Biosimilars could be a pot of gold or just a few coins for Indian cos: Utkarsh Palnitkar

Q&A with Partner, Head of Advisory, Head-Life Sciences Practice of KPMG India

Though Indian pharmaceutical companies are fairly successful in growing their global generics business, the technology skills and the cost advantage may not firmly remain on their side as they seek to replicate a similar performance in the much more complex biosimilars field, according Utkarsh Palnitkar, Partner, Head of Advisory, Head-Life Sciences Practice of KPMG India Private Limited.

Known to be an authority on Indian life-sciences industry, Palnitkar shares his views with B Dasarath Reddy on what Indian companies should be doing in the medium to long term to stay ahead of the curve. Excerpts:

Despite regulatory setbacks the large Indian generic pharma companies continue to do well in the US market, which accounts for a major share in their export revenues.  How do they manage to grow their sales in these important export markets?

Genericisation is pretty large in the US as well, and the product portfolio of many Indian companies is also expanding. Volumes are also growing in many of these products and if you tie it into the number of FDA approvals for their products that they have in the last six months, that has a direct correlation to their market share and growth.

Also, what is happening to a certain degree is the concentration of buyer power in the US in which consolidation has taken place in three distributors. There also, in terms of the alliances or the depth that these companies have got is again a reflection of what you are seeing in their growing market share.

Interestingly, if you look at any of the large Indian pharma companies two-thirds of their sales come from exports. When you talk of an Indian pharma company, it is a multinational company which is headquartered in India . Whereas the mandate of the other large multinational companies is turning into an Indian company and serving the domestic market.

The emerging markets scenario looks quite different and what should  Indian pharma companies be doing to grow there as well?

As far as the Indian companies are concerned they will still continue to focus on regulated markets where the value realisation is much much higher. In that block the only country that is less penetrated is Japan. Lot of energy will be focused on Japan also. 

In the other markets the challenges there are in many cases non existent reimbursement policies and  aligning with the buyers and the government in terms of making their products more affordable and more accessible. Some of them did it well.

In India they will have to look at government procurement. The procurement programme of Tamil Nadu, for instance, is very very good. Rajasthan earlier had started this mass procurement.

The  companies will have to look at institutional buyers like armed forces or CGHS. So they will have to tailor their programmes on an individual state government’s method and they will also have to demonstrate higher efficacy and try and differentiate themselves to become L-1 as tendering comes with wafer thin margins.

I don't think one can take a unidirectional approach like ‘we will focus only on one market’ because sheer volumes in emerging markets still remain very high and they have to sort of balance the equation.

Do they need to improvise on their focus in terms of products and product portfolio as compared with their global peers?

There will be some degree of consolidation that will be required. On the other hand, if you take Aurobindo Pharma, they acquired a neutraceutical company in the US. So there is a bit of both-in terms of broadening the portfolio as well as rationalising some of it-is required. From the Indian context, the investment that takes to build a community of medical representatives is substantial.

It will always help if you have complimentary products. If I have 2-3 products I can in-lincense some or get an alliance in products of other companies. The time medical reps have with doctors is fruitfully spent because he has a basket of products to talk about in paediatric health or women’s health etc.

And that is something the companies are increasingly looking at.. in terms of where they can get rid of some of the products out-license to somebody else and bring in other products where they require.

Many Indian companies are betting big on biosimilars, the next big opportunity in global pharmaceutical business. Will they succeed?

If you look at generics it is essentially the same salt or a same chemical entity being manufactured perhaps by a different method. So, it is relatively easy to compare a generic with the innovative product but not so in the case to prove similarity of a biosimilar.

The challenge that you face in biosimilars is the quantum of clinical trials that the regulator will ask you to do in various geographies. Let us assume, even if it is a smaller, limited set of trials if you have to do in Europe or the US, that will negate the entire cost advantage that Indian companies have.

Then a pot of gold at the end of the day seem like a few coins.

Otherwise also, the biggest cost of drug development  is clinical trials. Purely in my opinion the innovator companies when they come up with their own similars as follow-on biologics as it was called,  will probably stand at an advantage. And it is not just India.

The competition is going to be fairly intense with a number of producers in this space across many countries including Korea. The question is how many companies will reach that stage and what will be the margins after you spend huge sums on clinical trials.

But you can’t ignore biotech products as they constitute 30 per cent of the total products now and that per centage is going on increasing in terms of new product approvals.We have very strong chemistry skills in India while the biology skills are of nascent origin.

As the IPR regimes gets further strengthened, the confidence of global players to set up R&D centers in India will rise and that will have a ripple effect in terms of rapidly increasing technology skills. You are looking at a 10-15 year pathway by which you can expect outstanding biotech products discovered from India as well.

In the medium term what will these companies have to do to sustain the growth as the existing generics business continue to face margin pressure?

So, margins will certainly be under threat. Apart from  portfolio rationalisation, they will constantly have to look at ease and performance improvement. We are engaged with a number of Indian pharma companies in terms of their process improvement because  the only way that they can work on improving their margins is increasing their own efficiency. A lot of them are focusing on this already.

Some companies use different strategies. Some have volumes that others can’t match while some have done backward integration also. Clearly it is a highly competitive thin margin kind of industry. Some companies are getting into specialty products and difficult to make products. Overall size may not be large but margins are much better. At least that gives some via media.

Can we expect consolidation in the domestic pharma industry?

Indian side there are three categories of companies. Large Indian pharma where Dr Reddy’s, Lupin, Aurobindo, Cadila all of them will come. Then you have the medium pharma of the likes of  Ajanta and Aristo.

A number of these companies.. they are good brands but not in that size and scale and you have small pharma which are contract manufacturing companies. A lot of these companies are facing a bit of a standing at the edge of a precipice, a chasm or a gap. Further development means significant investment in  R&D.

So the question on the mind of a lot of these companies is, ‘ should we continue?’.  Some of them may carry forward. There may be a fatigue factor. You might see some consolidation happening there. The others may continue their journey as many of these companies are Indian promoter driven and fiercely entrepreneurial.

Forget about the M&As, you rarely see collaborations between Indian companies. I mean, if you start preparing a list of collaborations between Indian companies I don’t think even three lines in a page will get filled. It is not uncommon in the US or Europe of collaborations between existing pharma players. 

Will the Indian companies look at acquisitions as a part of their active growth strategy?

As far as overseas acquisitions are concerned I don’t think you will have mega kind of acquisitions. You will find small niche acquisitions which are largely used as vehicles of entry into those markets where they have no presence. Indian market  is highly competitive. For several products you have more than 50 manufacturers for one product, so it is highly fragmented. Sun-Ranbaxy deal  brought about 10-11 per cent market share to one company and completely changed the pecking order.

But as far as the upper segment of the Indian pharma are concerned they are more outward focused rather than Indian focused. It is the middle rung that will rather look at further consolidation but their aspirations also lie outside.