<b>The year that was</b> 2016: A mixed bag for Indian pharma

Sun Pharmaceuticals’ 15-year dream run of 30% compounded annual growth rate ended in 2016, with the company forecasting 8-10% now. The dream run not only made the company’s founder Dilip Shanghvi India’s second richest man but also created fortunes for millions of investors. They were disappointed this year as they saw the firm’s stock losing 25% in 2016 to Rs 618 a share on the BSE on Thursday.

Sun’s revenue from the US, which is 50% of the total, is hit by regulators' sanctions in that country. With the Ranbaxy’s $4.1-billion acquisition in 2015, the company bought four plants saddled with export bans from the US Food and Drug Administration (FDA). 

As Shanghvi was getting started to turn them around, one of Sun’s own key facilities received a warning letter from the US FDA. Although less severe than the outright bans faced by the acquired factories, the warning letter prevented the launch of new products from the plant for the US markets and hampered production there, slowing revenue growth in Sun’s core business as it added regulatory costs on top of those he bought with Ranbaxy.

Sun Pharma is not the only one facing hurdles from the US FDA. Mumbai-based Wockhardt has been the worst-hit with three plants being banned from exporting to the US. In August, the FDA added Wockhardt’s bulk manufacturing plant in Ankleshwar to its import alert list, joining plants in Waluj and Chikalthana that were banned in 2013.

“Notices and warnings have been issued to big pharma companies even in the US in the past,” says Jagdish Dore, managing director at Sidvim Lifesciences, a consultancy firm that prepares Indian companies for FDA inspections. “I see it as positive as Indian companies’ manufacturing matures with putting required processes. The industry should be in a much better position to deal with this in the next 12 to 24 months.”

As investors in Sun turned cautious, those backing Biocon were in for a pleasant surprise. Kiran Mazumdar-Shaw, founder of the Bengaluru-based biotechnology company, was long criticised for the poor return of her company's stock. 

The Biocon stock is up 80% this year to Rs 933 a share on the BSE on Thursday as its copy of top selling biologic drug had its first breakthrough in developed markets. This is the highest return for the year globally by any generic drugs company. This vindicated Mazumdar-Shaw’s call for patience while the company developed complex biosimilar that takes longer to bring results.

While Biocon ruled the roost for return to investors in the public space, US-based private equity major KKR made one of its best returns in India by making three times return in 30 months when Chinese firm Shanghai Fosun bought Hyderabad-based Gland Pharma at $1.46-billion valuation in July. The promoter family, along with KKR, owned 96% stake in the company. China’s Shanghai Fosun purchased a 37% stake of Gland from KKR Floorline Investments, in addition to 49% stake owned by the promoter family. The latter retains its remaining 10%, while KKR exited.

The year also saw Ahmedabad-based unlisted firm Intas Pharmaceuticals acquiring the generics business of Actavis in the UK and Ireland from global generics giant Teva for an enterprise value of £600 million (Rs 5,100 crore) in an all-cash deal. This is the largest overseas acquisition by an Indian pharma company. Intas is backed by PE giant Temasek and Chrys Capital. This clearly showed the might of PE-backed mid-size Indian pharma companies, which are now ready for big-ticket acquisitions and command high value.

For the domestic market, the year saw tightening from the National Drug Pricing Regulator, which capped pricing of 50 essential drugs this month. This includes those used for treatment of HIV infection, diabetes, anxiety disorders, bacterial infections, angina and acid reflux. The prices of stents – used by surgeons to unclog arteries and prevent heart attacks – may be capped by mid-February next year now that the government has notified them in the country’s drug price control order.

“As new drugs are being brought under National List of Essential Medicines, the government should also monitor accessibility dimension," says Hitesh Sharma, partner and national leader (lifesciences) at EY India. “Some players may find it unviable to manufacture or sell speciality products below certain threshold limits .”