Competitors Within

Big Pharma is not going to have it easy. US President Joe Biden’s executive order in July aimed at tackling high prescription drug prices by promoting generic and biosimilar competition could well mean that the pain for Indian pharma players in the world’s biggest market — $370 billion — is not going to end anytime soon.

Following the order, in the first week of September, the US Department of Health and Human Services presented a report to the White House Competition Council, stating that Americans were being ripped off through prescription drugs. “We pay the highest prices in the world, which leads to higher spending. Higher spending puts pressure on private and government payers to raise premiums or make benefits less generous. Lack of affordable access to prescription drugs and other healthcare services leads to worse health outcomes,” according to the report.

Of the $370-billion US drug market, generics account for $127.8 billion, with 9 out of 10 prescriptions comprising generic drugs, says IMARC, a market research agency.

The growing chorus around affordability means Indian pharma players, who have been battling severe erosion in generic prices since FY14, will continue to do so in the near future as well. “Generic drug prices in the US have dropped year-on-year for the past five years and the pressure continues. This is already having an impact on the margins of generic pharma companies operating in the US,” says Ranjit Shahani, chairman, JB Chemicals and Pharmaceuticals, and president emeritus, Organisation of Pharmaceutical Producers of India (OPPI).

The fact that managements of top pharma companies are fobbing off pointed questions on pricing in the US is only indicative of the cut-throat competition. “In terms of the value of price erosion, we are not sharing these kinds of numbers… it’s not an unusual situation. And naturally this will continue to be also in the future... It’s a normal business model in this country [North America],” Erez Israeli, CEO, Dr Reddy’s Laboratories, told analysts during the Q1 earnings call.

Competition in the US has intensified with more and more generic products being approved by the US FDA. The US had passed the Generic Drug User Fee Amendments in 2012, paving the way for faster FDA approvals — within 10 months versus 26 months — for abbreviated new drug applications (ANDAs) filed by generic companies. As a result, over the past decade, of the 5,768 ANDAs and 1,351 tentative approvals, companies from India cornered a chunk of the approvals with a 35% share. In 2020, the US tentatively approved 948 generic drug applications. On a financial year basis, the total number of approvals for ANDAs of Indian companies has increased from 409 in FY14 to a high of 935 in FY19. Though FY20 and FY21 saw lower approvals, overall applications stood at 1,276. Shahani believes bigger players will continue to see their businesses shrink. “Overall, the generics market has been declining at a CAGR of 5.5% over the last five years and the market share of the top 10 players has slipped, which is reflected in the filing of abbreviated ANDA approvals by the American regulator. New and smaller players account for half the ANDA clearances and this trend is likely to continue.”

Aggressive pricing by newer players is exerting pressure on existing ones to reduce rates. “It is similar to what used to be in the years ago — when you are launching a product, especially products we launched recently (in the last 12 months), then a competitor comes in and you need to defend your share and it leads to price erosion,” Israeli told analysts.

According to an analysis by market research specialist IQVIA, on an average, the first generic competitor prices its product at 70-80% of the original brand. The entry of a second player reduces the average price to 40-50%. The entry of multiple players (five or more) results in prices dipping below 50% of the innovator within the first year of launch. According to IQVIA, average prices fall to less than 5% of the innovator in products with more than 10 generic players.

What is also contributing to the decline is the consolidation among distributors. From about a decade ago, where 10 pharmaceutical distributors were controlling 80% of the US generic market, today the top three — WBAD, Red Oak and McKesson OneStop — corner 92% of the market. “With consolidation in the pharma supply chain, among wholesalers, pharmacy benefit managers (PBMs), and retail pharmacies, the bargaining power of these vertically integrated players has improved drastically, leading to pricing pressure on small and medium-sized generic players. This has resulted in a 4–5% discount in average generic sourcing cost,” according to the IQVIA report.

What’s pertinent to note is that competition for big players has not come from foreign shores, but from within India. “A lot of smaller and mid-sized listed and unlisted players have entered the US generic market in recent years,” says Kunal Mehta, analyst at Vallum Capital. Over the past eight years, while bigger players such as Sun Pharma, Dr. Reddy’s Laboratories, and Lupin saw US revenues grow 3-27% [except Aurobindo which saw a jump of 264%], the likes of Cipla, Alembic, and Granules Pharma saw a surge of 365-455%. Five listed players — Ajanta Pharma, Natco Pharma, Cadila Healthcare, Alkem Labs and Gland Pharma — which entered the US generics market during FY15 to FY16, have since managed to make strong inroads. “The US business has had exceptional growth over the last five years. We had a massive CAGR hit. We have cumulatively 146 ANDA approvals, including 18 tentative, and we are trying to launch five products in the second quarter,” says Pranav Amin, MD, Alembic Pharmaceuticals, a recent entrant in the US, in an analyst call during Q1 FY22.

But the bigger players, too, are upping the ante. For instance, DRL launched four products in the US, including Icosapent Ethyl Capsules, Ertapenem injection, Sapropterin 100 mg Sachet and Albendazole Tablets, and relaunched Famotidine Tablets. “We are growing in general and our top few products are about 35% in the US. We got the impact of the price erosion, but we did not get the impact in the market share stuff as most of the levers for us to grow will come primarily from starting in Q2,” Israeli told analysts.

The competition is only going to get intense. Shahani believes bigger players have to think differently to stay ahead. “Clearly, the big boys have to move up the value chain, away from plain vanilla generics to complex biologics or biosimilars, injectables and formulations with special delivery mechanisms, to stay ahead of the curve.”

Though pharma companies’ revenue loss in the US is being offset by strong sales growth in the domestic market, it won’t be enough. Mehta believes India cannot make up for the potential that the US offers. “The paracetamol market in India is worth ₹700 crore, but in the US it is worth $2 billion (around ₹15,000 crore). Despite the price erosion, pharma companies can hope to make money by increasing volumes.”

Despite analysts raising concerns over margins, Amin of Alembic points out that the US is still the place to be in. “What makes this market attractive or why do we keep making investments in it is becasue the addressable market size is very good.”

Big Pharma will have to either contend with growing the market via complex generic launches or go for strategic M&As. While Shahani sees a case for buyouts, he cautions, “The pharma industry is highly dispersed and realignments are likely to take place. Those which are for strategic reasons and complementary strengths will only succeed — pure size can never guarantee this.”