On Trial

Indian pharma is not banking on low cost advantage. Partnership deals and setting up contract research outfits for global drug trials, are some of its answers to competition. SMEs facing the heat, need to consolidate and rush in with alignments.

The $9.7-billion Indian pharmaceutical industry is learning new rules of the game in global pharma. Even as it is looking to make a global mark through acquisitions, patent litigations and in-licensing across the world, it is fighting erosion in generic prices in developing markets, intensifying competition overseas and an uncertain policy environment on home ground.

Consider this : Indian pharma clocked a turnover of $6.02 billion "� growing at roughly 9-10 per cent per annum as against a global growth of seven per cent "� with $3.72 billion in exports. The bulk drug production, as per KPMG's report on the sector, stood at $2.10 billion with over 400 bulk drugs and 60,000 formulations produced in 60 therapeutic areas.

The Indian pharma industry currently ranks fourth in volume terms and 13th in value terms in the world, with eight per cent of the world's drugs manufactured in India. The country has over 300 large and medium scale pharma enterprises and over 10,000 small companies. Despite the industry being highly fragmented, top 100 large companies control 80 per cent of the country's production.

Add to this, it has the highest number of US Food and Drug Administration(USFDA) plants outside of US and largest number of Drug Master Files (DMFs) in US. This will go into making of the pipeline that Indian companies can have for US, which constitutes 50 per cent of the world pharma market.

Cost advantage

India's pharma production costs are almost 50 per cent lower than in its western counterparts, while overall research and development costs are about one-eighth and clinical trial expenses around one-tenth of western levels, states the KPMG report.

While it costs a billion dollars to bring out a new drug in the West, the same can be done at roughly $300 million in India owing to its cheaper raw materials and labour force, along with a pool of trained high quality scientists.

With 700,000 scientists and engineers being churned out each year, including 122,000 chemists and chemical engineers and 1,500 PhDs, Indian pharma industry provides the highest intellectual capital per dollar worldwide.

As research pipelines dry up across the board in innovator pharma of the west and pricing pressures intensify owing to mounting competition, the focus on India and its ability to deliver at costs much lower than rest of the world is set to increasingly crucial. This fact has been borne out by Matrix's takeover by US-based Mylan laboratories for $736 million.

This acquisition "� first in the line of many, claim analysts "� is an endorsement of the spotlight that India will increasingly find itself in with more international as well as bigger Indian companies scouting for possible targets.

Moreover, prescription drugs worth $50 billion in US and $25 billion in Europe are set to lose patent by 2007-08, creating an unprecedented opportunity for the generic drugs "� Indian companies' forte "� to take on the market. As per industry estimates, Indian firms are likely to constitute 30 per cent of this drug mart. Currently, Indian industry is estimated to account for 22 per cent of the world generic market.

With 74 US FDA facilities "� largest outside US, 35 per cent of DMFs and one fourth of all Abbreviated New Drug Applications (ANDA) submitted to USFDA "� India has the critical requirements in place for leveraging the opportunity thrown up by patent expiries.

From 1970s till 2004, Indian companies had flourished on the back of reverse engineering the drugs of their western counterparts and marketing them in countries like India which had a process patent in place. The process patent allowed the same drug to be manufactured by another process that wasn't infringing on the patented process of the innovator company, and anyone dexterous in process chemistry could find a slightly modified way of doing it.

The product patent regime that came into force from January 2005 changed not just the way regulation stood but also enforced a research oriented line of thinking on Indian companies. Research-based business model is untread ground for Indian companies and if they can make breakthroughs here "� in terms of novel drug delivery systems as well as new chemical entities "� then, coupled with their cost effectiveness, India will have an advantage like none other in the world. As for generic business, it is a game of cost competitiveness that is notoriously linked to scale. This directly implies that the first crucial thing will be to build scale through massive investments (which will be time consuming) or consolidation (which will be a quick fix solution).

The party poopers

Even as the world is focusing on why Indian pharma would make it big, it is worthwhile to examine the chinks in this growth story. First of all, the dragon is turning the heat on Indian bulk drug manufacturers even as the big Indian pharma is trying to tap the potential of China's pharmaceutical market. The scale economies that bulk drug manufacturers in China have achieved, backed by good infrastructure, has forced many of their Indian counterparts to stop manufacture of certain drugs in India. Many more could follow.

