Executive Summary

The growth in the Indian pharma industry is largely pegged to the US, the largest market for generic drugs from India. This market, currently at ~$86.9Bn, is primarily driven by the continuous rise in the number of ANDA approvals by the US FDA and the subsequent launch of drug products in the US market. A huge patent expiry cliff is coming between now and 2030, which includes many blockbuster drugs. This is expected to open up a significant opportunity for more drug launches and drive further growth.

The continued release of generic medications over the years in this market has heightened competition and led to significant price erosion. While most drugs are still subject to price erosion, certain drugs are currently bucking this trend and increasing in price instead. This increase is primarily due to a more recent phenomenon: severe drug shortages in the US. These shortages are mainly attributable to two causes. Firstly, some manufacturers have been forced to exit certain market segments due to poor profitability resulting from a combination of price erosion and an increase in operating expenses. Secondly, increased detection of quality issues by the FDA has also resulted in supply stoppages of some drugs, adding to shortages.

It is evident from these trends that the US generic markets will continue to experience periods of margin pressure while offering opportunities for price escalations owing to supply scarcity. However, predicting which trend awaits which firm is challenging. This uncertainty leaves companies uncomfortably oscillating between a cost-cutting mindset (in response to margin pressure) and a growth-oriented mindset (sensing opportunity). If firms trim capacity in their plants, R&D, QC and supply chain to cut costs, they will find themselves unprepared for emergent supply opportunities. On the other hand, if companies don’t try to optimise costs, they will face profitability issues. This strategic dilemma is being faced by many generic pharma companies in recent years.

The only way to out of this dilemma is for companies to develop the ability to amplify their agility not by increments but by multiple times—while also improving cost efficiency. At first glance, agility and high-cost efficiencies may seem to be conflicting objectives. But it is not, if firms can consistently unlock significant capacity currently hidden in their operations, supply chain, QA, and R&D. However, achieving this requires rethinking some of the outdated practices in supply chain, operations, quality and R&D that persist in the industry, currently wasting capacity and hindering agility.

Indian pharma tied to thriving US generic market

The US generic drugs market stands as the primary revenue driver for the Indian pharma industry, being the largest among global pharmaceutical markets. Valued at $86.9Bn in 2022, it surpasses the EU market (the second-largest) by 1.5 times, with a value of $56.7Bn.

This market, where 90% of the drugs prescribed are of generics^[1], is expected to expand to $110.7Bn by 2028^[2], primarily driven by:

Profitability pressures as prices plummet

Even as the US market expands, most Indian generic drug suppliers face falling prices and must navigate thinner profit margins. This is mainly because
1) As competition intensifies, majority of generics face either slow or rapid price erosion within the generic drug market, with the speed of erosion depending on the rate of increase in competition, which is mostly linked to the complexity of the drugs^[4]

2) There has been a major buyer consolidation, increasing the bargaining power of distributors^[5]and reinforcing the downward trend of drug prices.

Twist in the Tale

Price erosion is now considered a norm, and most drugs continue to face pricing pressure in the US market. However, a group of high-value/high-volume drugs/segments^[6] have recently experienced a reversal of this trend - a rapid price increase. The result has been that the overall price erosion in the Indian pharma industry’s US portfolio has gone back to single digits - 6%-8%*.

This reversed trend in price is the consequence of an ongoing drug scarcity in the US (and globally) for an essential set of medications, including drugs crucial for emergency room care, prescription medicines, and even common over-the-counter remedies such as children’s cold and flu medication.

Some of the major drugs in shortage

The shortage situation, which was initially reported in 2014, worsened post-COVID, reaching its zenith with 250 active drug shortages in the US by the second quarter of 2024. 10%-15% of all SKUs in the US have some kind of shortage for various reasons. But the worst hit are cancer medications, especially chemotherapy drugs for breast, bladder, and ovarian cancers.

