A Strategic View of Pharma (Indian Pharma)

I work for a strategy consulting firm (not in the pharma domain). And often, industry outsiders primarily look at us as ‘hawabaazi’ /’seeing our watch and telling us the time’ – which is an extremely good place to start with. Sets low expectations. And as we all know, low expectations is the key to happiness as well as over-achievement. So, here is the ‘hawabaazi’ view of how I am seeing Pharma as of today – mostly will try to delineate the Hope vs Reality of the current situation. As usual, any of the stocks mentioned below are NOT stock recommendations and I am NOT a registered investment advisor. This is for learning and exchanging views.

The Return of Pharma Growth

The Hope:

Indian pharma companies were in deep capex mode from FY15-FY19. And there were also pricing pressures in the most lucrative market (US). Now

a) the pricing pressures are easing because of Covid

b) more FDA approvals are forthcoming which means FDA will not be as strict as they were in the FY15-FY19 period

c) pharma is a recurring consumption (in most parts) and no lockdown has affected this spending and therefore predictable growth than other sectors atleast for FY21

d) Most pharma companies have ended their capex and are re-looking at their capital allocations vis-à-vis the markets and are focused more on emerging markets and India where pricing isn’t so bad and hence RoCEs will return with lesser capex and better pricing and

e) somehow we are in a ‘strategic’ position to help US scale up on their manufacturing.

So, large growing opportunity. Hence bullish.

The Reality

I will try to answer a) and b) in detail below, but just to answer the other questions (c-e) quickly.

c) is a temporary phenomenon – but might be important for flows

d) opportunity size is limited and too many players are focusing on it all at once (which essentially means, increased competition, ergo reduced returns) and

e) is in the category of ‘what are you smoking’ (Mylan itself has 8 API manufacturing facilities and 2 formulation facilities in India – with enough US incentives, they can help a whole range of mfg scale)

So, coming back to a) and b).

So, a) why did pricing pressures come about?

  • In the year 2007, there were 11 distributors who would buy your products – wholesalers (Amerisource Bergen, Cardinal Health, McKesson), Retailers (Walgreens, CVS, Rite Aid, Pharmacy benefit management (PBMs) (Express Scripts, Caremark, Medco) and Key global distributors (Alliance Boots, Celesio) covering 80% of the generics market
  • And then, buyer consolidation started happening. From 2015-16, there are only 3 wholesalers/retailers (Walgreens Boots alliance having 31% market share, Red Oak (erstwhile Cardinal Health + CVS) having 27% market share and McKesson (Celesio, Rite Aid merged with McKesson) having 24% market share. That’s 82% market share between 3 players
  • So, when people talk (or more likely give goli) about pricing pressures easing, the one question you need to ask is – what has changed? Did any of the Big Three break their alliance? Have the Big Three become more lenient than ruthless? Is there a 4th major player emerging who will buy your products? What exactly are the factors that will lead to pricing pressures easing? Even if they ease for certain products due to Covid (or due to certain supply shocks which will close quickly), there is no strategic rationale for pricing pressures to ease over the longer term
  • Add this to the surge in ANDA approvals from almost all Indian pharma players in 2015-19 period (ergo, more competition, lower generic prices) and combine with buyer consolidation – why will the pricing pressure suddenly ease off?

The generics market in the US has been in the range of USD 75-80B for the past 5 years – and I don’t see a reason why this will suddenly increase when there is no new segment (like biosimilars) that are folks are getting into (we have had high hopes of making our mark in ‘complex/specialty generics’ and therefore increase this number – but as I elucidate below, that’s a pipe dream as well).

