of Biocon, a biopharmaceutical company, and Dr. Reddy's. Such developments often lead to plant shutdowns and import bans on specific products.

Broadly, there are three major issues: the efficacy of made-in-India drugs, data integrity, and hygiene factors. For example, Avandamet, an Indian-made drug used to treat Type 2 diabetes, was found to contain less than the required amount of the main ingredient, rosiglitazone, rendering it ineffective.

There have been numerous instances of data falsification, inadequate documentation and data traceability, and lax adherence to standard operating procedures. Some have led to delays in drug approvals or to rejections of applications. Regulators have found pest infestations and dilapidated basic infrastructure at major manufacturing sites.

The country's pharmaceutical industry will have to address these issues to retain its position in the global generics sector. The challenges are formidable, but some of the problems, especially in the U.S. and European markets, are self-inflicted, including neglect of quality and safety standards. These issues need urgent attention.

India's pharma industry needs to work with trade negotiators and regulatory bodies to deal with market-access issues in the high-potential export markets of China and Japan. However, the safety and quality issues will have to be dealt with internally -- perhaps by voluntarily adopting the best manufacturing practices prescribed by the World Health Organization for both in-house and contract manufacturing.

To deal with the erosion of profit margins, pharmaceutical companies should consider upgrading to high-value complex generics and specialty medicines, which would require increased spending on research and development -- currently less than 10% of sales revenue, compared with 20% for U.S. and European companies. That would mean reducing short-term revenue targets. Irrational combination drugs need to be phased out voluntarily, regardless of regulatory action.

Many of the challenges faced by India's pharmaceutical companies are addressable -- especially the concerns on drug safety and quality. Some top companies are already taking steps in the right direction. Last year, six major companies -- Cadila Healthcare, Cipla, Dr. Reddy's, Lupin, Sun Pharma and Torrent Pharmaceuticals -- set up a group to address the concerns over data integrity and to promote a quality culture. That makes sense. More is needed.

Ritesh Kumar Singh is a corporate economist in Mumbai and a former assistant director of the Finance Commission of India.

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