Drug approvals in India near record despite FDA inspection blitz

Mumbai/New Delhi: The US Food and Drug Administration (FDA) has become something of a bogeyman for India’s stock market.

An inspection blitz on Indian drug factories that supply to the US helped push the broader index of Indian healthcare stocks down by as much as 20% earlier this year from its all-time high in 2015 after some top firms received warning letters for failing to meet the regulator’s standards.

But even as the FDA has increased scrutiny of India, it’s been approving generic drug applications from the country’s firms at a record pace, with smaller companies like Aurobindo Pharma Ltd and Glenmark Pharmaceuticals Ltd leading the pack.

The FDA approved a record 83 new generic drug applications out of India’s publicly listed firms in the last six months of 2015, just as sanctions against the biggest of those firms were making headlines, according to FDA data compiled by Bloomberg. In the first half of this year, the pace of approvals slowed to 72 through June, still among the best six-month periods in data going back to 2005.

“Everything sounds negative around Indian pharma, but practically it’s just a few companies,” said Surya Patra, an analyst at PhillipCapital India Pvt. in Mumbai. “You are finding new players filing and participating in the US story—so as an industry or country as a whole India’s participation in the US industry will only improve.”

Increased focus

India’s growing importance in the US supply of generic medicines—India Ratings & Research estimates it accounted for 31% of all new drug approvals last year—prompted the FDA to increase its workforce in the country to 19 from 12 in recent years. That increased presence was felt last year as the nation’s two largest pharmaceutical companies, Sun Pharmaceutical Industries Ltd and Dr. Reddy’s Laboratories Ltd, along with a number of smaller firms, received warning letters on some of their plants from the FDA, restricting future approvals for products made at those sites until the regulator’s concerns are addressed.

In the first six months of this year, Sun received about five new generic drug approvals, while Dr. Reddy’s received one, according to the data. Glenmark, meanwhile, has won 10 new approvals in that period and Aurobindo has received 28. The latter two companies don’t have facilities under FDA warning letters. That follows on from strong momentum for the companies last year, when Glenmark won approval for a generic version of Merck and Co.’s $2.5 billion a year cholesterol drug Zetia, and Aurobindo got the go-ahead for a generic version of heart-disease drug Integrilin.

Maturing industry

On Wednesday, Sun Pharma, Glenmark and Aurobindo said they had received approval to sell generics of the AstraZeneca Plc’s blockbuster cholesterol pill Crestor in the US.

In part, the relative pace of new approvals between the companies reflects an inevitable maturation of India’s drug industry, according to PhillipCapital’s Patra. Smaller companies are getting more approvals as they take over production of the simple, low-margin generic pills the larger companies built their businesses on. Meanwhile the larger companies are graduating into more complex, higher-margin medicines, which means pouring more resources into fewer, but more valuable, approvals, he said.

This trend is reflected in the soaring research and development costs at India’s three largest pharmaceutical companies, which reached 8.8% of sales last fiscal year from 6.6% the year before and only 5.6% in 2009, according to data compiled by Bloomberg.

“These larger companies are graduating to differentiated products, more complex products, where the number will always be limited or smaller than the me-too product area,” Patra said. “That number will always be lower if you compare that with the smaller players who are just trying to participate in the mature product segment.” The US FDA didn’t respond to an e-mail seeking comment.

Even so, as the major producers bring their plants up to the FDA’s standards and warning letters get lifted their approval numbers could surge. With Sun saying it will be ready to ask for re-inspection of its major plant under a warning letter last month, and Dr. Reddy’s saying it had addressed 50% of its compliance issues, that boost could come sooner rather than later, according to Prakash Agarwal, an analyst at Axis Capital Ltd who follows the Indian companies.

The Indian pharmaceutical index is already showing signs of life, surging more than 10% since 21 June.

“In the next one year we’ll probably see companies that have been impacted by the FDA, they will start getting approvals,” he said by phone from Mumbai. “Approval momentum will continue to improve even from here.” Bloomberg