So, b) More FDA approvals forthcoming

I am not sure why market participants are excited about this development. No one getting the approval is almost the same as everyone getting an approval – the whole point of making profits is scarcity and exclusivity. Time was ripe for compliant-players to make a lot of money when everyone else was getting FDA VAIs and OAIs. But everyone getting a FDA green signal – why would you be excited? So essentially, more approvals -> more supply -> more competition -> no

That being said, if you analyse the FDA approvals coming by, except for Lupin and Aurobindo plant, most of the EIRs that were received were for VAI plants and not OAI plants. But people will also point out specific events like Ipca’s HCQ being exempted from a OAI plant? But folks, this is not the first time. FDA had exempted 10 molecules from Divi’s plant when it received a OAI (Ranbaxy and Wockhardt were provided similar exemptions in the past inspite of OAI on their plants, depending on the criticality of the molecule). Some sharper folks will also point out to expedited ANDA approvals as a sign that FDA is easing (or the company in question is a visionary or both) like it happened for Cipla’s Albuterol inhaler. But the point to note is that this inhaler was needed for patients with respiratory issues when Covid struck – we can’t really extrapolate this generic data to all of pharma, just because we think Pharma is a ‘Buy’.

The overall strategic point being – don’t be excited because neither has buyer consolidation gone away and neither has competition intensity decreased (and definitely don’t go by the golis in webinars by pharma MFs). And people will definitely not consume more medicines because there is Covid. 

Specialty Pharma:

Of course, these days every drug is a specialty drug – even paracetamol and metformin are called specialty drugs by anyone bullish on pharma. But what is the true definition of specialty pharma? Specialty pharma is usually oral or injectable medications (which are complex medications) usually used to treat complex chronic conditions. Their features typically include a) high cost ($1000/day for 30 day supply) b) high complexity (complex R&D, biologic/biosimilar, orphan drugs etc.) and c) high touch.

The Hope

Specialty pharma is a large market (USD 1000B globally) of which specialty pharma share is about 28%. US is a USD 400B market, of which specialty’s share is about 36%. India lags, with only 8% of specialty pharma share in a USD 15B market. The top three therapies globally in specialty pharma are Oncology (30% share), Auto-immune disorders (28% share) and Anti-viral medications (17% share).

There are many players in India doing specialty pharma, and there have been some very attractive exits as well in this market (Gland pharma to Fosun, Claris to Baxter, Agila to Mylan etc.). Given these exits, coupled with high growth and large market size, no wonder everyone in India’s pharma industry wanted to get on the bandwagon on specialty pharma and just leverage it to the hilt (and everyone singing praises as usual).

The Reality

Indian pharma companies (save for Biocon) have traditionally had a DNA of generics-at-scale. A few of the better ones tried and have been successful at branded-generics-at-scale. But a lot of them didn’t have the DNA to do specialty pharma – and given the attractive nature of the specialty market, especially in the US – tried acquiring the DNA.

  • Some of the large acquisitions over the past decade – Cadila (acquiring Sentynl for Rs. 9B in 2017, and already wrote off 30% with more to come), Dr. Reddy’s (acquiring lot of Teva’s ANDAs at $350M and writing off 75% of it), Lupin (acquiring Gavis pharma at $880M, writing most of it off), Torrent (acquiring Bio-pharm) etc.
  • We have traditionally lagged with the lucrative part of the specialty segment like inhalers, transdermals and long acting injectables. However, broadly, Dr. Reddy’s has announced exit from specialty front-end (sold off all neurology brands and most of dermatology brands – had targeted $400M revenue by FY22 – which now of course is not achievable), Cipla has spoken about reducing complex/specialty pharma investments (with focus primarily on respiratory/inhalers), Lupin of course has written off most of Gavis (and exiting Japan completely – a geography which constitutes 20% of Lupin’s sales), and Sun Pharma unable to launch any complex generics after Doxil and Gleevec (their US specialty revenue of $400M coming primarily from only 2 brands)
  • With the changing US pharma industry’s dynamics (more below), almost all pharma players are pivoting completely and now directing their capital to the double-digit growth and faster capital turnaround spaces of India and Rest of World (read China, Brazil, Canada)
  • Conclusion being – not many pharma players will continue their investments in the complex/specialty pharma space as the market dynamics are extremely difficult. So, the lucrativeness of ‘specialty pharma’ – next time you know what to say.

The overall strategic point being – almost everyone has bolted from the specialty pharma market in the most lucrative geography (US). Don’t let anyone tell you otherwise 


The Hope

Biologics are a USD 300B market globally, and there are 4-5 companies in the top 10 pharma companies whose sole claim to fame is biologics. Everyone thought that we would replicate the successes of brands to generics in the biosimilar market as well.

