Pharma poised to withstand recession

As economic recession plagues various industries, robust demand could insulate the Indian pharma industry to withstand these pressures. Arshiya Khan analyses the impact

The big global pharmaceutical companies have traditionally been cash-rich and not often dependent on debt. Despite the current lack of innovativeness in research plaguing this sector for a while, they are in the best possible position to see this economic meltdown through. In fact, according to a Datamonitor article, ‘Opportunity Knocks for Big Pharma in Credit Crunch’, these companies will in fact view this period as the best possible time to pitch for new acquisitions.. It is also believed that since the problems affecting big global pharma companies have been well known for several years before the present economic downturn, these have already been built into their stock market performance. For example, the Dow Jones US Pharmaceutical Index fell by 10 percent, between January 2007 and May 2008, while the Dow Jones Industrial average climbed by four percent (Google Finance, 2008 http://finance.google.com). Thus, these stocks are not expected spiral down any further.

India story

"The economic slowdown will result in fewer orders for our exporters. Also payments for the export orders in process and completed work may be delayed leading to a cyclic delay in fulfilling payments" - Daara B Patel Secretary General IDMA

"We don't see a slowdown in exports in the pharma sector. Demand has been robust, thanks to the very nature of the industry which is perceived to be the most defensive and inelastic sector as far as demand is concerned" - Ajit Kamath Managing Director Arch Pharmalabs

"The impact on pharma sector has been far less in comparison to other sectors. However the overall Indian economy is experiencing a slowdown and it will affect the country as a whole during 2009. We should look at infusing liquidity into the system and create investments in infrastructure and fuel the domestic demand" - Malvinder Mohan Singh Managing Director and CEO Ranbaxy

Middle class in India is growing in it’s income and healthcare expenditure, therefore, “Pharma industry may not get affected in domestic market at least for life saving and lifestyle diseases, but it may get affected all over the world due to competition of the economic slow down irrespective of business cycles or political cycles,” avers Dr R B Smarta, MD, Interlink Marketing Consultancy. However, this will definitely delay the progress but once again due to the nature of pharma industry and its necessity to get consumed will not allow it to get affected so drastically.

Striking a similar chord, T S Jaishankar, Chairman, Confederation of Indian Pharmaceutical Industry (CIPI) and Managing Director, Quest Life Sciences feels, the global economic slow down may not have a direct impact on Indian pharma industry.  “If anything, there will be greater pressure in developed and underdeveloped market for use of generic drugs, which would only attribute to India’s export capabilities. However new units and pharma IPOs may have to postpone their activities and India has to consider better capacity utilisation and outsourcing within India rather than undertake expansion,” he avers.

As Indian pharma has its strength in manufacturing, trading, selling and marketing of generics, quality and cost effectiveness of APIs manufactured in India, therefore the economic slow down in the world will definitely affect Indian pharma industry but because of its inherent nature and availability of medicines for treating patients, the impact will be in a few areas. Firstly input costs are increasing year after year which may affect the profitability of industry if pricing escalation is not corrected. And secondly the pricing mechanism may affect generics in India but one has to look at exports market differently. It will also depend on fluctuation of dollar rates in the world market.

However Jumana Barnagarwala, Head – Healthcare Consulting, Principal Consultant, Healthcare Consulting, Datamonitor remarks, “The recent acquisition of Ranbaxy by Daiichi Sankyo is an indicator that the economic slowdown is likely to impact large Indian companies that may be unable to sustain their expansion plans outside India because of their lack of liquidity.” However Malvinder Mohan Singh, Managing Director and CEO Ranbaxy offers a macro perspective. “The impact on pharma sector has been far less in comparison to other sectors. However the overall Indian economy is experiencing a slowdown and it will affect the country as a whole during 2009. We should look at infusing liquidity into the system and create investments in infrastructure and fuel the domestic demand.” Witnessing the India situation, companies with dwindling pipelines and with large numbers of drugs going off-patent in this decade are under tremendous pressure to retain healthy bottom lines, causing them to cut costs, primarily through lay-offs. Therefore there are many Indian pharma companies as well as MNCs who have cut down on jobs. Novartis has announced that it will lay off 300 of its field-force. In the past, Pfizer had stated it would reduce employee strength by about 10 percent of its global workforce in 2008; Merck announced 7,200 job cuts after reporting declining sales and GSK had announced a reduction of 850 R&D staff in the US and UK — just a snapshot of the economic chill blowing over companies in international markets.

