Indian pharmaceutical companies are facing tough times due to regulatory issues, integration headaches and depleting margins in an intensely competitive global pharmaceutical market. While India’s strength as a cheaper sourcing base is not in peril, companies will continuously have to be open to tweaking their business models to stay in the race and grow.
While India is ranked the world’s fourth largest pharmaceutical market in terms of volume and 13th largest in value terms, the need to diversify their revenue base and leverage on their low-cost base has led drug majors chart out an aggressive plan to expand outside the country. Hitesh Gajaria, executive director, KPMG India talks about the challenges Indian companies face and what they need to do to move higher in the value chain in an interview to Ram Prasad Sahu. Excerpts:
Is the USFDA action against Ranbaxy a cause for concern for Indian manufacturers?
While this action does not involve removing products from the market and FDA has no evidence to date that Ranbaxy has shipped defective products, it (the FDA) has sent a signal that drug products intended for use by American consumers must meet their standards of safety and quality.
The FDA has a history of prosecuting global giants for failing to comply with good manufacturing practice (GMP) requirements and for significant violations of current GMP regulations related to manufacturing, quality assurance, equipment, laboratories and labeling. There is no need to be unduly alarmed at these developments.
Acquisition and integration challenges (Sun-Taro/Dr Reddy-Betapharm) can be a drag on a company's time and resources. How do you make it work?
Most acquisitions are made with a little bit of hope. The hope is clearly that over a period of time you will be able to digest your acquisition. The Indian industry is in a learning mode as outbound acquisitions have just begun from India.
I am sure that serious players such as Dr. Reddy's and Sun would have carefully evaluated their acquisitions and would have firmed up business plans and actions to match the challenges that real life situations throw up.
Strong post-merger integration strategy and implementation actions as well as learning the ropes to fight hostile takeovers are two situations that demand senior management time and resources that you should be well equipped to deal with.
What should CRAMS players do to move up the value chain?
Strict adherence to product quality, delivery timelines, continuing focus on efficient cost manufacturing and respect and protection to intellectual property culminating in highest business ethics, are the fundamental blocks to building a successful CRAMS model.
Acquisition and successful integration of more complex technologies such as injectables, biologics and other niche therapeutic areas to consistently move up the value chain calls for greater emphasis and investment in infrastructure and regulatory capabilities. Indian pharma companies that have been successful have just scratched the surface, and can now build long term, sustainable and profitable businesses in this segment.
How do generic players tackle commoditisation of generics and price erosion?
Commoditisation and subsequent price erosion means that you are looking at the reduction of the topline value of the product. If a drug was available at $100 it will now be available at $9, once the patent comes off. But a $9 dollar drug is still good enough to give you healthy margins.Within the country (India), by value, that drug does not even fetch you $9. What do you need to do?
You have to be able to work on faster mapping of patent expiries, leverage cost competencies and first-to-file advantage, ramp up production capacities and, master the regulatory process so that your DMFs and ANDAs (which allow you to market your products in the US and European markets) get registered.
After all this, you still make a good margin because your cost of production may still be only 40 to 50 per cent of the reduced price level. There is money to be made even after 90 per cent of price erosion. In the US alone, it is a $5bn opportunity a year at reduced prices. And that is one third of the entire Indian pharmaceutical market today!
What is causing the increased buyout of generic companies by innovator pharmaceutical players and will this continue?
Consolidation will continue due to the pressures on Big Pharma be it drying product pipelines, productivity of research and development spends, rising costs, the increase in time it takes to get a drug approved, and the slower and a more conservative approach of regulators to approve new products.
Acquiring a generic player gives the innovator company such as Daiichi, in the case of Ranbaxy, a presence in 60 countries, a basket of Para IV filings and knowledge of the regulatory processes. This is not only limited to MNCs buying into Indian companies but Indian companies buying up European and American companies as well so that they can have access to those markets.
The reaction to innovator companies buying out Indian companies has been that Indian promoters are shoring up their shareholdings so that they can repel these bids or get a higher valuation for their stakes.
What business models (CRAMS/generic play/pure research) are best suited for growth as far Indian players are concerned?
Companies will have to be nimble, keep adapting and changing their business models. You have so many macro level changes that have taken place; the patents act is one, you have increasing number of CRAMS players who are demonstrating that they are still capable of making margins and you have Big Pharma that wants to partner with you provided you have the right ethical background, IPR in place and you are committed to long-term service-oriented outlook.
Models will have to be refined as the landscape changes. These changes could be external as well as internal. For example, if you have 24,000 units in the country and if half of them shut down or are merged then there is a changing landscape where your volume game of generics might still hold good. I
ndia is an underserved market with a tiny fraction of the population that has access to good quality healthcare and so there are opportunities to make money and cut costs (If it costs a rupee to treat a patient, drug costs only 15 paise, transportation gobbles up 20 paise).
Will investors flock to defensive sectors like pharma due to current market conditions?
Considering that the demand for drugs is relatively inelastic, firstly the slowdown in the US economy will put additional pressures to curb healthcare costs and further promote use of the low-cost generic drugs. Indian generic drug makers are also expected to capitalise on a large chunk of innovator products expected to go off-patent over the next three years in the US.
Indian pharma is also increasingly diversifying in other geographies such as Europe, Japan and the semi-regulated markets such as South Africa, Brazil and Russia. The market is clearly rewarding companies that are on an innovative growth path and are putting the basic building blocks in place.
It is a good defensive play, but you need to pick your choices carefully. Say you want to invest in one of the demerged research entities. Are you prepared to wait for three years and participate in this high-risk, high-return game? ICICI Ventures exited Dr Reddy's research outfit, Perlecan Pharma because there might have been a mismatch in the payback time of new drug discovery and ICICI's perception of it. Your risk appetite, knowledge of the industry, ability to pick the winners and the time frame you have in mind will decide your rewards in this competitive and ever changing industry.