I mean, why not, right? Biologics was a fast growing market and many biologics have gone off patent in the last 10 years and US alone is a USD 11B market, with rest of the world growing much ahead of the US. Biologics was solving some unique problems that chemical-based drugs weren’t able to solve earlier (several auto-immune disorders, rheumatoid arthritis etc.) and the insurance companies (and payers) were looking to reduce this ever growing cost.

So, what gives? Why are our pharma companies not making money hand over fist? Do you know large companies like Sun Pharma don’t even have any publicly known biologic/biosimilar development in place? If Sun Pharma doesn’t want to expend resources, who else has the capability to do it? Will we ever get on the biosimilar gravy train?

The Reality

  • First place to understand the present is to look at the past. So, why did chemical-based generics succeed? Even better, why did the Indian pharma companies succeed in the generics space? That’s because there was an extremely mature Hatch-Waxman act of 1984 that had an extensive framework of time and litigation for branded patent drugs to convert to generics. Almost the entire success of our Generics industry can be boiled back to this one act that the US enacted. 30 months delay for litigated drugs, ANDAs, 180-day exclusivity, state laws allowing generic forms to be substituted automatically by pharmacists for brand-name drugs prescribed by physicians, so long as physicians have not specified that the prescription must be ‘‘dispensed as written’ (also called ‘interchangeability’ – remember this!) and so on and so forth. Extremely mature framework and predictability for both the patent owners as well as generics
  • Compared to the mature Hatch-Waxman act, the US implemented the BPCIA act for Biosimilars. BPCIA was enacted in 2009, but the first USFDA approved biosimilar came in only in 2015. I have read quite a few articles on this act, and my basic understanding is that the act is so poorly written that there have been litigations at every stage of a biosimilar evaluation (for example, naming of biosimilars, scope of patent dance protocols, and of course the big one ‘interchangeability’. There are many conflicts and cases around this, but one of the primary reasons seems to be ‘principle-based litigation’ (read up Sandoz-Amgen case for more clarity on this topic). But it basically boils down the litigation costs, and more than costs, it is the timeline that’s killing most of the biosimilar pipeline. So, very capital ineffective so far because the litigation and the basic act for this litigation is not very clear and can be interpreted in various ways (Industry insiders call it the ‘time-climb’). US currently has only 12 biosimilars approved and 3 commercialized – 11 years after the Act came into place
  • Just to be clear, the approval timelines for biosimilar applications have come down to 10-12 months. However, almost all firms (and not just Indian firms) underestimated the amount of resources required to fight litigations in the US market. Given this ‘time-climb’ and the associated costs, the generic player wanting to launch a biosimilar will not want to cut price steeply to launch. Imagine this – when a chemical-based drug goes off patent and if there are more than 4 filers for that drug, the price post patent cliff is 80-90% lower in most cases. In case of biosimilar, the price cuts have not been more than 10-20%, which basically is not an incentive enough for the insurers in the market to push their payers down this route (And as cases of Humira and Remicade are proof, the original biologic player themselves shave off the price by 10-20% to prevent the biosimilar player to make any money). Of course, with ‘interchangeability’ a mandatory guideline for the US markets, the doctors are also not willing to take a risk on the biosimilar – resulting in very poor risk-reward for the generic player in biosimilars
  • So, does that mean Biosimilar potential is dead? Not necessarily. Let’s look at Germany for instance. Insurers incentivize hospitals and clinics to use cheaper options like biosimilars. The regulation in Europe around ‘interchangeability’ is fairly clear which means lesser litigations, which means the cost-to-market is lesser, which means there is a combination of price-cuts and market acceptance. Add to that, there are marquee players in Germany like KfH, the largest network of dialysis in Germany (30% of dialysis patients) who actively promoted the case of biosimilars (in this case, Epoetin). Therefore, the crucial play is lower regulatory hurdle (lesser litigations, not necessarily lesser stringency) -> lower time and cost of clearing the molecule -> cost benefits passed on to payers (forced by insurers and marquee players) -> rapid acceptance
  • So, what does this mean for Indian pharma? If I look down the list of biosimilar filers, most of them are global MNCs Pfizer, Amgen, Merck, Sandoz etc., who are huge multinationals with deep pockets. The cost of bringing a biosimilar to the market is estimated to be $100M-$200M (with the attendant risks listed above) vis-à-vis $1M – $5M in case of a chemical-based drug. Our Indian pharma players have had successes in the emerging markets (for example, Dr Reddy’s with the world’s first Rituximab biosimilar, Zydus Cadila’s Exemptia etc. and other players like Intas, Lupic, Cadila making headways in the emerging markets. However, Biocon is the only player with a US/EU presence (that too in partnership with Mylan) and Intas-Apotex partnership in this area is also promising (given Intas’ amazing presence and distribution) in Europe. But the real money is in the US – and unfortunately, not many players have even invested in the pipeline (Cipla exited the biosimilar pipeline in FY17 with a Rs. 2.5B write-off in Cipla Biotec, Cadila wanted to enter US with the biosimilar pegfilgrastim, but have stopped burning cash on this, Lupin is probably the only player having some pipeline in Enbrel (with EU approval) and Neulasta, Dr. Reddy’s targeting only emerging markets, Glenmark looking for a partner for bXolair, Sun Pharma has no investments in biosimiars, and neither does Natco (the only probably strategy seems to be ‘acquire some company once the regulations/BPCIA is more clear – else, can’t understand their decision-making)

