The problems of some pharma companies with the US regulator might stem from efforts to keep prices low
By Mohan Sule
Quality issues have ceased to shock Indian consumers over the years. The aftereffects of adulteration and usage of substandard ingredients resulting in temporary or permanent health setbacks and injuries and even casualties are common, grabbing attention for a few days. Yet no one stops buying consumer goods, shifting to new houses, partaking wedding meals, or visiting restaurants. This is in the belief that the latest horror is an aberration and there are competent authorities to keep vigil on the essential items of consumption. Auditors, for instance, are anointed as the conscience keepers of investors and are expected to go through the numbers of companies with a fine tooth. Their signatures on balance sheets imply that they have indeed performed the task expected of them. Regulators are supposed to keep the interest of investors and users above those of issuers, producers and other market intermediaries. The board of directors acts as a check to ensure that in its focus on the shareholders, the management team does not circumvent corporate governance. Even so many of them fail in their fiduciary duty on quite a few occasions. Poor quality of medicines is in the spotlight after the US Food and Drug Administration pulled up Ranbaxy Laboratories and Wockhardt. Despite the furor, the local regulator’s silence is surprising.
The controversy has come at a delicate junction. During the downturn of the last four years, big-ticket investors had gravitated towards companies in this sector for two reasons. Like FMCG, demand for drugs is inelastic. In recent years, many producers have emerged as important global players on par with some from the tech industry. Cheap generic drugs, like low-wage IT workers, are increasingly finding acceptance in the developed markets. A growing number of MNCs is outsourcing manufacturing to India similar to the back-office work being offshored by the global financial services sector. Some mid-size manufacturers have leapfrogged into the big league on the back of such production contracts and exports of their generics. Ironically, Daiichi of Japan bought controlling stake in Ranbaxy to ride the generics boom. If recession in the US and euro zone exposed how vulnerable our tech sector is to the well being of their customers, the revelation of flouting of good manufacturing practices by two mainline players has the potency to slow down or even scotch the growth of a sector that is yet to reach its full potential. To ring-fence the industry, it is necessary for the domestic quality control body to launch a nationwide inspection of facilities to weed out players who have stepped out of the line to demonstrate that shoddy manufacturing is not all pervasive. Going by the experience of the tech industry, this is not difficult to achieve. Many clients of Satyam Computer Services stood by the company, distinguishing between the talent pool and the promoters. Also, there was hardly any impact on the business of other players such as Infosys, TCS and Wipro.
Even as action is being taken on the ground level, there is need to introspect. How much of the blame can be apportioned to the greed of promoters and how much to faulty policies that have spawned an industry known for reverse engineering rather than innovation? In its bid to keep prices of drugs affordable, the government may have indirectly encouraged manufacturers to take shortcuts. Price control of essential drugs meant that companies had to remain small in scale. In the meantime, there was also a transformation in the composition of diseases as India embarked on the growth path and accepted the product patent regime in 2005 after joining the World Trade Organisation. Though MNCs hold patents for many lifestyle diseases, the expiry of some earlier varieties opened a window of opportunity for Indian producers. So much so that the share of exports of frontline player is equal or more than domestic revenue. However, penetrating the market by being the first to file molecules and compounds is just one step. To establish a lasting presence requires a change in attitude to what constitute acceptable practices to keep the cost of operations low. It is in this crossfire that the Indian pharmaceutical industry is caught. Some like Sun Pharmaceutical and Glenmark have made spectacular progress in the crossover. Many more will do so in the medium term. What is crucial is that in their race to capture market share by producing cheaper versions they do not lose sight of the fact that they operate in a space that is more fragile than that of other industries. Consumption of medicines is not a ‘want’ but a ‘need’. Many prescriptions for complicated diseases are patents, leaving no choice for consumers. As for policy makers, the episode is another reminder that controlled pricing can lead to a blowout.
By Mohan Sule
Quality issues have ceased to shock Indian consumers over the years. The aftereffects of adulteration and usage of substandard ingredients resulting in temporary or permanent health setbacks and injuries and even casualties are common, grabbing attention for a few days. Yet no one stops buying consumer goods, shifting to new houses, partaking wedding meals, or visiting restaurants. This is in the belief that the latest horror is an aberration and there are competent authorities to keep vigil on the essential items of consumption. Auditors, for instance, are anointed as the conscience keepers of investors and are expected to go through the numbers of companies with a fine tooth. Their signatures on balance sheets imply that they have indeed performed the task expected of them. Regulators are supposed to keep the interest of investors and users above those of issuers, producers and other market intermediaries. The board of directors acts as a check to ensure that in its focus on the shareholders, the management team does not circumvent corporate governance. Even so many of them fail in their fiduciary duty on quite a few occasions. Poor quality of medicines is in the spotlight after the US Food and Drug Administration pulled up Ranbaxy Laboratories and Wockhardt. Despite the furor, the local regulator’s silence is surprising.
The controversy has come at a delicate junction. During the downturn of the last four years, big-ticket investors had gravitated towards companies in this sector for two reasons. Like FMCG, demand for drugs is inelastic. In recent years, many producers have emerged as important global players on par with some from the tech industry. Cheap generic drugs, like low-wage IT workers, are increasingly finding acceptance in the developed markets. A growing number of MNCs is outsourcing manufacturing to India similar to the back-office work being offshored by the global financial services sector. Some mid-size manufacturers have leapfrogged into the big league on the back of such production contracts and exports of their generics. Ironically, Daiichi of Japan bought controlling stake in Ranbaxy to ride the generics boom. If recession in the US and euro zone exposed how vulnerable our tech sector is to the well being of their customers, the revelation of flouting of good manufacturing practices by two mainline players has the potency to slow down or even scotch the growth of a sector that is yet to reach its full potential. To ring-fence the industry, it is necessary for the domestic quality control body to launch a nationwide inspection of facilities to weed out players who have stepped out of the line to demonstrate that shoddy manufacturing is not all pervasive. Going by the experience of the tech industry, this is not difficult to achieve. Many clients of Satyam Computer Services stood by the company, distinguishing between the talent pool and the promoters. Also, there was hardly any impact on the business of other players such as Infosys, TCS and Wipro.
Even as action is being taken on the ground level, there is need to introspect. How much of the blame can be apportioned to the greed of promoters and how much to faulty policies that have spawned an industry known for reverse engineering rather than innovation? In its bid to keep prices of drugs affordable, the government may have indirectly encouraged manufacturers to take shortcuts. Price control of essential drugs meant that companies had to remain small in scale. In the meantime, there was also a transformation in the composition of diseases as India embarked on the growth path and accepted the product patent regime in 2005 after joining the World Trade Organisation. Though MNCs hold patents for many lifestyle diseases, the expiry of some earlier varieties opened a window of opportunity for Indian producers. So much so that the share of exports of frontline player is equal or more than domestic revenue. However, penetrating the market by being the first to file molecules and compounds is just one step. To establish a lasting presence requires a change in attitude to what constitute acceptable practices to keep the cost of operations low. It is in this crossfire that the Indian pharmaceutical industry is caught. Some like Sun Pharmaceutical and Glenmark have made spectacular progress in the crossover. Many more will do so in the medium term. What is crucial is that in their race to capture market share by producing cheaper versions they do not lose sight of the fact that they operate in a space that is more fragile than that of other industries. Consumption of medicines is not a ‘want’ but a ‘need’. Many prescriptions for complicated diseases are patents, leaving no choice for consumers. As for policy makers, the episode is another reminder that controlled pricing can lead to a blowout.
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