Branded generics: Acknowledging the wrinkles
In the first part of this series, we examined the much-maligned world of branded generics. And hopefully convinced some of you to look beyond the criticism and at the facts in what we think is a very important public health debate. This week, we attempt to “diagnose” the challenges facing the industry, debunk some of them and even attempt a “prescription” of potential solutions.
Critics cite the doctor-pharma nexus as one of the biggest challenges in the industry. It’s hard to make a case in favour of any anti-patient and anti-competitive nexus. But it is also unfair to tar the entire community of medical professionals with the same brush. Were we to ask the honest professionals in the industry a simple question: Why do you prescribe the brands you do, the answers will include:
a) I trust this company to have good manufacturing practices and good quality control.
b) I trust the chemistry capabilities of this company as they seem to have a complete portfolio of products.
c) I trust this company because it helps me monitor whether my patients are using the drug regularly and ensure compliance which is critical for chronic care.
India has 15,000+ pharmaceutical manufacturing plants of varying quality standards. Frankly, we are learning what “good quality manufacturing” is even in our best plants, as they undergo US Food and Drug Administration (USFDA) audits. In this world of variable productions, doctors are acting in the interest of the patients by making brand prescription choices based on what we believe is a fair assumption—that a strong brand that invests in its business cares for quality and outcomes. Isn't this an assumption we all make in our daily life when we make product choices?
The table below outlines how the share of the top 50 pharma companies in India has changed over time, broken at different levels. The unambiguous answer is that the market has been extremely competitive, and at every level there is loss of market share among the bigger players (the ones with more profits and easy access to capital).
If it was so easy to corrupt doctors, and push them to prescribe any brand, would not the bigger and more profitable companies have higher and higher market share? In addition, the fact that the No. 1 pharma company in India has a ~9% share and the top three have a market share of 19% tells you that this is a very, very competitive market—something that should make all consumers and regulators extremely happy.
Why should the consumer pay a premium for the same “salt”?
We can get into a long discussion on why brands command a premium—trust, consistent quality, delivery of a promise etc. But simply put, the phenomenon of consumers choosing the brand and price based on their perception of delivered benefits has stood the test of time and geographies. Isn’t this why some brands of milk, rice, oils and toothpastes command a premium over others?
The third wrinkle could be that “branded generic companies are making too much money” and acting like monopolies. As the market share data suggests, we have no monopolies. A quick look at the profitability of domestic focused pharma companies reveals PAT (profit after tax) margins of ~15% of total revenues. This compares to the government of India’s (state and centre) share of pharma industry which is 5-6% (sales tax, excise and corporate tax) of total revenue. Ironically, analyst estimates suggest that PAT margins in companies with significant US exports is actually higher, implying that their India business is less profitable. In summary, branded generics companies in India do not make too much money
What do we do about the unfair nexus?
The answer certainly does not lie in making the doctors write generic prescriptions. This will end up creating a new dangerous nexus between the “pharma company” and the “retailer”. A retailer who can certainly not validate the manufacturing quality or the chemistry prowess of the company is likely to make sharper commercial choices and has very limited stake in the well-being of the consumer (at least the doctor wants to see the patient again!). So in the name of removing one “nexus”, should we risk moving to another more commercial nexus? Alternatively, the doctor could hike his consulting fees and/or become a retailer herself, both not very consumer-friendly moves.
Another deleterious effect of “unbranding” would be that, ironically, it will curb the emergence of new players. One of the big reasons for the competitiveness of the pharma category is the ease of entry of new players and their access to capital. It is possible for new players to create niche brands, build conviction among a small set of doctors, and create a business. Most of the new businesses die, but some of them survive, thrive and eventually challenge the large players. Making it easy for large pharma to create a strong nexus with distributors and retailers will imperil start-up India in pharma land and capital will certainly become cautious if not run away altogether. We strongly believe that the “popular” healthcare policy prescription for this wrinkle is the proverbial hammer looking for a nail.