This could be the death knell for smaller Indian bulk drug units that survived as suppliers to bigger companies. In fact, big generic companies like Ranbaxy, Dr Reddy's Labs, Jubilant have their subsidiaries there and are eyeing the Chinese market pie. Aurobindo Pharma, Dishman Pharmaceuticals and Orchid Pharmaceuticals have already established their manufacturing bases in China.

China will be a serious competitor wherever large scale, mechanised production is required on account of its economies of scale. In pharmaceuticals, that would mean bulk drugs, APIs and intermediates. In formulations, Indian companies are way above but in API space we are likely to see a lot of aggression from the Chinese manufacturers.

Three out of four Penicillin G producers, J K Drugs, Torrent and Alembic have already closed their units as Chinese imports were available at half the price. Manufacturers of oxytetracycline, doxycycline, norflox and erythromycin too are feeling the heat. "It cost us 1000 crore to set up the Penicillin plant", said an industry executive which is feeling the squeeze on its erythromycin plant. Scaling down of production capacities of Vitamin E by Nicholas Piramal and that of Vitamin C by Ambalal Sarabhai Enterprises, is being undertaken for the same reason.

Pour into the reasons : The chemical industry is doing well in China as the power cost is a half of what it is India while land and other infrastructure is virtually given free. Also naptha, which was a raw material for most of the chemicals and bulk drugs, attracted zero per cent import duty in China.

Even as the bulk drug players are ruing, the big players are busy scaling the great wall. There is an inherent duality in the China angle as the smaller players see it as a threat and bigger ones as an opportunity.

Not just MNCs, even Indian companies can leverage the cost advantage by sourcing the raw materials from there. The allurements are many. China's $12 billion prescription drug sales are skyrocketing. It has an aging population, an increasingly affluent middle class and an growing incidence of cardiovascular and obesity related disorders. By 2010, it would be a $25-billion market and number four in the world after US, Germany, and Japan.

Another issue that Indian companies will have to placate the international pharma on, will be the Intellectual Property protection issues, which is considered to be weak spot for India. Despite a regime in place, implementation of the law is what the global companies are waiting on the sidelines for. Some of the concerns that plague them are lack of data exclusivity, pre and post grant patent opposition as well as nonpatentability of drug derivatives.

India is an interesting case study for one other reason. Even as the country boasts of the maximum number of USFDA compliant units outside of US, it is also home to rampant production of spurious and counterfeit drugs.

While the Mashelkar committee has recommended death penalty for those guilty of spurious drug manufacture, the recommendations are still languishing before the government. On another front of quality control, Good Manufacturing Practices (GMP), specified under Schedule M of Drugs & Cosmetics Act, 1940, became mandatory from July 1, 2005.

GMP outlines guidelines with respect to land area, equipment, storage, master formula records, manufacturing records etc. They are expected to outline and upgrade quality benchmarks in the Indian pharmaceutical sector. Mass scale closures were anticipated as a result of this.

Battling in a sector where smaller units are rather dispensable "� they contribute roughly 15 per cent of total production "� they have already seen their boats rocking in recent times with the introduction of product patent regime, MRP-based excise tax and VAT related confusions. This may force many of them to shut shop.

But then most analysts call this a much needed step and this sort of rationalisation in the industry a normal course of economic flux during a transition period. As a result, the Indian companies will require not just a massive investment in building up scale and marketing prowess to break into global markets, but also a lot of industry discipline.

Prescription for growth

Indian pharma players will require a sound business strategy not just to survive but also thrive. And one size will not fit all, as all companies will have to devise their own strategies to grow.

Orientation towards research is one such focus but it may remain confined to the realm of the big fish like Dr Reddy's, Ranbaxy Labs, Sun Pharma, Glenmark and Wockhardt. There will be risk involved in new drug research but they will also strike a pot of gold, hopefully sooner than later.

The others like Cipla and Nicholas Piramal will keep partnering the global companies and manufacturing formulations for them. JB Chemicals, Taro Pharma, Unichem and Jubilant Organosys also fall in this category. The mushrooming of contract research organisations round the country will keep lapping up opportunities for doing preclinical, late drug development and clinical studies for global drug trials.