The overall strategic point being – Indian players have consciously avoided the Biosimilar markets primarily because of complexity and aukaat reasons. So, the question is where is the next leg of new segment growth going to come from for these players over the next decade (ergo, higher valuations)?


Essential summary of the entire blog – No structural changes for easing of pricing pressures in the US market, no specialty pharma traction, no biosimilar traction, extreme competition in the India (and RoW) markets building up – so, why is everyone excited about pharma?

P.S: Hope it was worth the time of reading a long blog post. More importantly, as you can see, it’s not too difficult to cross the ‘hawabaazi’ barrier 🙂

P.P.S: Lupin bought Gavis Pharma for $880M. Gavis had a manufacturing facility (which would be Lupin’s first in the US), 66 products pending approval from the US’s Food and Drugs Administration (USFDA), and another 65 niche dosage forms in the pipeline. Impressive filings and seemed like a strategic buy. But what went wrong that Lupin had to write-off of the whole thing? Well, the US government’s increased scrutiny around opioids (drugs that use narcotics in their formulation) – and Gavis had a lot of valuable filings in Opioids which Lupin was hoping to leverage. Given the regulatory scrutiny, it made getting USFDA approvals for some of Gavis’s products more difficult and shrunk the opioids market as well. And hence the write-off. But why was Lupin so confident of pulling off acquisitions? Because Lupin bought Antara (from Oscient pharma in 2009 – with sales of $85M) and AllerNaze (nasal spray from Collegium pharma) – both of which were runaway successes – which obviously induced them to go for bigger and bigger bets. Thought will leave you with a story, than just ‘hawabaazi’.


Author: kdaaku

An investor trying to learn the intricacies of Value Investing. If Buffett found Graham, I found Prof Sanjay Bakshi.

6 thoughts on “A Strategic View of Pharma (Indian Pharma)”

  1. Very well written. Tks a lot. So pharma also becomes a trading bet only? What abt Divis lab? A safer option? Alembic pharma?

  2. It is a slightly complex subject for a layman to fully grasp and understand though the author has made every attempt to simplify the subject and contents.
    What I have understood is that Biocon is the only pharma company which is actively into biosimilars and should be able to handle the US market and its associated problem. Correct me, if I am wrong.
    Rest all are struggling with different strategies and other operational issues.

  3. Very well written. I am a consumer of a biosimilar in India and an investor who has been looking at opportunities in Pharma. I’ve held on to putting my money in the last two years and was almost leaning towards not investing in Indian pharma space , this article just helped me understand the basics in India Pharma.

  4. Wow
    You covered both breadth & depth of the industry.
    Haven’t read anything so detailed for a sector since long.
    Thanks a lot & please keep it up.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: