By Ruma Dubey

Yesterday, Cadila Healthcare was the top loser of the day on the BSE and the villain, like in all pharma stories was U.S. Food and Drug Administration (FDA). It has expressed concerns through Form 483, over the manufacturing process of at least one product at its Moraiya facility. On receiving the Form 483, the company has 15 days to respond before the FDA takes further action.  

A day prior to that, another ‘victim’ of the FDA, Ranbaxy was the big loser. The company, once considered to be a ‘blue blood’ Indian pharma company, posted a consolidated net loss at Rs.186 crore after making a one-time settlement provision of 240 crore. This is the same felony charges case where the company had pleaded guilty and had agreed to pay $500 million in civil and criminal fines. Later, it was slapped with more regulatory sanctions due to manufacturing violations as per US FDA. Currently, all its facilities have been shut down and it manufactures from only one unit for USA and the sorry plight is the fact though it has got a six-moth exclusivity production rights for a drug that recently lost its patent protection, it is not able to reap the benefits due to closed facilities. It has begun production of the generic version of Diovan, a BP drug by outsourcing it to a third party. This is the state of one of the best pharma companies of India.

Ranbaxy has in fact become a case study for other pharma companies in what not to do. It would be stupid to shoot the messenger, here the US FDA, for doing its job right. These tussles with the FDA are in fact a wakeup call for the entire sector, especially when one fourth of India’s pharma production is exported to USA. Big pharma companies, like the IT companies, export more then 50% of their production to North America. So when North America is our biggest market, isn’t it our duty to then have facilities which are FDA compliant? What is wrong if the US FDA demands corrective action?

Thanks to the exports to USA, our IT companies have learnt to publish very transparent set of performances. The format is as per US needs. Thus it helped us improve and rise up to a new standard. Ditto for Indian pharma companies. There is rue and woe amongst those in the sector that they have to spend so much money to upgrade their facilities to meet US export standards. Now that’s a good thing as this ‘tight slap’ was very much required.

One can call it ‘cultural differences’ but once you decide to go global, you have no option but to adopt global standards and processes. The cost of upgrading would be much lower than the cost of inviting the ire of FDA – that’s what we learn from Ranbaxy. Crisil has put out a report stating that cost of compliance for Indian drug companies will rise as this will include higher cost of hiring personnel, consultants and making the facility GMP complaint. While citing the reasons, Crisil has stated that cultural differences apart, attitude of employees, inadequate interpretation/ understanding, and absence of due process and systems were some of the major reasons for US FDA letters. Maximum enforcements over the past two years were on account of differences in interpretation or understanding.

The US FDA has implemented Good Manufacturing Practices (GMPs) and that is also the reason why scrutinizes have gone up manifold. But this still means that standards are poor and Indian companies are not US FDA complaint; it is as simple as that. As per the GMPs, all instructions are clear, entire manufacturing process is completely defined in a step-by-step format, records are kept of every step taken, facilities are designed to minimize cross contamination and mix-ups and more importantly, all operators are trained. These are stringent but very good standards. Most GMP companies in India are struggling to meet the compliance cost and companies needing GMP manufacturing in India need to monitor processes and products closely to ensure it is in compliance with US FDA.

In India, there are over 20,000 pharma companies and they do not have very stringent and complex certification procedures. Surely, you would have come across someone around you who does job work or contractual manufacturing of capsules or tablets or bottles for some bigger pharma company. Do you think their facility would be GMP or US FDA compliant? Thus when the tally of all processes and products is taken, discrepancies are bound to arise. Also remember, FDA conducts inspection of only those facilities which export drugs to USA.

The Indian pharma sector is currently going through a phase of transition, in terms of operations. And there are many worried that this diversion to upgrade their facilities, is taking away precious money from newer generic launches in the pipeline and R&D. So on one hand, costs will go up and on the other, the health ministry is planning to adding more drugs to the list of essential drugs, bringing more drugs under a price cap. Currently some 348 drugs are under a price cap, which is almost 30% of the total drugs sold in the country. And post this, there is news that some 100-150 more drugs will come under price control. Thus pharma companies are miffed as this is expected to affect their margins directly.

The price cut will be a double whammy for domestic drug companies while global companies have to contend with price cuts and consequent drop in margins. Analysts say that this will lead to more companies cutting their R&D spend. Lupin, which has been in the good books of US FDA for Q1FY15, spent Rs.244 crore on R&D compared to Rs.195 crore in Q1FY14, which is 7.4% of net sales v/s 8.1% of net sales in previous Q1. On the other hand, Dr.Reddy’s R&D spend on R&D rose 11% of net sales, up from 8.5% in previous Q1, showing an increase of 59%. In fact the stellar numbers of Dr.Reddy’s was driven by increased exports to USA. Torrent Pharma reported a 138% (YoY) rise in exports to USA in current Q1. Thus the point here is that if companies are FDA compliant, they need not worry; trouble is for those who have played truant.

Irrespective of the proposed price cuts, which could happen only by Q4 of current year, the going remains good for the Indian pharma sector. There is also probable good news around the corner – news is that beginning October (US Federal Govt’s fiscal  year begins on 1^st Oct and ends on 30^th Sept),  the US FDA could begin fast tracking approvals by significantly lowering its review period to 15 months from the current three years. Faster approvals will mean more new products in the market and this will mean good news for US centric pharma companies like Cadila, Torrent, Dr.Reddy’s, Lupin, Glenmark and Sun Pharma. Thus what margins they lose in India due to lowering of prices, they will more than make up by exporting more to USA.

All in all, good going for the healthy, FDA compliant Indian pharma companies!