However these cost-cutting measures overseas may not necessarily bring an ‘avalanche’ of jobs to India. But MNC subsidiaries in emerging markets like India and China hold a good chance as they are a small part of the total business, though a huge part of the MNCs future investment plan, according to analysts. Feeling the blow of the meltdown most of the Big Pharma (Innovator companies in both US and Europe) companies have started shutting down of facilities and resultant job cuts owing to a dwindling product pipeline and hence a move towards a more generic world. “This means there will be higher reliance on low cost destinations like India and China and gravitation of contracts/jobs to these countries. And India will be a preferred choice over China due to its long history of sales, regulatory approvals and its relationship with the US and Europe,” opines Ajit Kamath, Managing Director, Arch Pharmalabs.

Offering insight on how India will benefit from the slowdown Ajit Mahadevan, Partner, Health Sciences Practice, Ernst & Young opines, “At a macro level, the economic slowdown and credit squeeze would mean that cash is king. Therefore, all cost-reduction initiatives that are short-term such as outsourcing of chemistry, formulation development etc., particularly from emerging pharma and biotech companies could increase.” This in turn would lead to redoubling all cost reduction initiatives. Hence, outsourcing of clinical trials, manufacturing (API and formulations) by pharma companies may also increase. However these decisions on consistent and long term cost reduction are longer in lead time and more strategic in nature.

As Big Pharma is cutting on costs and pruning their field force, will there be more jobs outsourced (research or manufacturing) to India or will the credit squeeze in fact reduce jobs being outsourced? Highlights Jaishankar, “There may not be any appreciable change in the present scenario of outsourcing jobs, in research or manufacturing to India. However there could be a slowdown of global research activities and this decision is purely on account of commercial viability rather than any political influence especially with the new President Obama in office.”

"The situation on outsourcing of jobs is highly sector dependent. While theoretically it seems very likely that companies might increase outsourcing to lower costs in some sectors, it is also possible that the reduced business and plans on hold might stem the flow of work to countries like India" - Chetan Tamhankar Chief Operating Officer Siro Clinpharm

"Pharma industry may not get affected in domestic market at least for life saving and lifestyle diseases, but it may get affected all over the world due to competition of the economic slow down, irrespective of business cycles or political cycles" - Dr R B Smarta Managing Director Interlink Marketing

"If anything, there will be greater pressure in developed and underdeveloped market for use of generic drugs, which would only attribute to India's export capabilities. However new units and pharma IPOs may have to postpone their activities and India has to consider better capacity utilisation and outsourcing within India rather than undertake expansion" - T S Jaishankar Chairman Confederation of Indian Pharmaceutical Industry (CIPI) and Managing Director Quest Life Sciences

"More than economic meltdown, our exports are likely to be affected due to stringent FDA regulations in developed countries like US and Europe. Recent incidents with Ranbaxy, Lupin, Sun Pharma etc. are some indications. Also, Chinese competition is getting fiercer and they are more proactive in complying with the regulatory issues" - Dr Ajit Dangi President and CEO Danssen Consulting

Whereas Chetan Tamhankar, Chief Operating Officer, Siro Clinpharm feels, “The situation on outsourcing of jobs is highly sector dependent. While theoretically it seems very likely that companies might increase outsourcing to lower costs in some sectors, it is also possible that the reduced business and plans on hold might stem the flow of work to countries like India.” However this may not be the case with Indian pharma and healthcare industry as they have been insulated to a large degree from economic changes, compared to the other industries like consumer goods and real estate, he adds.

