India's Top Pharma Firms Look Beyond U.S. Generics. But There Are Risks.

A surge in commodity prices intensified pressure on Indian drugmakers' margins even as they lost pricing power because of competition in the U.S., one of their largest markets. Yet, aided by cleaner balance sheets, they have been investing in newer categories to grow.

From Sun Pharmaceutical Industries Ltd. and Dr. Reddy's Laboratories Ltd. to Cipla Ltd., Indian drugmakers are looking at specialty chemicals, biosimilars and complex molecules to add new revenue streams beyond generic drugs. And they are increasing their focus on India.

“Most of these companies have guided for a steady R&D spend target of 6-7% (of revenue) for the next one-two years,” said Gaurav Jain, director at GS Capital Advisors.

The focus on alternative streams intensified during the pandemic that stoked commodity inflation and drove freight costs higher, hurting return on investments and profitability.

“It could be said that the pharmaceutical companies may be quite close to the trough,” said Vishal Manchanda, pharma analyst with Systematix. Investments made by these companies in the next two-three years will set the tone for their future and pave the way for recovery, he said.

Balance sheets of most pharma companies are cash-rich and debt-free, offering room for investments, something they could not two years ago, he said.

Based on exchange filings and conference calls with analysts, BQ Prime compiled the therapies and categories that India's drugmakers are targeting to diversify U.S. generic exposure.

Chasing Growth In India 

India businesses for these companies will provide a sustainable, long-term secular growth, according to Aditya Khemka, healthcare fund manager at InCred Asset Management.

While the Indian market still has enough space to compound at 9-12% over the long term, the U.S. generics business has only limited scale-up potential, according to Manchanda. Since the slowing U.S. market for copycat versions of off-patent drugs contributes a "a very large pie" of sales for Indian pharma players, he said the companies are working hard to ensure they have other avenues.

Diagnostics and wellness are other top investing opportunities in India.

• Cipla is investing in digitising its India business for improved communication with doctor partners and developing diagnostic kits.

• Cipla is expanding its over-the-counter range to include vitamins, minerals, pain management through topical application and such areas.

• Lupin is also targeting diagnostics, while it may not be a very dominant theme.

• Zydus Lifesciences Ltd. and Dr. Reddy's are targeting preventive healthcare space. Zydus has an existing wellness portfolio, while Dr. Reddy's plans to grow in a big way by investing in nutraceuticals.

Investing In New Products

Indian pharma companies have been investing in categories including biosimilars, innovator and patented products, complex injectables, and new chemicals.

Sun Pharma and Dr. Reddy's have been investing 28-35% of their R&D expenses on the specialty portfolio.

The complex generics segment already generated around $674 million (about Rs 5,300 crore) in sales for Sun Pharma in FY22. This is around 13% of its total revenue, driven mainly by Ilumya (psoriasis), Cequa (dry eyes), and Odomzo (skin cancer) despite a decline in Absorica (acne) sales.

Sun Pharma has said the specialty business contribution has doubled since FY18. "We are continuing to look at specialty assets, either existing products or products close to market, or existing businesses where we can add value and the business is of strategic long-term importance for the company," Dilip Shanghvi, managing director at the company, said in a post-earnings concall.

Aurobindo Pharma Ltd., too, in its fourth-quarter earnings call guided for a double-digit growth for the specialty business, and expects it to hit $650-700 million in sales by FY24. The business includes oncology oral solid, hormonal oral solids as well as the entire sterile business.

Dr. Reddy's, Sun Pharma, Lupin and Aurobindo have also been targeting complex injectables across therapies.

Cipla has ventured into developing a complex respiratory product portfolio. This includes Albuterol and Arformoterol that have a U.S. market share of 17.2% and 29.8%, according IQVIA data for the week ended March 31.

BQ Prime awaits response to queries on specialty business emailed to the companies.

The companies are allocating "incremental" investments to new products to chase growth in the U.S., while launching new and in-licensed products, and expanding the medical representative sales force and outreach in India, Abdulkader Puranawala, pharma analyst at Elara Capital told BQ Prime.

Another category, Indian drugmakers are exploring are biosimilars. While Aurobindo and Dr. Reddy's are targeting oncology and immunology therapies in this category; Lupin is working in oncology and ophthalmology.

Cipla has partnered with contract manufacturer Kemwell Biopharm for respiratory biosimilars.

Aurobindo and Dr. Reddy's are also targeting complex active pharmaceutical ingredients or raw materials for drugs.

Some pharma companies are looking at geographical expansion. Dr. Reddy has forayed into China, while Zydus Lifesciences is targeting emerging markets in search of better margins for biosimilars, while avoiding a crowded U.S. market.

Lupin has launched biosimilars in Japan, Europe, India and Thailand. The company, after its fourth-quarter earnings, guided that its pipeline of new products roughly accounts for 30% each across three platforms: inhalation, injectables and biosimilars.

Not Without Risks

InCred's Khemka, however, cautioned that investments in new products come with their own set of risks.

Over the long-run, biosimilars may face price erosion similar to generics due to intense competition, he said. "While initially these may witness above-average growth, this space will also become highly competitive and may not be a very sustainable revenue stream.”

While Sun Pharma's investment in innovation or patented products may also set path for other Indian pharma companies to follow, Khemka warned that this high-revenue business also comes at a very high risk.

“If the research is successful, you enjoy monopoly, otherwise all expenses towards development are a write-off,” he said. Khemka referred to American and European generic companies including Teva and Viatris which have not been too successful.

“For most of these companies, there has either been a significant loss of market cap or [they] are on the verge of bankruptcy,” he said. This, he said, is unlike those solely into innovator product development such Eli Lily and Pfizer, which are well-placed.

While there may not be destruction of shareholder wealth, wealth creation from the additionally deployed funds is definitely at risk, he said.

Jain also flagged the increased risk of inspections and action by the U.S. Food and Drug Administration.

Manchanda, too, was cautious. While new initiatives, products, geographies are important, he said execution was key for success of new initiatives.