Indian pharma industry poised to tap significant opportunity in US generics market

The Indian pharmaceutical industry is poised to tap the significant opportunity in the “small molecule patented drugs” segment, opening up for generics through 2023-26, a report from financial services firm Elara Capital has said.

Major players with exposure to the US market, including Zydus Lifesciences, Torrent Pharma, Aurobindo Pharma, and Ajanta Pharma, are expected to be the primary beneficiaries of this upcycle, the report said.

The last product upcycle in the US generics market known as ‘Patent Cliff’, when products go off-patent, arose during 2011-15, when generic competition emerged for several large pharmaceutical products. The report indicated that a similar environment is shaping up now, with an anticipated wave of first generic competition suggestive of another patent cliff on the horizon between FY23 and FY28.

“This has been a looming threat for the US generics market. Drug patent expiration is notably one of the reasons for the growth of generic drugs and to couple it with the need for reducing healthcare costs, the worldwide demand for generic drugs continues to grow. With India having a robust pipeline of generic drugs, this upcoming cliff will provide a tremendous growth opportunity for Indian pharmaceutical companies,” said Shweta Gupta, Partner, INDUSLAW, a law firm tracking the pharmaceuticals sector.

“In addition to pharmaceutical manufacturers, other players in the Indian pharma ecosystem can benefit from the upcoming patent cliff, as a significant number of pharma companies will look to outsource non-core activities to emerging markets,” she said.

The competitive pressures in the US generics business intensified following the previous upcycle’s peak in 2015. Pricing deteriorated as players fiercely competed for market share in older products. The entry of new players, including many from India, further heightened the competitive landscape, the report noted which has been compiled by Dr Bino Pathiparampil, Gaurang Sakare and Heet Van.

However, there have been positive shifts in the competitive scenario for select Indian players such as Aurobindo, Zydus Life, and Alkem, who have reported a significant improvement in pricing, the report said.

Some players have strategically exited unprofitable products and reduced their investments in the US market, leading to an improved competitive environment. Furthermore, the underinvestment in product development for the US market between FY22 and FY24 may reduce competitive intensity in the coming 3-5 years, the report added.

The US generics market has also experienced drug shortages due to selective exits by players in unprofitable products and underinvestment in product development. This shortage may contribute to a pricing upcycle in the US generics market, the Elara capital report pointed out.

“There was significant inventory build-up in the channel during COVID due to apprehension about availability of medicine. However, as COVID subsided, the inventory in the system led to significant price erosion in the US generics segment,” said Tushar Manudhane, research analyst at Motilal Oswal Financial Services Ltd.

“With normalisation of inventory, the intensity of price erosion has reduced. Also, this, couple with limited completion product launches has improved the outlook of US generics segment. Having said this, the regulatory risks continue to rise partly due to good manufacturing process requirement and partly due to complexity associated with the manufacturing products,” he said.

Further, major Indian players have taken proactive steps by filing Abbreviated New Drug Applications (ANDAs) to seize upcoming opportunities in the small molecule patented drugs segment. The patent-cliff, which exposes large patented pharma products to generic competition, is expected to generate additional revenue and reduce price competition, benefiting the entire generic pharma industry, including smaller players.

“The generics market opening up for 'small molecule patented drugs' will allow Indian generic drug manufacturers to break barriers in previously unavailable avenues. The ability to file ANDAs in this sector will provide a route for scaling up the drug product range of such Indian pharma companies,” said Arvind Sharma, Partner, Shardul Amarchand Mangaldas & Co, a law firm who tracks the space..

“This is likely to increase global interest in such companies, thereby opening up investment opportunities for the generic drug sector in India. An upscaling in products will also pave the way for R&D investments to drive the sector forward. With this development, the Indian pharma companies presently stand at the precipice of a lucrative future,” he said.

As the competitive environment in the US generics market continues to improve, a cyclical upswing is expected, where annual price erosion may be forgotten, and annual price increases could become the norm, the report said. Larger players such as Zydus Lifesciences, Sun Pharma, Dr. Reddy’s, Lupin, Aurobindo, and Cipla, with a wide product basket, are anticipated to benefit the most from the upcoming upcycle. Smaller players like Gland Pharma, Alkem Labs, and Torrent Pharma may also experience benefits later in the cycle, according to the report.