The primary causes of these shortages are considered to be:

1] Exits by manufacturers from some segments under profitability pressure

2] Supply stoppage from some firms due to US FDA actions^[8]

1. Exits by manufacturers from some segments under profitability pressure

In addition to continuous price erosion experienced in the market for their portfolio of drugs, the bottom line of many firms is also concurrently being challenged by increasing costs – especially RM costs and logistics expenses.

Raw Material costs: Post-COVID, prices of key APIs from China have steadily increased. It is now up by as much as 12%-25%.^[9] There are some for which prices have gone up by 100%-140%.^[10]

Logistics costs: Depending on offshore API partners also makes companies more vulnerable to fluctuating logistics costs^[14]. Recently, a sharp rise in crude prices after the onset of the Ukraine crisis had a cascading impact on all input costs^[15]. Global events such as the Red Sea crisis, which disrupted global trade and supply chains by reducing traffic through the Suez Canal and necessitating a reroute around the Cape of Good Hope, resulting in delivery delays of 10 days or more, continue to periodically impact logistics costs.Global dynamics continue to have an impact on logistics costs from time to time.

Consequently, many large established firms have chosen to exit certain segments. In a notable instance, 75 generic drugs were pulled from the market when a major drug supplier went bankrupt^[16].

2. Supply stoppage from some firms due to US FDA actions

Another reason for shortages is that due to concerns about quality, the FDA has changed its approach to inspecting the manufacturing facilities for generic drugs. Over the years, since ~2013, the FDA has steadily increased the number of physical inspections. Though there was a hiatus necessary during the COVID years, the inspections have been picking up pace since. Recently, FDA has also started conducting unannounced inspections, especially in countries like India where they have offices^[17][18].

More enforcement generally detects more quality problems, more OAI (Official Action Indicated) found and more penal actions. One study on current drug ‘shortages’ claims that 62% of shortages stem from quality problems. ^[19][20][21]

In most other industries, such shortages tend not to persist as new manufacturers immediately jump in or existing suppliers increase supply. However, that is not easy in this highly regulated US market. To start selling a drug, the manufacturer must first develop and file an application with the FDA and await its approval. Even when existing companies wish to increase production, either by modifying an existing facility or building a new one, they may have to obtain approvals [22]. All this will take time. Moreover, they will have to be able to source more raw materials, including API. API supply is often protected by exclusive contracts, which limits access for other formulation companies.

Operational implications for Indian pharma

It is evident from these trends that going forward too, the US generic markets will continue to experience periods of margin pressure while offering occasional opportunities for price increase due to supply scarcity to some firms. However, it is very difficult to predict which trend awaits which firm. This leaves firms caught uncomfortably between a cost-cutting mindset (in response to price erosion) and a growth-oriented mindset (sensing opportunity).

Some companies resort to quick cost reduction efforts like reducing manpower in key departments like QA/QC, scaling back investments in R&D for the US market and taking decisions to throttle raw material or finished goods to control working capital costs to meet pressure of numbers. These actions are usually taken to achieve quick gains in a quarter, under pressure to show bottom-line results. The primary driver for such reductions is industry benchmarks of efficiencies. These benchmarks are usually misleading, as different companies have different product mix complexity, demand variability and operational set-ups. As a result, such steps not only fail to sustain in the long run but also lead to loss of protective capacity needed to respond quickly to changing market demand.

The only way to successfully navigate these unpredictable market shifts is for companies to:

Amplify Operational Agility
Ensure Perpetual Quality Readiness
Build Rapid Research & Development Capabilities

All these while having consistently low operational costs

This formidable goal is attainable without additional investment if firms can consistently unlock the hidden capacity in their operations. Companies that move counterintuitively with a consistent strategy are likely to achieve a Decisive Competitive Edge (DCE).

