Replacing China as API supplier for pharma will be a medium to long term story: Lupin

As smaller cos back off, competition in generics will reduce and there will be greater price stability, says Ramesh Swaminathan, Global CFO

Do you think that the worst is over and US generics prices have started to stabilise?
If we look at the pharma situation over the last two decades in America - from 2000 to 2020, we have seen different phases. Between 2001 and 2005, generic pharma was well poised. The pricing was fairly good. Between 2005 and 2009, there was a sharp reduction in prices due to various reasons. Again it picked up between 2011 and 2015. In fact, there were a lot of tailwinds and the pricing was very good. Prices did not come down very sharply. But in 2105, a lot of things really happened. First was the introduction of GDUFA (Generic Drug User Fee Amendment. That meant a lot more generic competition.

The second most important thing was essentially customer consolidation. Coming out of that was essentially consolidation of the channel partners out there. That is essentially McKesson and Walmart coming together. A lot more bargaining power went to the channel partners and lower prices for the industry itself. But things have stabilised much since then. Today, the situation is very stable. It really depends on the portfolio, the product that we have in the market.

Older products are pretty stable and that is possibly because of API prices also going up a bit. So, you find prices to be fairly stable for products that we have introduced in the last couple of years. There is of course a little volatility there. There is a lot more price reduction in products that we introduced very recently. Overall, pricing is stable and it will be the low single digits for quarters to come.

For the last few years, we saw US pricing was down giving a negative operating leverage. Do you think that is going to change and perhaps a 10% to 12% sustainable growth will also offer a chance to have a positive operating leverage? Or, is there a possibility of it staying in lower digits even though it is stable? Also post COVID is there a chance for more of an uptick?
One of the things that has happened is that a lot of competition is essentially from India. In the US, Teva which had a market share of close to about 25% way back in 2010, has got a market share of just about 9% there.


Likewise, Mylan which had a market share of close to about 12% is down to just 4%. Sandoz is down from 7% to 3%. There have been a lot of new entrants in that market from India -- Ajanta, Alkem, Alembic, Torrent which have also expanded their portfolio.

It is really the competition amongst the Indian companies. Smaller companies that have got into the fray have also realised that the return on capital employed is not as easy as they thought it was going to be. Because one has to invest in FDA approved manufacturing facilities of different kinds and there is a waiting period for getting your ANDA approved and so on. And there is of course working capital blockage.

Also once they are there in the markets, the ROC is not what they expected and so to that extent. some of them are also backing off. So I think the competition is going to be less intense and for that very reason, we would find some price stability in the market for several quarters to come.

If I could divide the portfolio of Lupin or for that matter any pharma company it is chronic, acute and speciality. Acute is where everybody is present, chronic is where some would say there is limiting pricing power but speciality is where the real margins and the pricing power are. Lupin in the past has attempted to move into the speciality drug space. This is a three-year old or a four-year old conversation but that has not translated into great margins, better pricing power or a huge uptick in your portfolio. What is stopping you from moving up the value chain?
I would nuance it further if you do not mind. When you come to the conventional products, there is a lot more competition out there. In the last several years, Lupin and for that matter the bigger companies are focussing on delivering on what they would call more complex generics and this includes complex injectables, the inhalations piece and the like.

In fact, the growth really is out there in complex injectables and it is growing at over 6-7%. Inhalations segment is growing at over 15% and the next frontier really is biosimilars. And all of these in fact would have limited competition because there is a fair degree of complexity associated with that, in terms of the way the development takes place, in terms of manufacture, in terms of regulatory affairs and of course, that also calls for clinical trials. All of this means a lot more difficulty in getting to the market itself. The competition for these products is going to be limited and that is where the bigger companies are focussing on.

Speciality is a different story altogether. We will take that separately. I think with a lot of these products coming into the market over the next few years, I would imagine the realisation from the point of view of the generic companies in India would be much better. So the future really is into the more complex products.

Coming to biosimilars, I honestly feel this is the next frontier for several reasons and of course, the sunrise industry in so far as the Indian companies are concerned. First, essentially because there are high entry barriers for getting into biosimilars. Each of these molecules have potentially cost us $50-$60 million including the clinical trials. Of course, there is considerable difficulty in getting it right also, but once you have a clone, if you have done immunogenicity studies well and of course, if you get your PK studies well enough, then potentially development risk will be mitigated to that extent.

Then of course, comes the market test. Given the situation there and the competition being limited to about four or five, you would find a pricing of at least 30-35% of the original price. It is not the way it is for the smaller molecules. Today biosimilars have not really picked up in terms of the American market. There are about 19 biosimilars in Europe. Europe in fact has adapted more to biosimilars, the American market is still about picking up. Once it does so, the realisations for players in that market would be much higher.

Coming to speciality, that is a very different cup of tea. Firstly, you need to have deep pockets because it calls for a very different kind of approach. It calls for a sales force and most important, you need to have a product which meets unmet demand. There is of course, the innovation quotient which is extremely important and clinical data. Most important, you require a lot of patience.