Taking the thought further Dr Ajit Dangi, President and CEO, Danssen Consulting offers a live view that he got from the recently held G-20 meeting in Washington, where world leaders agreed not to get into protectionist mode. If they keep their word, outsourcing is unlikely to be affected as it is one way of reducing costs.

Impact on generics

Pharma is generally considered to be a recession proof industry. However there are instances that people even cut down on medicines particularly for chronic diseases and OTC products when economic meltdown begins to hurt their pockets. Healthcare costs in most developed countries are ballooning and generics can help in containing healthcare costs. While there will be some impact, it is unlikely to affect the generic companies heavily. Some even see a silver lining in the ongoing crisis the current global economic slowdown will provide a huge opportunity for Indian generic companies. This is because the US and other developed countries are looking at bringing down healthcare spends. One of the methods would be to look at tenders in drug purchase at a much lower price compared to the present price levels. Adds Daara B Patel, Secretary General, IDMA, “The incoming US President has expressed his views on supporting and promoting generic drugs.  This is good news for Indian pharma industry as our strength is generics. Indian Pharma exporters must be prepared and take advantage of this economic revival and the subsequent demand for Indian generic drugs.” Besides, “As majority of the pharma exports from India are in the generic sector, these would not be affected significantly by the slowdown though the companies might face pricing pressure, feels Tamhankar. In such a scenario, India has a big opportunity because generic drugs will become a large part of the healthcare spends.

On the contrary though Indian generic majors might not like to talk about it, slowdown in the US and European countries have the potential to show a significant impact on the growth prospects of the Indian generics industry. In these developed regions, the number of uninsured people is growing by leaps and bounds. Many of them are postponing their surgeries and other medical treatments too. Therefore world over there will be greater push towards generic usage as individual healthcare budgets shrink and health insurance becomes more unaffordable. To take advantage of this, our Government must first provide support to exporters by providing tax sops, by making provisions for exigency funds and encourage Indian banks to facilitate foreign currency loan repayments etc. to tackle the slowdown in demand from US and Europe, feels Patel.

Bsides generics, exports is another major area where India has been on the fast track. And with companies in US and EU cutting down on production and manufacturing how will pharma exports in India’s be affected? Points out Patel, “The economic slowdown will result in fewer orders for our exporters. Also payments for export orders in process and completed work may be delayed leading to a cyclic delay in fulfilling payments.” Contradicts Kamath, “We don’t see a slowdown in exports in the pharma sector. Demand has been robust, thanks to the very nature of the industry which is perceived to be the most defensive and inelastic sector as far as demand is concerned.” Agrees Dr Ajit Dangi, President and CEO, Danssen Consulting, as far as exports are concerned India is still on its `08 target. Due to depreciation of the rupee, exports from India are going to be cheaper. “More than economic meltdown, our exports are likely to be affected due to stringent FDA regulations in developed countries like US and Europe. Recent incidents with Ranbaxy, Lupin, Sun Pharma etc. are some indications. Also, Chinese competition is getting fiercer and they are more proactive in complying with the regulatory issues,” he remarks. However industry observers feel that exports to Latin America and Africa have led to a slight downturn. Supplies to the US and Europe continue to maintain the momentum that has built up over the past few years.

Companies to watch

Estimated at around $29.6 billion, the US remains the largest generic market in the world. Some of the prime markets for generics in Europe include the UK, Germany, France, Spain and Italy, altogether estimated at $18.7 billion. Some of the Indian generic majors like Dr Reddy’s get about 70 percent of their revenues from international markets and 30 percent from India. Thus, won’t the current global economic slowdown put stumbling blocks in India’s success story witnessed so far in the global generics market? Highlights Mahadevan, though the US is the largest generic market in the world it has not necessarily been the largest export market for India - particularly in finished formulations. “In fact the US has been a very difficult market for Indian players to make any serious inroads given its structure and competitive intensity. As a result very few Indian pharma companies make strong margins in the US generic market. The slowdown will probably not help this industry as costs in the US market will come under further pressure. Jaishankar cites an example, “The revenues of Indian generic majors like Dr Reddys would not be affected on account of economic slowdown.  If anything, there will be substantial reduction in their revenues on account of severe competition among major players such as Teva, Actavis, Ranbaxy, Mylan, Dr Reddy’s, Cipla, Sun Pharma etc.