1. Amplify operational agility

When changes occur in market demand, the extended lead time in this industry - from procurement to dispatch, typically lasting 6-9 months, makes it challenging for formulation companies to respond promptly. For instance, attempting to respond to the demand for a significant change in the volume of a product may leave the company retaining ageing inventories or incurring additional costs to expedite processes. Therefore, companies with much higher in-built operational and supply chain agility can have significant advantages over others. However, for this, they have to reassess some of the long-standing industry practices.

a. Abandon monthly rolling forecast-based inventory creation

It is time to abandon forecast-based procurement and production. Forecasting errors have become a self-fulfilling prophecy for many companies. While firms strive to enforce a ‘freeze period’ in planning, changing demand patterns compel them and disrupt production plans and raw material procurement schedules, resulting in issues with delivery reliability. Due to these reliability concerns, demand planners continually revise forecasts to incorporate this unreliability. Coupled with delayed responses, many formulation companies are struggling with classic bull-whip effects in their value chain.

Companies that have moved away from monthly rolling forecast-based supply chain and have designed strategic buffers in RM/QC/FG with daily ‘pull’ signals for replenishment based on consumption have achieved the dual advantage of agility (serving from buffers reduces lead times) and efficiency (buffers at strategic locations in RM/QC/SFG, etc., absorb variability).The benefits achieved include a 25%-50% reduction in lead times, a 20%-40% reduction in inventory, and the elimination of hold time deviations.

b. Relook at archaic finite scheduling methods

Similarly, in production, companies need to relook at their archaic finite scheduling methods, which ignore variability and uncertainty and assume a deterministic demand and capacity definition. This has resulted in overloaded lines, uneven loading in packing lines, month-end skews in output and a lot of expediting.

Companies that have moved to a constraint-based material pull system in production, with the ability to dynamically adjust production plans as per changing configurations of demand and capacity availability, can protect capacity utilization while ensuring agility. These plants have daily visibility of line loadings across the entire plant configuration and can adjust dispensing based on emerging constraints. However, the plants moving on to this way of daily dynamism will have to give away their approach of attempting a ‘fixed’ monthly plan, which anyways, eventually never stays fixed. Advantages experienced after adopting the new approach include an output increase of 40%-70%, improved OTIF to the tune of 99% and more than 75% reduction in airfreight expenses.

c. Stop underestimating capacity

As companies keep launching more products across different regulated markets, the manufacturing complexity goes up, as the plant has to manufacture many molecules with multiple change overs with smaller batches than before. These changeovers and reduced campaign opportunities eventually reduce the net capacity available for production.

However, most companies have not made sufficient efforts to leverage the constraining work center, as the constraint itself shifts with the product mix. Many plants lack trend records of work in progress (WIP) across different work centres, hindering the detection of constraints. This is due to typical ERP configurations, which only provide production confirmations at highly aggregated levels, obscuring constraints within the plant. This lack of transparency also hampers opportunities for significant gains through minor investments or additional manpower. Without an objective understanding of constraints, such opportunities are often viewed solely as costs, impeding efforts to drive continuous improvements. In some plants, setup times have remained unchanged for many years, and machine run times have not been optimized for higher speeds despite operating below approved speeds from R&D.

Firms that have focused on enhancing the visibility of various work centres in production, along with implementing targeted productivity improvement programs, have been able to achieve a 20 to 30% increase in output and subsequent reductions in cost per tablet (15-25% reduction), with only a strategic addition to costs in few constraining areas.

d.Stop considering API suppliers as outside your system

Many generic formulation companies in India source inputs from

Chinese API firms.
Indian dedicated API firms.
Own API plants (under the same corporate umbrella).

Sourcing from China, while often cheaper, is clearly fraught with significant supply risk and loss of agility, as was showcased during the COVID outbreak.

Companies sourcing from an Indian partner, whether owned by the same group or otherwise, is not without its share of problems. Currently, formulation firms treat even their own API plants as ‘outside units’. The evidence of this can be seen in the fact that (for in-house and independent partners), the given orders change very often. Time to time, earlier orders are not picked up either. These API plants, in turn, function by trying to push inventory to the formulation plants to secure their top lines. This dysfunctional way of working leads to a bull-whip effect, bad capacity planning, sub-optimal utilization of API plants and high unwanted inventory in the whole supply chain. The loss of capacity and consequent bad economies of scale impact many API plants, rendering them unattractive for Indian formulation plants.

