If the stock market is any guide, Sharvil Patel has just inherited one of the top generic drug manufacturers in the world. Now, he just has to figure out how to keep it that way.
Even as the copycat drug business reeled from increased regulatory scrutiny, withering competition in the U.S., or some combination of the two, his family’s Cadila Healthcare Ltd. seemed to have things worked out.
Under Patel’s father, Pankaj, the Indian drugmaker had a major plant cleared of U.S. Food and Drug Administration sanctions – a feat that many of its compatriots have struggled to pull off – clearing the way for its U.S. product pipeline to finally start flowing. In the first half of this year, Cadila’s stock delivered returns of almost 50 percent, making it the best among generic drugmakers worldwide with a market value of more than $1 billion.
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Cadila has given up a chunk of those gains in recent days as quarterly results from across the industry show U.S. price pressures have only increased. But the Patels say their new products can over time offset that deterioration because many of them will face less competition, either because of exclusivity agreements or the complexity of making them. And besides, with three generations in the generic drug business, they’ve seen hard times before.
“That’s the beauty of being in a business family – since you’re born you are seeing it,” Sharvil Patel, who recently took over as managing director, said sitting next to his father at the company’s 10-story headquarters. “You see it with his relationship with his father, my grandfather, you see it when you come to work.”
Cadila reports first-quarter results tomorrow.
Analysts have revised their estimates for its first quarter down amid weak results across the industry, Bloomberg data show. While the average estimate still projects revenue rising 11 percent, net income is now forecast to shrink about 3 percent. On Wednesday, Cadila’s stock dropped about 8 percent as the Indian generics sector tumbled after a subsidiary of the country’s biggest drugmaker, Sun Pharmaceutical Industries Ltd., reported a decline in sales.
Pankaj Patel says price erosion on Cadila’s portfolio of older products in the U.S. is now in the low double digits, compared to the high single-digit estimate he gave on a conference call only last quarter.
But the Patels also expect to benefit from sales of new products. Cadila got a particularly big boost in June when it announced that because it had been first to file, the FDA had awarded it six months of exclusivity to sell a generic version of Shire PLC’s $1.1 billion ulcer drug, Lialda, in the U.S.
This fiscal year, they plan to launch three generic drugs delivered transdermally, often through adhesive patches, a tricky technology that commands higher margins because of its difficulty to copy. That’s part of about 40 generic drug applications the company has before the FDA, any of which they say could be approved this year.
“It’s the largest pipeline in the landscape among the domestic players,” said Nitin Agarwal, a Mumbai-based pharma analyst with IDFC Securities Ltd. “They picked the right products and have done a good job of executing those products.”
Founded when Pankaj Patel’s father, Ramanbhai, left his academic job at a local school of pharmacy in 1952, the firm now has a market value of almost $8 billion and annual revenue of about $1.4 billion. Though Pankaj Patel is one of India’s richest people, they still keep to the Indian tradition for all generations to live together in the family house, the latest additions being Sharvil’s two young children.
That arrangement made another family tradition, no talking about work at home, all the more important more than a year ago as Cadila found itself saddled with a U.S. sanction blocking new products from its main plant.
Like the company’s larger Indian rivals, Sun and Dr. Reddy’s Laboratories Ltd., a 2015 FDA inspection found manufacturing shortfalls at Cadila’s key Moraiya factory about 30 kilometers outside Ahmedabad.
Re-inspections at Sun’s Halol factory and at facilities belonging to Dr. Reddy’s produced new lists of issues that left their warning letters in place, though Sun did have some success with U.S. regulators this year getting an import ban lifted on another Indian plant acquired in 2015.
While the Patels undertook many of the same steps of simplifying and automating their manufacturing processes as their Indian peers, they say cultural changes were just as important.
That meant big changes like erecting a firewall between the manufacturing and marketing teams so workers in the factories don’t feel pressured to sacrifice quality to meet commercial deadlines.
And there were the smaller things like producing videos on quality issues that play on a loop in factory canteens, or running daily quizzes on quality care complete with prizes. Ultimately, a re-inspection saw the Moraiya warning letter lifted.
The Patels are also taking steps to ensure their factories don’t run afoul of the FDA again by setting up a unit to collect forms the FDA publishes for all its global inspections so they can analyze whether potential problems noticed at other companies could appear at a Cadila factory.
Last month 64-year old Pankaj Patel announced his more than 20-years running the company were over, handing the reins to his son. He will now focus on broader strategic questions as he steps back into the role of chairman to let his son run the company’s day-to-day operations as managing director.
“I think it is right for management and senior people to hand over the baton to the next generation,” the elder Patel said, “You lead the organization by example.”