Indian pharma: Generics eyeing differentiation

Girish Bakhru

HSBC

Girish Bakhru explores the current climate of the pharmaceutical industry in India.

Fall from a cliff?

2012 was the year of blockbuster drugs losing patent protection. Lipitor, Lexapro, Geodon, Plavix, Provigil, Seroquel, Singulair, Actos, Diovan HCT and most recently TriCor. All in all cUSD30bn worth of drugs lost patent protection in last 12 months with most launches (except plain Diovan which is yet to go generic and TriCor which was delayed) appearing on time as estimated.

This year will present with less than half of the opportunity seen in 2012. As per estimates, only cUSD18bn drugs lose patent protection in 2013, of which few are biologics – Procrit, Humalog, Neupogen, Rebif and Avonex – which are yet out of reach of generics in US and hence less than half are addressable. What is further worrying is that of these USD15bn addressable opportunities only four are blockbuster expirations(drugs with more than USD1bn sales).

Four blockbuster drugs losing patent in 2013Figure 1: Four blockbuster drugs losing patent in 2013.

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“Watson will emerge as the third-largest generic player in the world…”

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While cumulative generic opportunity over period 2013–17 may be similar to that seen over the period of 2007–11, in lieu of increasing competition from smaller players and hence aggressive price erosion, major generic pharmas across the globe are seen hunting for product opportunities that can sustain the growth momentum in US over a long period of time.

Distancing from plain-vanilla generics

A move from plain-simple oral generics to differentiated generics based on different delivery systems including injectables, sprays, aerosols, topicals is convincing for generics. Not only does this keep competition from other players away for a longer period of time, better pricing environment in these opportunities has helped in generating better return on investments (ROI).

Recent filings among Indian companies highlight this shift towards complex generics

Figure 2: Recent filings among Indian companies highlight this shift towards complex generics.

While filings are moving towards complexity, it is evident that most companies are keen to focus on profitability more than market share. In other words, companies are increasingly launching products where there is more favorable pricing. Additionally, with implementation of GDUFA, most Indian companies are focusing on quality filings over quantity and hence relinquishing ANDAs where the market is overcrowded and the pricing is expected to be abysmally low.

Adding to the above differentiation is an increasing emphasis on building branded business in developed markets – a move that gradually pushes a generic model towards a specialty pharma model. Most Indian large-caps generics have small presence in branded products within the US with marginal-small contribution to bottom line (except for Lupin). This is in contrast to Teva where the branded portfolio accounts for well over half of the company’s profitability.

Watson’s CEO, upon completion of the Actavis acquisition on 31 Oct 2012 emphasised that post the Actavis merger, Watson will emerge as the third-largest generic player in the world, and the company will essentially focus on brand growth through brand acquisitions and licensing deals to diversify across therapies and treatment methods. On 31 Dec 2012, India’s Sun Pharma’s chairman Israel Makov had expressed in an interview that the company would like to be a significant player in specialty-pharma business.

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“…the big question is whether to shift focus away from the biggest pharma market in the world.”

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 Branded presence within US among Indian majors

Figure 3: Branded presence within US among Indian majors.

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Branded business remains a controversial source of diversification in our view given the risk of generic entry in the case of weaker IPR (patent protection). Additionally, given low experience with in-house R&amp,D most companies would struggle to maintain a healthy pipeline on branded products and will rely on expensive acquisitions. Nonetheless, Indian pharma is seen investing more in building business in this segment given stability in revenues and pricing advantage.

Hunt for technology – M&amp,A is back?

While US slowdown is a bigger worry for most pharma, the big question is whether to shift focus away from the biggest pharma market in the world. Indian companies have the advantage of a strong market, which has not seen incremental slowdown so far despite recently implemented tighter pricing control. Additionally, most companies have built material presence in other emerging markets through timely acquisitions or scale-up of front-end businesses organically.

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“This year is undoubtedly going to see more action on the M&amp,A front.”

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Having said that, the US market would remain in focus for a large part among Indian companies given the relatively smaller size when compared with three largest generics – Teva, Mylan and Watson / Actavis. This year is undoubtedly going to see more action on the M&amp,A front. Over the past few months alone, Indian pharma has seen four acquisitions involving three large generics of which two (detailed below) were aimed to add differentiation through proprietary technology.

• Sun Pharma announced an offer to acquire DUSA pharma which is a very differentiated move because it brings drug-device product asset into so far a purely product based generic company. DUSA’s key flagship product is Levulan PDT (photodynamic therapy), which is a two-part treatment approach in a dermatology condition called actinic keratosis. Levulan is a chemical aminolevulinic acid hydrochloride that is applied on the lesions which is absorbed by the actinic kertosis cells making them extremely sensitive to light. The affected part is then exposed to BLU-U blue light illuminator, which triggers a reaction destroying the affected cells.

• Dr Reddy’s recently announced acquisition of OctoPlus NV would potentially add the controlled release technology, which can be applied to various products. OctoPlus key asset is Locteron, which is a controlled release interferon alpha based on proprietary PolyActive technology. PolyActive technology has been shown to be superior to much commonly used PLGA (poly(DL-lactide-co-glycolide) microspheres.

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Indian pharma has seen four acquisitions involving three large generics

Figure 4: Indian pharma has seen four acquisitions involving three large generics lately.

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Search for long-term growth areas will keep R&amp,D investments high. Additionally, few companies have active investments in biosimilars and NCEs that will be drivers a few years from now. Until then Indian pharma has to settle with growth from base business in the US and other parts of world including India, differentiated launches in complex generics space in US and inorganic routes. The bigger question is if all will succeed in this road to transition.

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About the author:

Girish Bakhru is a healthcare research analyst at HSBC and has been actively watching trends in the industry over last five years. Prior to this he has worked at Lehman Brothers where he was actively tracking US Pharma sector. He holds a medicine and management degree from premier institute in India. He has practiced as a medical practitioner over a year before joining the financial services industry. He also holds a CFA from CFA Institute, USA.

What M&amp,A activity can we expect to see in India?