To improve agility at a strategic level, companies exposed to the US market need to have better control of inputs. So, with persistent price and supply fluctuations (and ongoing government support), it makes sense for some of the larger firms that currently source a significant chunk of inputs from China to consider opportunities to integrate upstream into the manufacturing of raw materials.

However, whether working with its own API firms or Indian partners, the current way of functioning has to change. The formulation companies have to integrate supply chain planning of both their formulations and API units. This integration can be brought about by following VMI where the API suppliers have full visibility of raw material position at formulation plants to adjust their production plans. This approach, along with volume commitments (and a pricing arrangement), can lead to significant efficiency gains. It will eliminate wastages in the supply chain, such as unwanted airfreight expenses, write-offs due to product expiry, excessive inventory (20%-40% reduction), and warehouse space used for this excess inventory. These wastages are significant and can have an impact of 20% to 50% in many firms’ bottom line.

2. Ensure perpetual quality readiness

Maintaining good quality systems is definitely a high-cost endeavour, especially in highly regulated markets like US. Nevertheless, the repercussions of falling short of quality standards are disproportionately higher. Companies that have faced 483 issuances from the US FDA are well aware of the steep price paid for any lapses in Good Manufacturing Practice (GMP) or Good Laboratory Practice (GLP) processes. To avoid such consequences, companies have no alternative but to ensure their quality systems meet the highest standards. This necessitates a paradigm shift in the practices of many Indian firms.

a. Shift away from solely pursuing ‘Inspection Readiness’:

Most firms focus on ‘Inspection Readiness’ approach to quality rather than ‘Perpetual Regulatory Readiness’. The industry in India has gotten used to getting an intimation of inspection and the top management ‘leaving aside’ everything else to attend to the inspections. In many companies, the entire senior management bandwidth gets occupied with preparing for the upcoming inspections and post-inspection. This leads to a huge shift in the priority of the day-to-day operations of companies, causing a loss of value.

It is time to let go of this temporary ‘Inspection Readiness’ approach to a more ‘Perpetual Regulator Readiness’ approach. This can ensure that an FDA inspection is part of just another day in the life of a plant. This is especially important considering the decision of the US FDA to do surprise inspections in the Indian market^[17].

To ensure perpetual readiness, companies have to enhance their ability to do meaningful RCA based on scientific thinking for various quality incidents happening inside the plant and the lab. It is not just enough to do a RCA for OOS or OOT events but also for minor quality incidents happening in the plant and lab. Currently the focus on incidents is very weak for most companies. A dedicated bandwidth analysing the origin of incidents and putting in processes to eliminate them at the origin will go a long way in ensuring high-quality readiness- reduction on invalid OOS by more than 70% and lab incidents by 50%-70%.

b. Rethink the practice of different plants, different levels of quality

Another common practice in the industry is to operate different plants with differing levels of quality norms in order to reduce costs. For instance, norms are usually high for plants meant for the US market and comparatively lower for plants serving ROW countries. This creates a bad overall corporate culture with regard to quality. Moreover, it is also evident from recent actions from regulatory bodies of ROW countries that they are increasingly tightening the quality benchmarks for export to their nations. The Indian government is also taking steps to protect the reputation of the industry as a whole. So, it is time to rethink the practice of maintaining different plants/quality benchmarks for products from the same firm headed to different markets.

Going forward, companies will have to plan for a high and uniform quality culture across all plants. The higher costs of quality in labs (GML)serving regulated markets can be easily managed by driving standardization and using principles of proper division of labour in the lab between resource groups. The real wastage of capacity in a lab in the work done by analysts are the many non-value-adding activities in the lab itself. More than 10%-20% of the analyst’s capacity in many labs is wasted in activities of queueing, searching for lab consumables, and dealing with overheads of many avoidable quality incidents.