This is a path some others, which don't want to invest in high-risk, high-return game of research, might take. Such contract research and manufacturing services (CRAMs) will form a substantive part of survival and growth strategy. The market for CRAMs was believed to be worth $500 million in 2005, with a projection of $1 billion by 2010.

This avenue will, however, be limited to those few who can develop in-house capabilities to handle the clients' requirements such as product registrations in the global markets and manufacturing facilities in compliance with regulated market norms. SMEs which do not possess these qualities are bound to consolidate sooner than later.

Consolidation is going to be the buzzword for times to come and while this was relegated to the domain of bigger Indian players acquiring abroad, the Matrix-Mylan deal has put Indian companies on the radar of global pharma. There are bound to be more such buyouts not just by international innovator and generic companies in India but also by larger Indian companies.

This year has thrown up the largest ever acquisitions in the domestic as well as international pharma space for Indian industry. While Dr Reddy's bought German Betapharm for a whopping Euro 480 million, Mylan bought 71.5 percent stake in Matrix for $736 million (pegging the valuation at over a billion dollars). Add to the list, Ranbaxy's acquisition of Romanian Terapia, Belgium-based Ethimed NV and Italian Allen S.p.A and Wockhardt taking over Irish Pinewood.

Interestingly, where they are not buying out, they are collaborating in a bid to achieve scale as well as add offerings to their product portfolio. Inlicensing of drugs belonging to another company portfolio and leveraging one's distribution strength in the country to push it.

With over 20 marketing license deals been struck in the Indian pharmaceutical sector in the last few months and more in the offing, Indian companies are gearing up to strengthen their product basket without incurring research expenses. The international licenser, on its part, penetrates a new market piggybacking on licensee's distribution network and gets a fixed revenue share, while making no investment at all. Ranbaxy has entered into marketing license agreements with Janssen-Ortho Inc, in the Canadian market; Invagen Pharmaceuticals Inc, in US market ; with Hyderabad-based Zenotech Labs in US, Gilead for anti-AIDS drug Tenofovir, Ethypharm LL India for Tramadol 50 mg and Eurodrug Laboratories for Doxophylline in the Indian market.

Gilead Sciences, besides Ranbaxy, has signed up agreements with seven Indian companies for Tenofovir and is scouting for more. Ahmedabad-based Torrent Pharma has tied up with Chinese company, Tasly to exclusively market Cardio-tonic pill, in India.

Panacea Biotec has a measles vaccine by Indonesian PT Bio Farma, a veterinary vaccine of National Research Development Corporation and with Netherlands Vaccin Instituut for polio vaccines and has atleast three more deals in the offing. Lupin will be marketing ItalFarmaco's cardiovascular product, Enoxaparin Sodium Injection, in India.

While contract research and manufacturing are an important vertical, inlicensing or contract sales will form the third plank of the oursourcing boom.

Pro-generic wave

Governments across the world are leaning towards generic drugs in a bid to reduce their mounting healthcare costs. Most governments of countries like US, UK, Germany and Canada bear the healthcare costs of their employees and with a larger portion of their population greying, they are feeling the need to become cost effective in drug provision.

While US encourages generic competition through Para IV challenges to patents and a following six month exclusivity period, Germany and Japan have also been promoting generics.

The $ 26.43 billion German pharma market has imposed a 30 per cent reduction in drug costs, would also bring changes in reference pricing system and increase the mandatory rebate. Though some Western generic drug makers may feel the heat of price cut, it will pinch the Indian companies much less that have a small base there and are insulated by their cost competitiveness.

The $65 billion Japanese pharma market and second largest in the world may end up being a gold mine for Indian companies as from April 1,2006, a financial inducement has been put in place, for doctors prescribing generic drugs.

Newer markets are emerging in Africa, Russia, CIS, Eastern Europe that will be the growth engine for Indian companies in years to come. Africa, the focal point of all AIDS and tuberculosis related funding, will receive almost $4 billion each year. This will come from agencies like WHO, UNO and other global agencies to fight these diseases. Also, according to an Edelweiss sector report, there are campaigns like Global Fund for AIDS, TB and Malaria, President Bush 's Emergency Plan for AIDS Relief (PEPFAR), Stop TB Partnership.

The Indian pharma are faced with half of this opportunity i.e. $2 billion opportunity each year, with the AIDS epidemic and resurgence in TB and Malaria, sweeping the world. Cipla, Ranbaxy Labs, Aurobindo and Lupin have already begun to move in to capture this market, others like Hyderabad- based Hetero Drugs, Matrix, Strides and Ipca Labs are the next batch of likely entrants.

