Healthcare spending in the US is much higher compared to any other developed nations both as a proportion of gross domestic product (GDP) and per capita. National Healthcare Expenditure (NHE) for 2008 is projected to touch $2.4 trillion and is expected to grow much faster than the economy. The reports project NHE growth at a compound annual growth rate of 6.7 per cent between 2008 and 2017, while the economy is projected to grow at 4.7 per cent during the same period. Therefore, the healthcare issue came as no surprise at the centre of the US presidential race, which was a more serious concern when the economy was in crisis. The objective of both, the Democratic and Republican parties was to contain costs, increase access and improve efficiency.
The President Barack Obama's conservative stance on outsourcing with an objective of job protection and creation has put India at the receiving end, as presumed. Besides information technology, the pharmaceutical industry is the biggest sector of Indian economy that is thriving on the outsourcing opportunities, especially from the US. A conservative estimate of the current outsourcing business of the Indian pharmaceutical industry with the US alone is in the range of $4-5 billion comprising of active pharmaceutical ingredients (API) supply, contract manufacturing, contract research (drug & clinical) and is projected to reach approximately $24 billion by 2015.
US pharma industry - Less to smile, more to worry
Prescription drugs account for a little over 10 per cent of the healthcare dollar, while hospital care and physician services constitute the bigger chunk, >50 per cent. In such a scenario, the question raised is: Why should the pharma industry be worried about the healthcare policies of Obama? Analysis of the proposed healthcare reforms by Obama relevant to prescription drugs would give a sense of mixed impact on the US pharma industrys' prospects in the coming years. Understanding this is important to draw conclusions on its impact on the Indian pharma industry.
Although the policies seem to strain the industry, there is a sign of relief. Concern over drug price is unfashionable in Washington as it leads to minimal gains. Hence, the belief is that the political focus might be on cutting the cost of other factors like healthcare delivery that can bring significant cost savings and allow the government to extend the coverage for more Americans. However, one has to wait and watch to see the net impact of these policies on prescription drugs.
Being competitive - Pipeline & price
The new policies are expected to weaken the US pharma market in terms of two key parameters that define the competitiveness of the industry - pipeline and price, at a time when the drug development cost is spiraling (the average capitalised cost of development of a new chemical entity has grown from $300 million in the 1980s to a billion at the end of the century). A good control on cost of development and supply is critical to be competitive in the market. Hence, at the outset, it can be said that outsourcing by the US pharma to realise the cost advantage might not change by the new healthcare policies.
India story
It appears that the Indian pharma industry has spent the last six or seven years in preparing for this day. The US Food and Drug Administration (FDA) approved plants can enable many players to directly enter into the US generics market, which was earlier ruled by a few big companies while others can continue to thrive on the outsourcing opportunity as contract manufacturers. This change could lead to increased generic competition in the US leading to price erosion and impact the profitability.
Biologics is another area where Obama is keen to allow generics to increase the accessibility of biologics to needy patients. For those companies that have made investments and developed capabilities in 'biosimilars,' it is a big opportunity. The challenge for Indian companies is to strengthen their intellectual property (IP) protection laws before it aspires to make a mark in the biogenerics market.
Increased use of generics can deprive the US pharma industry from inspiration and incentive of developing new drugs. Such a scenario can have a negative impact on the Indian contract research services sector over a period of four to five years when the new drugs will be ready for development by service providers. However, an immediate impact could be seen due to global meltdown where the small to mid cap companies that are dependent on external financial resources are deferring the funding of clinical trials as expressed by an industry insider. The current contracts of both research and clinical services are expected to continue with no major change in the scope. However, the future contracts will depend on the outcome of the four year term of the new US President, Barack Obama
(The authors are consultants with PharmARC Analytic Solutions)