<b>Bhupesh Bhandari:</b> Trump cloud on pharma's cash cow

The Nifty Pharma index has fallen 11.52 per cent in the last six months. All the heavyweights of the industry – Sun, Wockhardt, Lupin, Aurobindo – have shed value as investors fear the United States may restrict the import of inexpensive medicine.

The US is where these companies make money. India, under stringent price controls, does not hold much attraction for them. Now, with President Donald Trump all out to promote “Make in America”, Indian pharmaceutical majors could be in for a rough ride, it is feared.

Pharmacies in the US are allowed to hand out generic versions of the prescribed medicine unless expressly prohibited by the doctor. So, all a generic company has to do is reach its medicine to the pharmacies, and that takes care of sales. There is no need to maintain a force of medical reps. What they need to do is keep a hawk’s eye on medicine that is close to patent expiry — and file quickly for permission to launch a generic version.

Given their expertise in process chemistry, and low production costs, the opportunity is just right for Indians.

This has indeed served them well. In 2015, India was the fifth-largest exporter of medicines to the US by value, after Ireland, Germany, Switzerland and Israel. Of these four, the first three are largely makers of high-priced patented medicine. By volume, India was second after China. But China exports low-value APIs and intermediates, and not generics. Canada and Mexico, in spite of the preferential treatment they get under NAFTA, were below India. 

Much of the work the pharmaceutical companies have done in the last several years could get undone if Mr Trump cracks down on imports. At the moment, India’s concern is about the info-tech sector as Mr Trump takes steps to protect jobs from being exported. But the stakes are no less in pharmaceuticals.

Indian pharmaceutical companies say any crackdown on them will not be prudent. Apart from exports, they have invested billions of dollars in the US, and provided jobs to thousands. Thus, the charge that they have mercenary-like mined the market is not true.

These companies are even prepared to manufacture in the US all medicine that is sold only there. But medicine that is sold in a large number of countries they will have to continue to make in India, or else they will lose their cost advantage. Mr Trump’s team has to decide if it wants inexpensive medicine or more jobs. Indian companies are hopeful that good sense will prevail and the US will do nothing that upsets the applecart.

There is another challenge: About a third of the manufacturing sites in India approved by the US Food and Drug Administration have not been physically inspected by it. This is because the regulator is short of inspectors. As Mr Trump has frozen all recruitment, these facilities can afford to breathe easy. But once the freeze is lifted, and inspections start, some of these facilities can face the heat. 

The US is critical for India. It is large and Indians have cracked it. The next big market after the US is Japan but that has proved to be a tough challenge for the Indian generic players. Japan, because the average body type there is different, has its own standards and regulations. Even if you have mastered the regulatory game in the US, it in no way prepares you for Japan — you have to start from scratch. Moreover, the Japanese are finicky people: They want their medicine to be not only effective but to also look good. Its finish and packaging have to be FMCG grade. That is why Indian companies have failed to make a dent there, though the Japanese government wants the country to rapidly adopt generics in order to bring down healthcare costs.

Next to Japan is Europe. But the problem is that the continent is not one large market and each country offers a different set of problems as well as opportunities. England, for instance, is a strong generics market but the price erosion after a medicine goes off patent is too steep. Germany, on the other hand, is led by the insurance companies, which calls for expertise in bidding for orders. Each country needs a different team and strategy. This makes the cost of doing business very high.

Back home, price controls have made India unattractive for many. According to one estimate, in the last two years, over 400 Indian and foreign-owned pharmaceutical companies have gone to court against price changes, banning of fixed-dose combinations, and non-compliance with law while fixing prices. This is such a waste of managerial bandwidth.

The last option for Indian pharmaceutical countries is markets in South America, East Asia and Africa. Some of these countries, like Brazil, are big markets but most are small. 

So, the US is the safest bet for Indian pharmaceutical companies and they need to do all they can to protect their turf.