Lupin has got into women’s health because that is one space which has been vacated by big pharma and to that extent, the competition there is much lower.

In the past, we have met with a lot of success with products like Suprex and Methergine and a couple of other products but in recent times, we bought Solosec a couple of years ago. It is still early days and we are also learning through our own experience. Today, with the Covid situation, there have been a lot more leanings in the way we think. We should be promoting that product, we would be focussing on the high prescribers with a much reduced sales force to rationalise on cost and we still have a lot of hope in that product, we believe in its potential.

Whereas India exports or manufactures 35% of the total generic medicines which are available in the world now, we are still dependent on raw material for API from China. About 50-65% of the total raw material for APIs is coming from China. Now that the rhetoric against China has started, how challenging would that be for Indian companies? Do you think the Atma Nirbhar or anti China rhetoric could cost Indian pharma companies dearly in the short term?
China is a big player insofar as the chemical market is concerned. The situation is very different for different companies. A lot of them depend on China for key starting materials, bulk materials for excipients and likes as well. In the case of Lupin, the actual API import is on the lower side. We work with other chemicals really but if you really want to replace China as the producer for the world, it is going to be a medium to long term story. India has about 25% of the API capacities in terms of USFDA capacities in the world but there is still some way to go when it comes to supply. We still rely on that. Rhetoric is there, the intent is there, it really has to be aided by the right opportunities. The government is trying to encourage that but the investments have to be forthcoming. I would imagine it will certainly happen given the thrust today and the anti China factor. I would think that the API industry would bounce back in the next couple of years if greater investments are made in this area.

Do you think faster monetisation of the complex R&D pipeline at an industry level is the key to watch for the Indian pharmaceutical sector? Would that put companies such as you in leadership positions along with Dr Reddy’s and Sun Pharma in your peer group?
Faster approvals would be highly desirable but obviously when it comes to the complex ones, the FDA itself is kind of evolving through its guidelines. I think it is going to take time for the approach to come through. One has to get pathways for knowing how generics actually work when it comes to some of these complex ones.

Largely would you say that Indian pharma is in good stead? Are all the pricing control issues, demonetisation, GST -- the one time hits are behind us? Also, with faster ANDA approvals coming in, are the tailwinds now well in favour of the sector as the market seems to believe?
I would think so too. There are at least three growth engines for this industry. One is of course the large American market and with most of those complex ones we are getting into, it is certainly a very lucrative market.

Second and the most important of course is the India piece itself. India is still a an under penetrated market despite a lot of pressure in recent times. But it is still good for growth for several decades to come. There has been lot of emphasis on affordability but with more access to healthcare and awareness of healthcare, the Covid situation is helping in some ways. There is going to be a thrust from the Indian government and potentially a lot more awareness in the public itself which will certainly set the ground for faster growth out here.

There are several markets which have not been penetrated. The focus so far has been on America. So, we could look at the other emerging markets and as long as the India strategy is right and if you get your act right with the portfolio, you should make good there as well. I would think the Indian pharmaceutical industry is well poised for growth for some time to come.

So the pharma sector is in a sweet spot for growth over the next few years. While we are talking about the growth outlook, could you sum up the key advantages on the R&D side and the approval side? Where is the fillip going to come from?
It is going to be from the R&D side. So far as our ability to churn out newer products which are still being tested, is concerned, when it comes to Lupin, we have at least a couple of those molecules which are out-licensed but it is still work in progress on that. Based on the immediate prospects, I should also say that the Covid situation impacts the demand situation in both India and America.

I think the second half and the years to come are going to be great. The hedge fund situation could be a little lacklustre. principally because demand is lower in India as we are seeing in the first quarter, possibly because of the supply disruptions which have impacted logistics in some ways. So there might be some demand contraction in the industry when it comes to India and I would say the same thing about America as well.

We have found some contraction in terms of prescriptions both on the chronic as well as the acute side. More on the acute side though. I honestly feel it is a very temporary situation and could last out fully to the first or potentially for the second quarter and things will certainly pick up from there. The second half for sure will be much better.

Are there going to be huge advantages to local manufacturing? All countries are doing that. If you are a local company, you get advantage on tenders, you do not have to pay what is now called the crawl back tax. How do you plan to tackle these basic issues?
You are absolutely spot on. The flavour of the day seems to be nationalistic foot forward and it seems to be resonating across the globe. It is there in India, in America with the current President and it is in other parts also.

For example, in Lupin, we have been conscious about this for quite some time and in most countries where we are operating, we actually have local manufacturing as well. Of course, the basic paradigm is low cost manufacturing in India and exporting to the rest of the globe. But there are manufacturing facilities that we have acquired or set up in other parts of the world. We have a facility at Somerset, in America, Brazil, Mexico. We have got large plants out there.

For Indian pharma, you need to have the basic paradigm of manufacturing from India but you should certainly supplement that with local manufacturers and you could do that perhaps for depending on the product, the portfolio that we have and so on. But that for sure is a way to go.