Oct 18, 2016 04:17 PM IST | Source: CNBC-TV18

Pricing pressure in US biz cyclical in nature: Cadila Health

In an exclusive interview with CNBC-TV18, Pankaj Patel said that the pricing pressure in US is cyclical in nature and competition is going to exist in the generic medicine market in US.

Indian companies have a cost advantage in the US market which enables them to compete there even with increased competition says Pankaj Patel, Chairman and MD of Cadila Healthcare.

In an exclusive interview with CNBC-TV18, Patel said that the pricing pressure in US is cyclical in nature and competition is going to exist in the generic medicine market in US.

On the domestic production and business front he said that ten site transfers from the company's Moraiya plant have been completed and the USFDA has been requested to inspect the facility.

Below is the verbatim transcript of Pankaj Patel’s interview to Ekta Batra on CNBC-TV18.

Q: This is your 20 acre research and development facility and let us start with a little bit of a brief on that. Tell us more about your facility?

A: This research facility which is located here is known as Zydus Research Centre. It is focussed on new chemical entity research. So, whole facility takes care of all the kind of research requirement for new chemical entity research. It would mean that from an in silico developing a molecule concept to ultimately doing the phase one clinical study we can do it in this facility.

So, we have basically focussed on creating a world class facility with all kind of capabilities in terms of either it is animal testing, whether it is chemistry, analytical chemistry, whether it is in vitro biology, formulation development, first in man study, all the facility exists here.

The uniqueness of this facility is that it is a facility at one place which can do everything that basically helps in better collaboration with each other scientists in different discipline. So, the NC research is usually a teamwork and this team work is achieved through this one big facility with all the people at once place. The other uniqueness of this facility is this is the first facility in India in private sector which has also capability of doing study in primates. So, apart from large animals we also do study here in primates which is the only facility in private sector in India.

Q: There is one criticism about Indian pharmaceutical companies as opposed to their counterparts in the US and Europe that we are not that capable when it comes to R&D as compared to others. We are good at generics but not as good in terms of R&D. Why is there a lag, why is there a difference between us and the rest?

A: We started much later than most of the industry. If you look at the top of the pharmaceutical companies globally they have a history of 100 plus years. Our industries have maybe history of 50 years or around 50 years and we started from scratch and as a result initially our focus was to develop formulation. Then we went into bulk drug, then we went into value added generics. Now we are moving into NCEs and other areas. It is kind of a path of development.

People believed that India cannot make a tablet or a liquid or an injection in 1950s, it is no longer a truth. People believed India cannot make active pharmaceutical ingredients (APIs). India became the API capital of the world. People believed that Indian products cannot be sold in every market. Today we sell in every country in the world. So, the question is we need time and it is a learning exercise that we can actually achieve.

If you go to any pharmaceutical company globally and you look at the list of the people about 30 percent of the people are Indian origin. So, there is no reason why Indian scientists cannot develop drugs.

Q: So, currently R&D is around 7-8 percent of your sales. Say, by 2020 how much will it possibly be?

A: We would remain at that range. Our goal has been initially from the beginning is to - we are relatively small company from a global size point of view and it is very important for us to ensure that we optimise and take advantage of India fully. India advantage; India cost advantage, Indian capital advantage is a big advantage we have in India and how do we maximise it. That is why you see this big facility here that we can do everything in house. We don't have to outsource and as a result we can keep our costs lower.

So, at the same time while we want to do everything we want to ensure that we do not overspend on something which is not to be spent and make sure that everything is done in a reasonable cost and that is what we achieved here.

So, we believe that this exercise which we have created of creating kind of a model by which we can do research in a very disciplined way there are very stage gates set up in every research project to make sure we stop a project if we feel that at stage we have not reached a goal. We also make sure whatever we do is done in a cost optimised way.

Q: One of the key diabetes molecules that you managed to launch in the Indian markets is Lipaglyn. What is the state in terms of revenues in India for that particular molecule and how are you scaling it up in the US and other regulated markets particularly?

