HYDERABAD: Leading Indian drug makers have sharply increased their R&D budgets over the past five years, as they stare at tempered growth in the US from the launch of plain generics. The R&D spending of the top seven Indian drug makers rose to around Rs 8,500 crore in the last fiscal year from Rs 2,700 crore in fiscal 2011, according to one estimate.
Experts predict the launch pipelines for generic players in the US will be impacted as drugs coming off patent may see a fall in the 2017-2020 period. Amid gloomy outlooks of weakening growth in the large markets of the US and Europe and competition-induced price erosion, Indian companies are focusing on the development of complex drugs to offset the impact.
Industry experts and analysts opine that the US market is set to see limited major first to file launches in the near term. Companies that file first to sell copies of drugs that come off patent get exclusivity to sell those for the initial months in the US, giving them pricing power and better returns.
According to the experts, the top seven Indian drug makers spend nearly 9% of sales on R&D as they eye high-margin complex therapies such as inhalers, injectables, controlled-release drugs, dermatology products and biosimilars.
They are now expected to also step up acquisitions in the developed and emerging markets over the next few years, in a bid to maintain revenue growth and profitability, said analysts.
The US generic market has seen increased competition and consolidation of pharma distribution chains, resulting in acute pricing pressure for Indian pharmaceutical companies, said analysts with ratings firm ICRA in their latest report.
Most of the Indian generic drug giants had benefited immensely from the large size drugs worth around $85 billion (about Rs 5.76 lakh crore) going off patent in the US market over 2012-16. The proportion of patent expiries will relatively moderate to around $51 billion over 2017-20.
While generic products witnessed a price erosion of nearly 20% on an average over the last couple of years in the US market, the branded products saw an increase of more than 16% in the same period. Experts estimate the price erosion in generics to continue in high single digits in the coming years, so developing new products would help.
According to ICRA, almost all the major Indian pharmaceutical companies have materially stepped up R&D expenses over last few years. The top seven Indian (based on FY2016 revenue) saw their aggregate R&D expenses increasing at a CAGR of 26% over FY2011-16 as against revenue CAGR of 17%.
Subrata Ray, group vice president at ICRA, told ET: “As a result, R&D expenses as a percentage of sales has increased from 5.9% in FY2011 to 8.4% in FY2016 for the set of seven leading companies.
Anubhav Aggarwal and Chunky Shah, analysts with Credit Suisse, in a report said they preferred to stay cautious on the US generic market and expect the price-toearnings multiples of stocks with high exposure to US generics to get de-rated as the price erosion will further increase for the domestic copycat drug makers.
Echoing similar views, Edelweiss analysts Deepak Malik and Rahul Solanki, in a report, pointed out that commoditisation will intensify in the US market, accelerating price erosion and tapering the annual growth of generics market to as low as 1% by 2020.
“As the generics space becomes crowded and growth rate becomes a challenge by 2020, the only avenue for Indian companies will be to move up the specialty value curve,” they said.
Acquisitions in emerging markets remain key means for Indian pharmaceutical firms to scale up presence since the organic growth route has proven fairly time-consuming, said the ICRA analysts, adding that the focus of buyouts would be on filling gaps in product portfolio. “Given the strong financial flexibility of Indian pharma companies on the back of healthy cash flows and low gearing, ability to raise funds for potential acquisitions remains favourable,” said Subrata Ray of ICRA.