The higher costs of quality in plants (GMP) can also be offset by gains (output increase of 40%-70%, reduction of cost per tablet of 15%-20%) from the new way of managing operations and continuous productivity improvement projects, such as reducing setup times and optimizing machine run times. Moreover, extracting more capacity from the same plant will also reduce the need to set up multiple plants and alleviate the strain of capital expenditure investments. Firms that are successful in maintaining a high and uniform quality culture will stand out and gain a competitive advantage.

3. Build rapid research & development capabilities

Many generic pharmaceutical R&D projects aim to synchronize their completion dates with the patent expiry of the respective drugs to maximize their launch value. However, even for those drugs that experience delays in the R&D pipeline, there is a need to expedite them as quickly as possible. Delays can exacerbate the price erosion a drug typically faces, rendering a product unviable. This is due to the substantial budget outflow required to launch a drug, including regulatory fees and bio equivalence studies. If a drug is not expected to fetch a minimum price in the market, this cost burden can prompt a company to abandon a product even after full development—a significant waste of R&D capacity and resources. Consequently, most companies initiate projects in their R&D pipeline at the earliest opportunity.

However, R&D resources, both in upstream areas like formulation and method development or downstream aspects like regulatory compliance and plant capacity, are shared across multiple projects. The methods team is also tasked with numerous value engineering projects alongside drug development, creating pressure to accelerate progress on every front. This situation, combined with the iterative nature of work, frequently results in system overload. Our experience indicates that many firms unknowingly exceed their system capacity by 60% to 100%.

The challenge arises because defining capacity in this iterative environment is complex, making an overloaded condition difficult to discern. This leads to sluggish project movement, delayed responses from departments, and a dispersion of management attention among different projects. The rush to begin projects and their slow progress, compounded by shifting milestone dates, hampers procurement's ability to synchronize vendor inputs efficiently, causing further interruptions and delays that impede system flow. Additionally, imperfect lab development often results in issues during scale-up and exhibit batches, diverting crucial R&D resources away from newer projects in the pipeline. This unpredictability in flow creates conflicts between R&D and plant managers over project capacity allocation, exacerbating delays.

Many companies attempt to address this issue using conventional project management approaches, which frequently fail in high-uncertainty, shared-resource environments. However, companies that transition to project flow management principles, incorporating objective capacity definitions to stagger project introductions without overburdening the system, along with principles like full information kitting and agile short burst planning cycles with daily execution focus, have uncovered the power of ‘less is more’! Through these transformative principles, they've achieved impressive results—nearly doubling their previous performance with a 30%- 50% reduction in lead time and a 50% increase in project output—all without the need for additional resources.

A final word

While it is imperative to make these changes for a business to be future-ready, it is important to plan transformations in a proper sequence to avoid an overload of initiatives. The firms need to identify the area that is the current leverage point impacting business and transform that area first before moving to the next. Such a transformation framework will help firms put in place a consistent operational strategy that will enable them to effectively navigate highly regulated markets like the US and exploit opportunities precipitated by firms that try to juggle different operating strategies during different time periods.

References & Notes

^[1]FDA, "Office of Generic Drugs 2021 Annual Report," 2022. [Online]. Available: https://www.fda.gov/media/156066/download?attachment#page=2. [Accessed 16 September 2023].

^[2]IMARC Group, "US Generic Drug Market: Industry Trends, Share, Size, Growth, Opportunity and Forecast 2023-2028," 2023. [Online]. Available: https://www.imarcgroup.com/us-generics-market. [Accessed 17 September 2023].

^[3]An abbreviated new drug application (ANDA) contains data which is submitted to FDA for the review and potential approval of a generic drug product. Once approved, an applicant may manufacture and market the generic drug product to provide a safe, effective, lower cost alternative to the brand-name drug it references

^[4]Health Economics Review, "Trajectories of prices in generic drug markets," 11 July 2022. [Online]. Available: https://healtheconomicsreview.biomedcentral.com/articles/10.1186/s13561-022-00384-w. [Accessed 19 September 2023].

^[5]Currently, three large joint ventures -Red Oak (Cardinal‐CVS), Walgreen Boots Alliance (with Amerisource), and McKesson OneStop (with Walmart and Express Scripts) have been estimated to account for as much as 90% of all US generic drug purchases.