A: In India that drug has received very good response from the medical fraternity. Today there are about 300,000 patients who are already consuming this drug and the drug is doing very well in the Indian market and growing rapidly. We have also stated phase II study in US where we are basically doing study in Dyslipidemia, Hyper Dyslipidemia area. We are also are starting another study in US for hyper liver diseases and so and so forth.

So, the whole game plan is really bring these drugs to the world. So, apart from US we are also brining this drug to the other market. So, we believe very strongly that these drugs has a very good promise and future to offer to the world.

Q: One of the key focus areas for you has been transdermals where you have around five Abbreviated New Drug Applications (ANDAs) which you filed for in the US plus one which you acquired from Teva very recently as well. What is the progress when it comes to transdermals in particular?

A: So, we are close to approval. We cannot give a specific timeline but we have reached to a stage where we should be having approvals of few products in a short period of mite.

Q: You have also signed up for maybe researching anti-malarial as well as something for chikungunya. So, when can we expect something because there are millions of people in India right now who are either suffering from dengue or chikungunya or something to do with mosquitoes?

A: One of our goal is also to basically while being research based pharmaceutical making sure that we do something meaningful for our people in India. And as you rightly said these are the major issues we all face today. So, our work has been going on a fast speed both in the area of dengue and chikungunya and we are in the clinical trial phase.

Q: What about the US markets because last quarter your revenue was down around 14 percent odd. You have received eight approvals in 2016. Your guidance is around 15 approvals, 20 approvals rather. Is it going to pick up?

A: It is going to pick up from next quarter onwards. We have received several CRLs and we believe that the products are reaching at advance stage of approval. We are confident that we would get those approvals this year.

Q: When does US starts growing?

A: We will see from the quarter which is the fourth quarters onwards the growth will be seen in the US market.

Q: One of the key approvals that you have received recently is Asacol HD but you have launched it as an authorised generic (AG) at this point. What is the likelihood that you may you would get final approval from the USFDA and you would possibly launch it on your own, is that something in the pipeline that you would be working for?

A: Currently, we have launched the authorised generic of Asacol HD and we are expecting FDA approval. We will take a decision based on the approval what next step we should do.

Q: One of the criticisms some analyst share is that may be Cadila is doing too many AG launches which is authorised generic launches, are you going to start focusing more towards getting the final approval and then less towards the AG launches or is that going to be a strategy which you will still focus on?

A: AG launches are not as a part of a strategy, however companies do approach us for a launch of AG and then we do accept those assignments. Because we have global relationship with those companies, companies approach us to launch their AGs. If they are not in our pipeline then we would launch the AG. As far as Asacol HD is concerned this was part of our settlement that we would launch the AG and that is the reason why we have launched the AG.

Q: The other big potential that the market is focusing towards is also Lialda which is the same family as Asacol HD which is supposed to be a big potential for Cadila. What is the status on that?

A: As you might be aware that we have won the first court judgement in our favour that we are not infringing the patent. We would await till the next action is taken by the company. We are also at advanced stage of approval process as far as Lialda is concerned. It is contingent to our Moraiya plant get approved by FDA which once that is approved we should expect also the regulatory approval of Lialda.


Q: I wanted to ask you about the Presidential elections in the US. I am sure you have been watching it closely will it have any ramifications when it comes to Indian pharma especially when we are talking about may be capping pricing because of the whole issue which has taken place in terms of innovative pricing on certain drugs?

A: One thing is very clear that as far as we Indian companies are concerned, we have a cost advantage. This cost advantage will makes us last to live. So, even if the situation becomes more competitive, Indian companies would be able to manufacture at a cost and able to compete in the US market.

Q: Pricing pressure is the other concern that a lot of companies are facing in the US. Are you facing that similar concern?

A: Yes, because of the consolidation of the channels, there is definitely a pricing pressure and the impact of the consolidation of the channels has now been seen by the companies. So, there is a pricing pressure on the US market at this moment. This is a cyclical phase, we have seen every period of three-four years, we see pricing pressure coming up and then after some of the not so efficient manufacturer leaves market, the market stabilises and then grows.

