Natco shifts focus from US to India amidst pricing pressure and competition in former market
“India potential is being underplayed because lot of the big guys are so focused on US, I think they are not doing interesting filings in India. Build a good brand and launch it early, there is a lot of value in India,” Rajeev Nannapaneni, Vice-Chairman and CEO said on company's latest strategic shift.
In a radical shift in strategy drug maker Natco Pharma said it will throw more capital and R&D resources towards generic filings in India and Rest-of-the-World (RoW) markets over US citing heavy competition and pricing pressure.
As part of the new strategy the company will be doubling the R&D budget allocation for filings in India from current 20-25 percent to 50-60 percent focused on oncology, hepatitis-C and the newly launched cardio and diabetes business.
On the contrary, US will get about 20-25 percent, almost half of what it used to get earlier. The company said it will limit its filings in US to 4-5 annually from the earlier plan of 8-10.
“What we are saying is instead of doing so many filings let's do limited number of filings where we think there is a good chance of limited competition. If it's me too product, kill it before hand and put that money in India instead,” said Rajeev Nannapaneni, Vice Chairman and Chief Executive Officer of Natco Pharma at the company’s earnings call.
Natco spend Rs 123 crore or 6 percent of its sales on R&D. The company had sales of Rs 2079 crore in FY17.
As per the new strategy the company aims to launch 15-20 new products in India, a significant number would be first to file generics.
“India potential is being underplayed because lot of the big guys are so focused on US, I think they are not doing interesting filings in India. Build a good brand and launch it early, there is a lot of value in India,” Nannapaneni said defending his latest move.
Natco said it also aims to target other branded markets and open front end in Brazil, Canada, Venezuela, Philippines and Singapore.
To be sure Natco is not as big as its other Indian peers in US. The company makes large portion of its money on domestic formulation business, with exception in FY17 when it had exclusivity of generic Tamiflu in US.
The company however has an interesting future ANDA pipeline in US that includes big opportunities such as multiple sclerosis drug Copaxone 20 mg/40 mg and cancer drugs Tykerb, Zortress and Revelimid with a potential to make a windfall.
Natco's move comes at a time when Indian drug makers, even mid-sized ones have expanded their R&D budgets and capital expenditure aimed at generics filings in US, the world’s largest and high margin market for generic drugs.
It costs around USD 0.5 to 1 million for each ANDA filing. The cost of filing is in addition to the cost incurred on building and running a US FDA compliant facility.
Things have started to get complicated in US – as the market gets increasingly crowded by more and more generic players competing to gain market share and the consolidation of retail and distribution channels driving down the prices significantly. Even the heightened regulatory scrutiny by US FDA is adding to the uncertainty.
“Today everybody has money, if you take top 25 companies they all have great (R&D) budgets and there isn't much difference in terms of technical capabilities,” Nannapaneni said.
“When you have more than 5 players the pricing pressure is so much and because of the (channel) consolidation the hold that they have on you is just ridiculous.”
“So unless you give the discounts you'll not be able to do business. People are running the business at cost plus basis,” Nannapaneni added.
Nannapaneni further says that companies need to have limited competition product or a drug shortage to make any meaningful money.
“And you need have that item in your portfolio and you need have recurring item every year otherwise you won't make any money,” he said.
Analysts says Natco's exuberance for India comes from the fact that it was able to build successful Hepatitis-C and oncology business from scratch in a highly competitive market.
“It will take more than a year to see whether Natco’s India and RoW focus would be paying off or not,” Afzaal Mohammed. Fundamental Research Analyst - Pharma Sector at Karvy.
“It costs significantly less to file for generic in India and compliance costs are low,” Mohammed said.
Another analyst who didn't want to be named said that Natco's move is smart."Even big generic makers with large front end presence, huge portfolios and backward integration capabilities have been struggling in US market, it would be wiser for smaller ones to be cautious," the analyst said.