Read the Week-1 course Building Blocks of Pharma here.
Pharma Sector – Week 2: The Regulatory Framework
This is the second article of the 5 articles series on Pharma Sector Analysis by Sadhan.
During this 5-weeks course series on Pharma Sector, we target to capture the following modules in our Week-2 session:
Pharma Sector: The Regulatory Dynamics
A brief explainer video on CIR, Warning Letter, OAI, ANDA, NDA, Drug Price Control
Moving on, let us start with the topic of this article which is the Regulatory Structure of the Pharma Sector. This article will cover India as well as the US from regulations from the Investor’s point of view.
Let us first understand:
Indian Pharma Regulatory Framework
Pre- Manufacturing is governed by rulebooks of Central Drugs Standard Control Organization (CDSCO) while manufacturing and Sales & Distribution is governed by their state counterparts called State Drug Regulatory Authorities (SDRA).
You might have heard of or read on the labels of a drug that “This a Scheduled Drug…”.
So it is important for us to understand this classification as depicted below:
This classification is done by
which is a regulator, whose main responsibility is to make a schedule of essential medicines. The medicine under this Schedule is called Scheduled Drugs.
NPPA was formed in 1997 and primarily controls the Ceiling Price of a scheduled drug. The methodology of fixing the Ceiling Price is below:
- First working out the simple average of price to retailer in respect of all branded-generic and generic versions of that particular drug formulation having a market share of 1 % and above
- Then adding a notional retailer margin of 16 percent to it.
- Companies are allowed to hike prices of such drugs by only up to 10% in a year.
NPPA sorts the drugs on a Formulation basis i.e. If they banned a drug then they list out the size for example 20 mcg, 50 mcg, etc versions.
The Truth of Drug Price Control
NPPA can only control the prices of devices and products that are defined as drugs under the Drugs & Cosmetics Act.
It is the antiviral medicine (Popularly used in Covid treatment) whose prices in India could not be regulated as it is not defined as “Drug” but “Therapy” in India.
This benefited manufacturers of Remedesivir as they could charge as high as 10x of before the Pandemic price of the drug.
Pharma firms response to Price Control: Evergreening
Some of the formulations of Workhardt drugs were under Schedule however they made cosmetic changes in the formulations applied to NDA hence these new formulations of the same drug became exempt from NPPA.
This is a widely held practice in the Pharma Sector and is called Evergreening.
Launch of Different Formulations evading price ban
Case: Thyronorm (Abbott)
Thyroxine sodium (Trade name Thyronorm by Abbott lab) is used in the treatment of hypothyroidism, a condition in which patients are affected by low levels of thyroid hormone.
Currently, thyroxine sodium 50 mcg and 100 mcg dosages are under price control.
Other strengths of the molecule such as 12.5 mcg, 25 mcg, 62.5 mcg, 75 mcg, 88 mcg, 112 mcg, 125 mcg, 150 mcg have been kept out of NLEM, thus their prices are higher than 50 mcg and 100 mcg dosages.
In conclusion, NPPA is not a powerful regulator as USFDA hence that situation allows pharma sector companies to get their way around the price control.
Now, let us look at:
Global Pharma Market
Clearly, the USA pharma market is ~25 times bigger than the Indian Pharma market, hence the fortunes of Indian drug companies are intertwined with US regulations.
Therefore you should be knowing basic regulations including key terminology of the US pharma industry.
A few reasons why the US & Indian pharma sectors are so much interdependent is summarized below:
Regulatory Aspects of Drug Approval In USA
In the US, the new drug approval process is accomplished in two phases: clinical trials (CT) and new drug application (NDA) approval.
What is NDA?
New Drug Application (NDA): When a pharmaceutical company creates a new drug, the company must contact the FDA and demonstrate that the new drug has a particular quality and that the drug is safe and effective.
The review is a comprehensive analysis of clinical trial data and other information prepared by the FDA drug application reviewers.
What is ANDA?
Abbreviated New Drug Application (ANDA):
Submitted for generic drug products. Generic drug applications are called “abbreviated” because they are not required to include preclinical (animal) and clinical (human) data to establish safety and effectiveness.
Instead, a generic applicant must scientifically demonstrate that its product is bioequivalent (i.e., performs in the same manner as the original drug).
Once approved, an applicant may manufacture and market the generic drug product to provide a safe, effective, low-cost alternative to the public
Let us have ANDA filing from a business perspective.
This chart explains:
With US $140 bn drugs going off patent the US generic market is going to be growing at a similar pace as in the recent past.
The USFDA is known for being a nosy regulator as they keep smelling all plants in the value chain including APIs, Formulations.
You might have seen Indian Pharma sector investors fearing this world called: EIR
Let us know the implication of Official Action Initiated (OAI) & Warning letters below:
If you are reading these lines, then congratulations to you. Now you have understood the intricacies of the Pharma regulations (both Global as well as Local).
Stay tuned for the Week-3 course.
To consolidate your understanding of the pharma sector, I recommend you to watch these videos while setting the newly acquired industry knowledge in motion:
Alkem Labs: Fundamental Analysis
Learn the hidden platform of 800 brands in less than 15 min
Solara Active: Fundamental Analysis
Watch our 15 min Analysis Video to find out about a Dependable API manufacturer
Advanced Enzymes: Fundamental Analysis
Watch why we think Advanced Enzyme could be Motherson Sumi of Pharma
Read the analysis of Indian Companies here.