Indian Pharma Companies shift base to overseas for R & D
Piramal Enterprises, the Piramal group’s flagship company operating primarily in the healthcare sector, has decided to close its Mumbai drug research and development (R&D) unit, its largest in the country. With this, the list of Indian drug makers that have either downsized their R&D work or have moved it outside India has got longer. Ten years ago, India wanted to become the hub for drug research. Some scientists said they could discover and develop a new molecule for less than $100 million – a tenth of what it cost abroad then. Today, much of that enthusiasm seems to have dissipated. Piramal Enterprises Vice-chairperson Swati Piramal recently told Reuters that the group has “lost the India advantage”. The only option left, she said, was to invest in R&D abroad.
The trend has already begun. Indian companies that want to expand beyond generic medicine are investing in R&D capabilities abroad. Lupin is setting up two R&D units in the United States. Cipla has said that it will invest about Rs 1,000 crore in Britain to develop drugs for respiratory- and oncology-related diseases. Sun Pharma, India’s largest drug maker, in July bought Pharmalucence in the United States, which has sterile injectable capacity there, “supported by strong R&D capabilities”. Others like Dr Reddy’s Laboratories, too, are known to be looking at similar acquisitions overseas. Carrying out research abroad is expensive, yet Indian companies are choosing to do that because of the better ecosystem there.
Drug makers complain that there is too much red tape in India. The complaint does have an element of truth. The Supreme Court last year directed the Union health ministry to review 157 clinical trials approved by the Central Drug Standard Control Organization after allegations of irregularity in the approval process surfaced, and banned clinical trials for all new chemical entities unless they were personally vetted and cleared by the health secretary. This has considerably slowed the approval process. Some rules get in the way, too. For instance, the one on video-graphing all clinical trials has made R&D on female contraceptives very difficult. Stringent guidelines are required, but they should be transparent and well thought-through – and a decision should come within a specific time frame. In the United States, it takes 28 days to get all approvals for a clinical trial; in India, it could take well over a year.
The other deterrent is the growing ambit of price control. A lot of R&D money goes into developing novel drug-delivery systems, which result in better medication. For instance, it has been seen that moving from three pills of a medicine a day to one improves compliance. But a company that develops such a delivery system may find that the molecule is under price control, and there is no way it can recover the cost of developing the new delivery system. This acts as a huge disincentive for R&D.
India needs more drug research. It is home to a host of tropical diseases that do not interest global drug makers; that R&D has to come from within the country. But unless the government gets its act together, domestic drug development will not happen.
With regulatory action rising, drug makers opt for larger covers
Stricter norms by the FDA will lead to higher compliance costs for Indian companies and it will remain high over the medium term
Faced with a rise in the cost of compliance owing to regulatory action by the US Food and Drug Administration (FDA), Indian pharmaceutical companies are now turning to insurance firms for larger product-liability cover. Even smaller pharma companies, in the nascent stages of drug discovery, are purchasing these covers, insurance executives said.
According to a recent report by global credit rating agency CRISIL, stricter norms by the FDA will lead to highercompliance costs for Indian companies and it will remain high over the medium term. The report noted that the cost of compliance for drug makers has doubled over the past five years.
Tapan Singhel, managing director and CEO of Bajaj Allianz General Insurance, said there was a financial bearing to expand abroad for the pharma companies with the FDA regulations. He said compliance has become a bigger issue for these companies and hence, they are opting for pharma liability covers.
“Higher growth brings complex risks and stricter regulations with it. Therefore, it is essential for the pharmaceutical companies to have insurance solutions that respond to changes in market conditions and emerging risks,” Singhel added.
Adding to this, Ursula Waldhausen, chief executive senior underwriter, Allianz Global Corporate & Specialty, said the global exposure for Indian drug makers was increasing, given the rise in worldwide distribution of their products.
“This implies that the risks faced by these companies are no longer restricted within India. Today, they have a substantial exposure in foreign countries, especially in the US and the European Union. Stricter norms in these countries and instances of heavy losses in the past call for a comprehensive global liability cover for these companies,” she explained.
In the past few years, there had been a rise in regulatory action by the FDA against Indian drug makers. Actions included not just drug recall but also enforcements such as warning letters and import alerts. The US is the largest export market for Indian pharmaceutical companies.
Bajaj Allianz said it would focus on risk management of these companies and offer solutions to ensure they were adequately covered. Bajaj Allianz General Insurance, along with Allianz Global Corporate & Specialty’s Pharmaceuticals Global Practice Group, said they have the financial strength to provide major capacity and the worldwide resources to provide immediate help in case of claims.
Product liability covers are the most risky in the sector. With risks of faulty drugs and products recalls that can cause a financial and reputational damage to the drug maker, the industry is rushing to insurers for larger covers, protecting them against major costs rising out of fines and recalls. Insurers said there has been a 15-20 per cent rise in the prices of these covers.
Sanjay Datta, head of underwriting and claims at ICICI Lombard General Insurance, said apart from bigger pharma companies that have been taking product liability covers, smaller firms are also showing interest in these covers, especially from a US exposure point of view. The Indian pharmaceutical market was worth $6 billion in 2005 and grew to $18 billion in 2012. The sector is estimated to be a $35-70 billion market by 2020.
Sushant Sarin, senior vice-president (commercial lines and broking) at Tata AIG General Insurance, said mid-size and large companies buy pharma liability covers.
“The driver here is not the size, but that they export generics to the US. They take a product liability cover also because the retail chains abroad where these medicines are sold ask Indian manufacturers to purchase such covers,” said Sarin. He added that a product recall cover is taken along with a product liability cover so that the cost of recall also gets covered.