That has happened in generic -- I call it generic cyclical nature or generic cyclic business. This is what we are seeing that we are at the bottom of the cycle now. We believe that after this bottom, we will stabilise and go up.

Q: So it is not going to get worse, there are not going to be more generic companies which are going to be launching the same drugs in the US?

A: I think competition is going to be there in generic. If you want to be a generic player and if you expect that there is not going to be a competition, I don’t think it is going to be happening.

Q: How do you beat pricing pressure on the US to be in the market?

A: I think success formula for US business is basically continuous launch of new products, ability to optimise cost and efficiency. The US customers not only look at price, but also look at a good service level. So maintaining a good service levels, supply chain efficiency are very important to become successful in US market.

Q: Now talking about the Moraiya facility, 60 percent of sales come from that particular facility, what is the status currently, how many site transfers have you completed?

A: We have completed about 10 site transfers, but we also have requested FDA to inspect our facility. Whenever FDA will come, we are confident that we should be able to get approval of Moraiya facility as well.

Q: Moraiya has been a bit of a sticky issue in the past as well. Why is that?

A: The issue at this time was mainly because of the complaint investigation and a product failure on one of the narrow therapeutic area products that is the reason why we received this issue. We have been doing something much more than what we should do it.

As a result, we launched a programme which is known as Quest. It addresses beyond the compliance kind of a situation. Our goal is now to move beyond compliance and making sure that we are ahead of others in terms of doing things at our plant, so that we always have success.

Q: Why the site transfers when you should have the confidence that your facility should get cleared?

A: We had the confidence but we realised that Moraiya facility has too much of load. We thought that this would reduce load of manufacturing on Moraiya and get into other facility. As a result, overall the load will get distributed and in the process from a long-term supply planning also it will help us going forward.

Q: Do you think there is a systemic issue that Indian pharmaceutical companies face which they might be adapting now when it comes to US FDA? It is not just Cadila it is many companies that have received warning letters.

A: It is a part of journey. Every pharmaceutical company you know have faced problems with FDA at different times. It is an opportunity for you to learn and go ahead. It is not something which one should take as a problem, but it should be looked as an opportunity to improve and move forward.

If you want to sell into market, the regulator who is responsible for the safety of the patients in that country, they will be extra cautious about it. This is a part of the journey. So, it is kind of a professional hazard I would say. It is going to be there and I don’t think we should be too much of concerned about it. It might be a temporary problem for companies, but it is not a permanent problem.

Q: So, it is not a culture issue or it is a culture issue which is being resolved?

A: Definitely, it is a culture issue we need to have the culture of quality, culture of uprightness, culture of speaking out in our organisation. I think the way we have been we need to change. Very important for that is to basically develop that culture among every person working in the organisation. So, we achieve that through our program which is called Quest. It is a very interesting program in our plants.

Every day morning when people attain the plant they spent first 20 minutes discussing culture before they go to work. So, that is the kind of done every day all the days. That is the effort which we need to put it which would change the culture.

Changing culture is not easy it is a long term requirement. So, this will gradually but definitely improve. Our Quest program has completed one year, we clearly see a change in culture and we are moving forward to continue this program forever.

Q: Zyfine facility is not that much of a concern for you?

A: We were not done any commercial business from that site. The facility is currently shut down.

Q: For the US or in general?

A: In general.

Q: A quick word with regards to the domestic markets because the domestic sales have been single digits for the entire industry in the previous quarter barring a couple of them and that is because of National List of Essential Medicines (NLEM) the pricing list as well as what is happening with the fixed dose combination (FDC) and the lack of clarity on the same. Do you expect some resolutions soon?

A: I believe so; I have read some announcement made or newspaper article recently saying that something has been thought about by the government. I believe that industry needs stability, a stable policy and stable environment, so that we can invest and grow.

Q: Do you expect pick up in terms of the single digit growth that we have been seeing?

