Credit: Shutterstock photoOver the last 10 years, the export prowess of India’s generic pharmaceutical industry has reshaped the global pharmaceutical business. Since the 1970s, helped by the abolition of patent protection rights, India’s pharmaceutical industry has been dominated by home-grown generic drugmakers. Once known as exporters of bulk APIs[i], Indian generic drugmakers have moved upwards on the global value chain and managed to gain a foothold in regulated markets such as the US and Europe. For example, in the US, Indian generic drugmakers account for 40% of generic and 10% of finished dosages[ii] by volume. Total sales for Indian generic drug companies[iii] grew from nearly $4 billion in 2004 to $17 billion in 2014 (an annualized growth rate of 16%), while foreign sales for Indian Companies grew even faster at 22% per year, from nearly $1.7 billion to $12 billion (Figure 1). This augurs well for Indian companies, which are also experiencing growth momentum in their domestic market.
Source: PharmaBiz
Strong US Growth
Indian generic drugmakers have gained a significant toehold in the US, with a dominant share in ANDA-drug[iv] approvals. In fact, Indian companies are second only to US-based companies in ANDA approvals, maintaining a total share of nearly 30%-40% on a consistent basis (Figure 2).
Source: Factset
In addition, Indian firms have accounted for 20-25% of the first ANDA-approvals for a specific drug over the last few years, which may serve as evidence of their strong R&D capabilities. This is a key statistic, as first ANDA-approval is considered a major reward in the generic drug industry and comes with the exclusive right to sell the generic version of a drug for the first 180 days after patent expiry. With a current backlog of 3,000 pending ANDA applications and the FDA indicating its goal to clear 90% of these in the next 3 years, India’s generic players may see strong topline growth in the next few years.
Investment in Research & Development
R&D is a major focus for Indian generic drug companies as they continue to move further up the value chain and become more competitive on a global basis. For the top Indian generic companies that publish their R&D investment numbers, total R&D investment expanded from 3.88% of sales in 2010 to more than 6% by 2015, while total R&D investment more than tripled from $252 million in 2010 to $833 million by 2015 (Figure 3). Considering that India’s currency depreciated by nearly 50% during this same period, the R&D growth numbers quoted are significantly understated.
Source: Factset
India’s generic drug companies have also made significant headway in the manufacturing of APIs. A recent FDA report indicates that of the 3,652[v] facilities worldwide approved for the production of APIs (and finished dosages), India accounts for nearly 23.7% (the largest share outside the US) and is the largest exporter to the US (double the exports by China).
Strong Balance Sheets Could Lead to M&A Activity
Another key growth trigger is expected to come from the strong balance sheets of the largest Indian generic pharmaceutical companies, which should allow them to pursue inorganic growth through M&A. Over the last 15 years, the top US generic drug players such as Teva Pharmaceutical Industries (TEVA), Mylan Inc. (MYL) and Allergan (AGN) have grown in size on the strength of successful M&A, which indicates the importance of scale and size in the industry.
At the moment, top Indian Companies such as Lupin (LPC: NSEINDIA), Dr. Reddy’s Laboratories (DRRD: NSEINDIA) and Sun Pharmaceuticals (SUNP: NSEINDIA) have low debt-to-equity ratios (
Source: Factset
Growth through M&A is not something new for Indian companies. For example, over the last 5 years, Sun Pharmaceuticals (SUNP: NSEINDIA) has become one of the top 5 generic companies in the world, capitalizing on the acquisitions of Taro Pharmaceutical (an Israel-based pharmaceutical company) and former Indian generics leader Ranbaxy Laboratories.
Potential Headwinds
As Indian drugmakers are selling products in the US market, local manufacturing facilities have to follow manufacturing standards and quality controls set up by the US FDA, which can expose Indian drugmakers to high levels of regulatory risks. Ranbaxy Laboratories, one of the largest Indian generic companies a year ago, is a case in point. Despite having a strong ANDA pipeline, the company lost out on competition due to 3 FDA warning letters in 2008 and 2013 restricting their exports to the US. In the past 2 years, large Indian drugmakers such as Dr. Reddy’s Laboratories (DRRD: NSEINDIA), Sun Pharmaceuticals (SUNP: NSEINDIA) and Cipla (CIPLA: NSEINDIA) have received FDA warning letters for different facilities. Though Indian companies have asserted their commitment towards FDA compliance, these actions could lead to short-term investment losses for investors.
Conclusions
Backed by the success of Indian companies in tapping the US generic drug market, a largely underpenetrated but fast-growing local healthcare market and strong fundamentals, Indian generic drug firms may be a compelling investment case for investors.
Leveraging its extensive research into the space, Indxx has developed the Indxx Global Generics & New Pharma Index to provide access to the companies in this industry. The index includes exchange-listed companies, on a global basis, that derive a significant proportion of their revenues (or that have the potential to derive a significant proportion of their revenues) from the generic drug industry, or that have a primary business focus on the generic drug industry. The products of these companies are pharmaceuticals that are identical, or bioequivalent in the dosage form, safety, strength, quality and intended usage to brand name pharmaceuticals. As of December 31, 2015, the index included 83 securities of companies with a minimum market capitalization of $1 billion and a weighted average market capitalization of nearly $35 billion.
Indxx has licensed the index to noted New York-based asset manager and ETF sponsor Van Eck Associates Corporation for their exclusive use, and Van Eck has launched an ETF tracking the index – the Market Vectors Generic Drug ETF - under the symbol GNRX.
[i] API stands for Active Pharmaceutical Ingredient which is chemical molecule in the medicine that lends the medicine desired therapeutic impact
[ii] http://www.careratings.com/upload/NewsFiles/SplAnalysis/Patent%20Cliff%20in%20US%20-%20CARE%20Ratings%20report.pdf
[iii] It include 12 largest listed Indian Generic firms which are covered by Bloomberg Industries. These firms have bene considered as proxy for Indian Generic Pharma industry throughout the article. Fiscal year for Indian companies end at March every year which has been adjusted to make it comparable to US counterparts. For example, Annual sales declared as of March 2015 has been used a data for Fiscal year 2014.
[iv] ANDA stands for Abbreviated New Drug Application. This application is filed for approval of generic drugs.
[v]http://www.gmp-compliance.org/enews_03940_FDA-publishes-List-of-GMP-facilities-producing-for-the-US-market--generic-drug-products-and-APIs-.html
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