So what should policy makers do?
Before we jump into solutions, we need to diagnose the problem better. Why do some doctors build a commercial relationship with pharma companies? We believe there is at least one underlying reason, and maybe many more:
Becoming a doctor is ridiculously expensive with a not-so-great return on investment, given how much money doctors on average make, and how much time it takes for them to make that money.
One big reason for this is poor supply, driven by reduced availability of medical seats, which is in turn due to significant underinvestment in medical higher education.
Second reason, the duration of the programme is too long. A good doctor takes 8-9 years before he can begin his/her practice; and then takes a decade to establish himself/herself.
If you have ever asked your general physician how much money he/she makes you will likely be embarrassed. Here’s a quick comparison with two other popular educational pursuits. While the cost of a medical seat is two to three times the cost of an MBA, an entry-level doctor makes 20-40% of what an MBA makes. If you take under-graduate engineering as an example, the salary levels at entry level are comparable. However, the cost of education is significantly lower. India produces ~500,000 engineers every year as compared to ~50,000 doctors. This has happened thanks to proliferation of engineering seats in the country driven by private entrepreneurship, public fund allocation and a regulator focused on creating supply. In hindsight, allowing the Medical Council of India a significant role in “capacity creation” is like allowing a “guild of engineers” control over the engineering seat supply. This certainly invites a rethink.
Yes, medicine is a professional service. But we must make it possible for honest practitioners to render great service and make it worth their while.
Net-net, if our country’s objective is to continue to keep drugs affordable, and available, while curbing the doctor-pharma nexus, the prescription could look like this:
1. Believe that the path to low prices is paved with competition and not price control. We are already dealing with quality concerns emanating from close to 85% of domestic bulk drug requirement currently being imported from China. This will only expand further if price control is widened and there is greater disincentive for use of locally manufactured APsI (active pharmaceutical ingredients, majority of which are being exported). Price control is a relic of old India. It creates scarcity and corruption. Let’s do away with it.
2. Continue to make it easy for new companies to emerge. This means—endorse branded generics. Don’t create a new unholy nexus between retail and pharma. This only benefits big pharma and retail and is unfair for the customer.
3. Improve the underlying manufacturing quality of all medicines. This will enable new competition and keep a strong lid on prices, and prevent profiteering. Encourage accreditation of manufacturing facilities, push companies to disclose the quality of the plant from which the product comes. The US Food and Drug Administration has recently taught us how far behind we are on this aspect.
4. Encourage emergence of organized retail in every form—online and offline. Good quality retail is a pre-requisite for fierce price competition, and helps keep the pharma companies on their toes.
5. Sunlight is the best disinfectant. Force disclosure from doctor association and doctors on sponsorships in conferences/CMEs (“continuing medical education” programmes). Force companies to disclose their sales and marketing expenses. Have a small number of very clear principles enunciated by the Medical Council of India and encourage doctors to sign up for them. Encourage transparency; don’t terrorize companies or doctors.
6. Allow doctors to advertise their credentials.
7. Make it easy for “purchase” and “sale” of practices. Treat it like long-term equity. A liquid market of practices will help young doctors get to their feet soon and create value of retiring doctors by monetizing their goodwill. This will help honest doctors thrive.
8. Increase supply of medical seats. Come up with imaginative solutions for tenure to become a doctor. Make it an exciting profession like engineering has now become.
Finally, ensure that pharma remains an attractive industry for capital. When capital thrives, competition exists. When competition exists, the patients get affordable, high quality care. Are the recommendations simple but difficult to execute? Yes, they are. But then, which complex problem with multiple stakeholders has had easy solutions?
Abhay Pandey and V.T. Bharadwaj are managing directors, Sequoia Capital India Advisors
Disclosure: The funds advised by Sequoia Capital India Advisors are investors in multiple pharma companies focused on the domestic market.
This is the second of a two-part series. For the first part, click here.
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