A: We are already saw in the last month the market grew at 12.5 percent so we are seeing the growth picking up.

Q: Do you have a large part of your portfolio affected by FDC at all or the lack of clarity on FDC?

A: Our large portfolio is not affected by the FDC.

Q: 20 percent I think is impacted by NLEM?

A: NLEM of course, yes.

Q: How do you counter that?

A: I don’t think that is essential drug should be price control, that is a policy we are happy with that. The question is if the list is changed very rapidly and too much changes periodically we would face this problem. So, I think they should not essentiality criteria too often. At a reasonable period they should change the essentiality criteria if at all required and too many changes actually creates problem.

Q: FY17 will we see domestic growth in single digits or double?

A: Double digit for sure.

Q: We moved away from the listed space and now we are at your private hospital which is supposed to be one of the top10 hospitals in the country as well. What led you to invest in it and when was it set up?

A: This hospital came into existence about a year back. The objective here was -- when I was visiting hospitals, I realised there are small things which are so important for the patient and are not being done. It has something to do with quality and management and I realised that the way you can give back to society would be to create something which can become a change agent in terms of managing a hospital or running the hospital going forward. So, with that dream, we created and we are committed as a family that we will invest into this kind of hospital, which would be a kind of a unique hospital.

The uniqueness of this hospital is first of all -- it is state-of-art. It has all the most modern equipment, which is required in the medical care is available. More importantly, it has a complete transparency and accountability. It has a motto of service, so when you enter here, everybody greets you and not ask you a question, why you are here.

We believe that when the patient comes or when his relative comes here, they are under a stress and in that stress environment, they require careful handling, communication to help them cool down and get confidence in building.

The second thing we did was that when you go to a hospital, you will realise that an estimate is given. By the time you leave, you end up paying much more. We think, if a hospital gives an estimate, that should be the final payment, nothing more can be charged, only less can be charged.

We created a system where we can attend any patient who comes here in emergency in less than 60 seconds.

Q: It is not only hospitals that you are focused on it is also education that plays a big part in your life. Give us a background in terms of the schools you are running and what your current positions is as well?

A: My father was a teacher before he started the business. Our family always believed value of education, my father in particular. So, when he completed 75th year the family decided we are not celebrating his birthday, but we are going to donate a school for him. On his 75th birthday we started a school which is called Zydus School for Excellence. We have now two schools they are the private school with a lowest fee and has all the standards which are required in a good school available. Our student always top in the city in terms of their exam results etc.

Apart from that in education area our family supported a medical school in Ahmedabad. So, I am the chairman of Gujarat Cancer Society. Under this we set up a medical college and hospital which is a charity hospital in Ahmedabad which charges the same as the municipal hospital will charge, so nothing almost negligible charges. It runs a 150 student medical school and very soon it is going to start the post graduation.

Apart from that I have interest in education, so as a result I took responsibility to get into Indian Institute of Management and IIT. I believe that by creating certain systems the education can improve a lot.

Q: When you talk about education what about the succession plan because your son has a Ph.D. which is focused on the pharmaceutical space as well. What is the plan when it comes to the succession of Cadila Healthcare as well as say Zydus Wellness?

A: Obviously, my son is a Deputy Managing Director in Cadila Healthcare. He is currently running a large part of the business as a primary responsibility. Ultimately, my goal is to basically him to take more responsibility and based on his performance he can become the Managing Director of the company.

Q: What might your vision be then in terms of Cadila Healthcare?

A: I would support the Cadila Healthcare till I am there. However, I will spend more time in social area. I have lot of interest, personal passion. It gives me an internal pleasure to do something meaningful in other areas than my business and I would continue doing that.

Q: If you are talking about guidance say you are over a USD 1 billion may be Rs 10,000 crore in terms of revenues, 17-20 margins and profit what is your guidance say in the near-term as well as may be for two to three years?

A: In long-term we basically want to become larger than what we are today. However, we should double our sales, triple up our profits in next five years or so.

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