The Indian pharma industry has grown at a healthy Compound Annual Growth Rate (CAGR) of 10.9 per cent in the last decade leading up to FY2022, according to a recent report released by the credit rating agency ICRA. The credit rating agency reports that the Indian Pharmaceutical Market (IPM) has witnessed a growth rate of 7.7 per cent in the first three-quarters of FY2023 led by price growth and new product introductions. The report further predicts that the IPM is poised to grow at 6 to 8 per cent in FY2024.

While the overall growth trajectory of Indian pharma seems steady, another trend which is interesting to look at is the research and development spending of many top Indian pharma firms. Industry experts contend that largely the research budgets of the top firms have remained flattish in the last two to three years on account of Covid, but the scenario might be changing for some select firms like Sun Pharmaceuticals, Dr Reddy’s Labs, Zydus Lifesciences, Cipla and  Biocon Biologics among others due to a hurting generic pharma industry.

“The R&D spending as a percentage of revenues improved to 7 per cent in Q3 FY2023 from 6.5 per cent of revenues in Q1 FY2023 for a sample of companies tracked by ICRA. Overall, we expect the R&D expenses for the leading pharma companies to stabilise at 7.0 to 7.5 per cent of the revenues over the medium term in line with FY2022 and 9MFY2023 levels,” states Mythri Macherla, Assistant Vice President & Sector Head, Corporate Sector Ratings, ICRA.

In the third quarter of FY2023 Sun Pharmaceuticals invested Rs 670 crores in its consolidated R&D, an increase of 22 per cent year on year, similarly, Cipla’s investment in R&D in the same quarter increased by 33 per cent year on year to Rs 363 crores. For Biocon Biologics the investment in the December quarter of FY2023  increased by a whopping 144 per cent year on year to Rs 337 crores, whereas in the same quarter, Zydus Lifesciences’s research budget jumped by over 35 per cent quarter on quarter to Rs 344 crores.

“With the ongoing FDA issues and the US market becoming more and more challenging for the generic companies, there has been a rationalisation in the R&D costs across the names in the generics space. Hence, a lot of ANDA filings are being filed,” says Param Desai, Research Analyst, Prabhudas Lilladher.

Desai further says that these select companies are now focusing on moving up the value chain, from generics to speciality segments, complex generics and biosimilars. And accordingly, they are spending more on R&D towards that part of the business.

On being asked whether this is a reaction to the increasing competition faced by the Indian generic pharma companies in the foreign markets, Desai agrees and states “Yes, that is the only answer as the generic business industry is not moving up and the scenario has been deflationary for quite some time. And to that extent, I think moving up the value chain is the right step.”

Kiran Mazumdar Shaw, Chairperson, Biocon Group stated in an interview with BW Healthcare World that India should continue to develop affordable yet high-quality generic medicines, but the focus should be on discovering novel drugs for critical and fatal diseases. She said that the pharma industry should increase its investments in R&D, especially in innovative therapies that can address unmet medical needs.

“To feed the growth engine of the pharma industry, which is of strategic as well as economic significance to the Indian economy, we need to focus on the next set of opportunities represented by biopharmaceuticals, specifically biologics and biosimilars,” Shaw enumerates.

Desai explains that the select firms have carved out their niche segments, “Cipla is investing in the respiratory segment and peptides, Sun Pharma is investing in speciality segments, Dr Reddy is investing in complex generics and biosimilars, Zydus is also doing biosimilars and complex generics,” he adds. 

India Vs The Developed Markets 

Pharma pundits opine that while the research spending is slowly reviving and moving up for the Indian pharmaceutical sector, the spending is almost half if not less when compared with their counterparts in developed markets like the US and European Union. 

“R&D spend of leading global pharma companies (Sanofi, Pfizer and Novartis) has been considerably higher at 15-20 per cent of their revenues over the last few years, primarily due to their continued focus on developing innovator molecules and wider presence in regulated markets,” says Macherla.

One of the reasons that experts provide for this gap between R&D spend between India and the west is the profitability and the government incentivisation provided to the companies in the developed markets. “Companies like Pfizer, Novartis etc. have much higher profitability. The Indian companies have only USD 1 to USD 1.5 billion in US sales, whereas the global companies are earning upwards of around USD 10 to USD 15 billion-plus. So there's a huge difference between the revenue as well as the profitability,” Desai informed.

Another key determinant of overall R&D spending as a proportion of total sales is the product basket of a company says Macherla adding that certain other firms such as Viatris, Teva and Endo which derive a sizeable portion of their revenues from generic drugs spend only 4 to 8 per cent of their revenues on R&D indicating that even amongst global pharma companies, the product basket towards which R&D is focused (innovator vs generic molecules).

Indian R&D Spend Outlook

Experts believe that there is no benchmark for the Indian pharma companies to embark upon and it all depends on how much shelling their balance sheets can support. Desai says that for all the big pharma names, the US sales have not seen an uptick in the last five years. So for them, it's not an easy call to overspend, as all these projects are long gestation in nature, which may or may not succeed. 

Desai believes the increase in the research budgets will be gradual. “Eventually the spending will go up but as I said, there will be some rationalisation. Companies will spend more on specialisation and more on biosimilars and complex generics rather than spending on generics,” Desai predicts.