"The right strategy in generics for India has always been about not over-focusing on the US and regulated markets, but rather building a strong capability in smaller but often more profitable geographies like Common Wealth of Independent States (CIS) and some Latin American (LatAM) countries" - Ajit Mahadevan Partner Health Sciences Practice Ernst & Young

"The recent acquisition of Ranbaxy by Daiichi Sankyo is an indicator that the economic slowdown is likely to impact large Indian companies that may be unable to sustain their expansion plans outside India because of their lack of liquidity" - Jumana Barnagarwala Head - Healthcare Consulting Principal Consultant Healthcare Consulting Datamonitor

Besides generics the blow will also be felt by companies with blockbuster drugs in their kitty. For instance, the sale of Pfizer’s best selling cholesterol drug Lipitor fell 13 percent in the last quarter as some financially struggling patients stopped filling their prescriptions. Elaborating on the list of the companies likely to be affected Jaishankar says, “As such the major companies affected will only be multinationals Pfizer, Glaxo, Merck, etc, who are dependent solely on block buster drugs which are all coming off patent and Indian generic majors are all set to acquire sizeable share.” He feels in this context Merck’s acquisition of Serono at a very high price would be beneficial in the long run but their sale of generics division cannot be rated as a right move in the present context of global economic meltdown. Therefore, Indian companies like Dr Reddy’s, Sun Pharma, Zydus Cadila, Lupin who have acquired European companies will benefit. And companies such as Cipla, and Wockhardt who have not made any announcements of their European and South American plans are likely to face the brunt. Also included in the list will be companies with weak pipelines for new products as their research products go off patent.

How to evade the looming crisis?

Though there is a majority from the Indian pharma industry who feel that pharma sector is insulated from recession, it ‘may be’ a case of over-confidence that is blurring the Indian pharma industry’s ability to spot the danger signs? In such a scenario what could be the right strategy to evade the looming crisis?

It is most opportune time for India ngeneric majors to target emerging markets like Europe, South America, Australia, South Africa etc., rather than put too much investment into the US market, advices Jaishankar. Striking a similar chord Mahadevan asserts, “The right strategy in generics for India has always been about not over-focusing on the US and regulated markets, but rather building a strong capability in smaller but often more profitable geographies like Common Wealth of Independent States (CIS) and some Latin American (LatAM) countries.” Further, playing a more niche strategy in terms of product profiles such as NDDS, injectables, oncology, vaccines etc., would lead to higher profits. These strategies would hold true both before and after the economic downturn. “Broadly speaking, economic slowdown at an individual level could mean a smaller budget for healthcare resulting into a preference for generic drugs, which are more affordable over patent protected ones,” feels an official spokesperson of Sun Pharma.

What’s next?

The new US regime headed by Obama is expected to be more in favour of generics which could mean a huge upside potential for India. Drug companies may not take as bad a hit as the financial sectors, as there is always a demand for medicines. There is pain globally and it will trickle down to local firms. But research and other services will continue to come to emerging markets, in the aftermath of the economic down-turn because of the cost to bring new drugs into the market and the increased accent of several governments on branded generic medicines (off-patent medicines that are less expensive than original drugs. The Indian Government can support the Indian pharma industry by mainly standing by the industry, and also standing up to international pressure to amend our laws in patents, in trade, in regulatory matters etc, feels Patel.

On the other hand Indian drug majors seem confident that if they can withstand the short term pain, there will be long term gain. It is still too early to judge the impact and we have to wait and watch the India story.

arshiya.khan@expressindia.com