The Indian policy environment, on the other hand, is in a limbo with the National Pharma ceutical Policy hanging as various industry and government factions thrash out contentious issues. If this policy, in its current form, were to be implemented then the industry can look forward to a slew of Pharma Parks in the country and benefits for the research intensive companies.

Mid sized companies can keep growing

Cipla has quietly carved its niche as a cost effective drug manufacturer that partners global pharma. Amar Lulla, CEO, Cipla speaks to Bhuma Srivastav on the challenges ahead.

What are our advantages?
The most significant advantage is the historical perspective and 50 years of bulk drug manufacturing experience that India has. It is the familiarity that will set us apart. Also, Indian scientists and chemists are the best in the world.

In the post product patent era, what change is required?
There is a need to bring in more efficiencies in technology as we have to gear up for competition from the Chinese pharma industry, which is well supported by their government in terms of subsidies, costs of utilities and infrastructure. On the other hand, we can partner with China to leverage their low cost advantage. As for research, if you go on 'manipulating' a molecule, you will incur huge expenditure without a corresponding benefit. So, it is important that in today's environment, one should stick to the tried and tested drugs and focus on delivering drugs in a more efficacious, safe and patient-friendly manner.

....your stance seems very anti-research?
No, R&D is needed but it is important to know who has the muscle to bring new chemicals entity to the marketplace. Indian companies have to perforce tie up with a big brothers with the likes of Pfizer, Merck, Novo Nordisk etc, who have the international presence and can influence the medical community.

And what is your prescription for growth?
As far as Indian mid-sized companies are concerned, their size is so small in international terms that if they keep expanding their product portfolio and accessing newer markets, they can keep growing comfortably for the next five years. There is scope for alliance-based growth in the form of licensing and collaborations. However, there are challenging times ahead for the big boys as the pipeline of new drugs will be getting scanty, coupled with the fact that the regulators are becoming increasingly cautious.

Chemistry at work

Standing on the diametrically opposite side of the opinion spectrum is Sujay Shetty, associate director, PricewaterhouseCoopers who believes that Indian companies bring their strengths in process chemistry, manufacturing and research skills on the table while collaborating on the international scene:

How do you see the Indian companies faring in the international market?

While the old patents regime, based on process patents, forced the industry to grow through reverse engineering, it allowed them to grow certain skill set in the process. It is this manufacturing background and expertise in process chemistry that will hold them in good stead in the manufacture of next generation of APIs. Customised manufacturing and research (CRAM) will be a vital segment for Indian pharma to focus on with considerable potential.

What hindrances will the industry have to face?

The main challenge in contract research side will be the Intellectual Property (IP) protection related issues. Though we have a patent regime that is TRIPS compliant, simply because we are coming out of the 'reverse engineering' background, we will have to see how robust is the enforcement of IP laws. It is not an hindrance..more like a caveat. Another issue will be the attrition rates across the industry spectrum. Skill sets will need to be home grown and nurtured and in the emerging scenario, hiring and retaining people will be tough. In the low priced local market, affordability and accessibility will be an issue.

Your view on competition from China's bulk drug industry?

The Chinese competition is there and many Indian companies, not just the international ones, prefer sourcing the basic drugs and chemicals from China. Even in APIs and higher intermediates, they are emerging as a serious force to reckon with. But I see it both as a threat as well as opportunity. Indian drug makers can use China as a base for low cost sourcing of drugs. Also, India has a research expertise and it goes higher up in the value chain in pharma. So there isn't a need to worry too much.

What are your growth suggestions to Indian companies?

In this post patent regime, there will be three models of business strategy: innovator companies with focus on R&D, those that specialise in the CRAM segment and finally a set of strong, cost-competitive generic companies. The days of indulging in reverse engineering of drugs and bringing them to less regulated markets is over.

Do you see increasing consolidation here, post Mylan- Matrix deal?

Yes, we'll see a lot more of that happening, both in terms of international as well as Indian companies scouting for targets. Indian pharma has caught the eye of international innovator as well as generic drug makers. A lot of joint ventures, acquisitions, alliances "� both inbound and outbound "� are definitely on the cards.