^[6]Business Today, "The US Squeeze," 31 December 2017. [Online]. Available: https://www.businesstoday.in/magazine/pharma-healthcare/story/sun-pharmaceutical-rise-and-fall-in-us-market-global-drug-market-indian-pharmaceutical-industry-regulatory-hurdles-88180-2017-1 2-11. [Accessed 21 September 2023].

^[7]Ashika Group, “Ashika Monthly Insight - July 2023,” 3 July 2023. [Online]. Available: https://ashikagroup.com/images/blog_images/pdf/2023-07-03_9111_Ashika%20Monthly%20Insight%20-%20July%202023.pdf#page=29. [Accessed 11 October 2023].

^[8]FDA actions (including Warning Letters, Import Alerts, Recalls, Approval Withdrawal) can halt Indian pharma supply to the US if compliance issues persist.

^[9]Times of India, "API crisis, again: PLI in key pharma ingredients was supposed to reduce dependence on China. But the job's only partly done," 21 December 2022. [Online]. Available: https://timesofindia.indiatimes.com/blogs/toi-editorials/api-crisis-again-pli-in-key-pharma-ingredients-was-supposed-to-reduce-dependence-on-china-but-the-jobs-only-partly-done/. [Accessed 21 September 2023].

^[10]Times of India, "Costs of raw material for drugs rise by up to 140%," 20 July 2021. [Online]. Available: https://timesofindia.indiatimes.com/business/india-business/costs-of-raw-material-for-drugs-rise-by-up-to-140/articleshow/84569034.cms. [Accessed 21 September 2023].

^[11]Times of India, "China supplies more than 80% of pharma raw materials, 19 June 2020 [Online]. Available: https://timesofindia.indiatimes.com/business/india-business/china-supplies-over-80-of-pharma-raw-materials/articleshow/76453541.cms. [Accessed 15 September 2023].

^[12]Active Pharmaceutical Ingredients

^[13]Key Starting Materials

^[14]Times of India, "Spike in raw material prices hits pharma companies", 27 February 2023. [Online]. Available: https://timesofindia.indiatimes.com/city/mumbai/spike-in-raw-material-prices-hits-pharma-companies/articleshow/98261018.cms. [Accessed 21 September 2023].

^[15]World Economic Forum, "How does the war in Ukraine affect oil prices?," 4 March 2022. [Online]. Available: https://www.weforum.org/agenda/2022/03/how-does-the-war-in-ukraine-affect-oil-prices/. [Accessed 11 October 2023].

^[16] NBC news, “How one U.S. drugmaker contributed to the escalating drug shortage crisis”, 16 July 2023. [Online]. Available: https://www.nbcnews.com/health/health-news/akorn-us-drugmaker-closure-escalating-drug-shortage-rcna91402. [Accessed 11 October 2023].

^[17]Moneycontrol, “US FDA to step up unannounced inspections on Indian pharma plants”, 29 September 2023. [Online]. Available: https://www.moneycontrol.com/news/trends/health/us-fda-to-step-up-unannounced-inspections-on-indian-pharma-plants-11450221.html. [Accessed 11 October 2023].

^[18]FDA Data Dashboard. [Online]. Available: https://datadashboard.fda.gov/ora/cd/inspections.htm.

^[19]FDA, “2019 Drug Shortages Report,” 2020. [Online]. Available: https://www.fda.gov/media/131130/download. [Accessed 16 September 2023]

^[20]FDA Data Dashboard. [Online]. Available: https://datadashboard.fda.gov/ora/cd/complianceactions.htm.

^[21]OAI is usually followed with some official action. According to the FDA Law Blog for inspections during 2022-23, about a quarter (26%) of OAI classifications resulted in Warning Letters. 19% resulted in import alerts

^[22]Compliance Quest, “The Cost of Non-compliance,” 12 February 2021. [Online]. Available: https://www.compliancequest.com/blog/the-cost-of-non-compliance/. [Accessed 11 October 2023].