Sun Pharmaceutical Industries Ltd., India's largest generic drugmaker by market share, has spent the last two years stuck in a holding pattern.
Operations at a key factory in Halol have been hamstrung by the still-lingering effects of a warning letter Sun received from the U.S. Food and Drug Administration in December 2015. Despite the company's efforts to fix the manufacturing-related violations, U.S. regulators have yet to give an all clear — delaying the approval of new products made at the site.
It's a familiar story for dozens of other India- and China-based drug manufacturers flagged by the FDA for not keeping their operations up to code.
In recent years, the U.S. agency has issued warning letters to production plants in India and China at an increasing rate. Last year, for example, 39 of the 61 notices sent by the Office of Manufacturing Quality in the FDA's Center for Drug Evaluation and Research were to facilities in the two countries.
Observers say the stepped-up oversight isn't likely to wane any time soon — putting product quality in focus at a time when the domestic industry in both countries aims to move further into novel drug development.
"It is safe to say that the scrutiny is only going to increase in China over the next few years as well until that industry starts to mature," said Sam Verungopal, a principal at PwC, in an interview.
Enforcement actions like those faced by Sun also ups pressure on generic drugmakers abroad, just as falling prices and increasing competition threaten the wider industry's business model.
When inspectors knock
Many of the ingredients contained in medicines sold to U.S. consumers come from factories churning out pills and vials near Asian cities like Mumbai and Shanghai. Roughly 80% of active pharmaceutical ingredients and 40% of finished drugs are imported from abroad, according to the FDA, which has responded by opening offices in both India and China.
Given the reliance on foreign-sourced supply, it's not a surprise regulators have paid attention to drug factories overseas.
To better support inspection of the thousands of plants, the FDA opened offices in both India and China a decade ago. But, only in recent years have the number of warning letters issued to facilities in those countries surged.
That jump is particularly notable in the three years between 2015 and 2017. During that period, an office within the FDA's Center for Drug Evaluation and Research issued citations to nearly 80 Chinese and Indian plants for violations of Good Manufacturing Practices (GMP) — compared to 48 sent to facilities located elsewhere.
This uptick has occurred even as the number of inspections resulting in Form 483s, a notice of potential violations, has held steady. According to analysts at PricewaterhouseCooper LLP's Health Research Institute, this suggests an increased emphasis on quality during FDA inspections.
Of particular note, though, is the rapidly rising number of China-based plants flagged for GMP shortcomings.
"You could take a blueprint of the issues that were found across India and apply it to China. They are finding many of the same issues," PwC's Verungopal said, citing data integrity in particular as a key concern.
India, while still maturing, has seen a marked improvement in quality systems and employee capabilities, according to Verungopal.
The FDA isn't the only regulatory body probing manufacturing quality in India and China. Recently released data from an intra-agency program led by the European Medicines Agency showed the two countries were far and away the most frequent target of API-related inspections.
For companies like Sun, shipping knockoff drugs into the U.S. has boosted business, fueling a string of acquisitions and licensing deals. In the fiscal year ending March 31, 2017, sales of generic medicines accounted for 45% of the Indian giant's $4.5 billion. About half of revenues earned by Lupin Ltd., a rival, came from sales in the U.S.
With that much business at stake, Indian drugmakers are vulnerable to regulatory actions by the FDA and other agencies.
FDA scrutiny can have real consequences. Warning letters block the approval of new products made at the targeted facility. And unaddressed violations can lead to placement on import alert lists, allowing U.S. officials to turn back imports of drug products.
Sun says delays in securing approvals for products made at its Halol site have hurt sales and added remediation costs.
Through warning letters and import alerts, the FDA can effectively shut out a non-compliant manufacturer from the all-important U.S. market.
But even for the many drugmakers that export to the U.S. with no issue, selling cheap generics isn't the business it used to be.
"Clearly we are in a situation where regulatory approvals for products are coming much faster than they used to and there are many more players in the market than historically there used to be," said Dilip Shanghvi, managing director at Sun Pharma, on an earnings call last November.
More powerful buyers, too, have put pressure on companies' pricing power.
Facing such challenges, some generic drugmakers may be tempted to diversify into higher-margin branded drug markets.
Just last month, Sun Pharma won U.S. approval of its first novel biologic drug — an IL-23 inhibitor called Ilumya (tildrakizumab) that the company had in-licensed from Merck & Co. in 2014.
Besides traditional generic players, other companies in the region are making strides in novel drug R&D as well. Hutchison China MediTech, Beigene Ltd. and Innovent Biologics Co., among others, are leading a rapidly emerging Chinese biotech field that aims to bring drugs developed in Chinese labs to markets domestically and overseas.
That growth will mean FDA inspectors more often visit India- and China-based plants in the context of evaluating New Drug Applications. U.S. approval of TaiMed Biologics Inc.'s new HIV medicine, for example, followed the FDA's first pre-license inspection of biologics contract manufacturer in China.
Moving up the value chain into novel drugs will keep the spotlight on manufacturing quality.