SMS PHARMACEUTICALS LIMITED
ANNUAL REPORT 2007-2008
SMS PHARMA IS PASSING THROUGH EXCITING TIMES. The excitement is derived not
only from what we have achieved, but what we expect to achieve and what we
are doing about it.
We are transforming our presence from a manufacturer of products to a
knowledge-driven provider of comprehensive solutions.
The niche business model:
We are decisive about the kind of business model constituents that will
make this a reality.
Consider the contextual environment:
About 11 leading drugs, including four blockbuster drugs worth USD 20
billion, are going off-patent in 2008 in the US alone. By 2011, drugs worth
around USD.60 billion will go off-patent (IMS Health, pharmaceutical
consultant) and about USD 100 billion products are likely to go off-patent
With so many products going off-patent, the pertinent question to ask:
where will the new products come from? How will the industry manage
spiralling research costs in developed economies? How competently equipped
is the industry to address the tight timeline?
The prevailing realities point to an increased role of outsourcing
research. Consider this: a new drug takes around 9.5-15 years on average
from the stage of discovery to approval to be commercialised, warranting
around USD 28.9 billion in investment (Source: ENAM India Research).
Besides, with New Molecular Entity (NME) and New Drug Approvals (NDA) not
throwing up any spectacular results, leading innovator companies across the
world are seeking cost-effective research alternatives. In view of this,
global R&D outsourcing is expected to accelerate and extend beyond in-house
R&D spends. The result: 30% of bulk drug manufacture of pharma R&D is
outsourced by global majors (Source: The Economic Times 3rd March 2008) and
this number is expected to rise.
In line with this emerging reality, we have commissioned a new R&D hub,
comprising 10 large laboratories, which will be used in contract research,
custom synthesis and infrastructure leasing.
At SMS Pharma, we have outlined a two-pronged strategy to capitalise on the
1. Research-led growth:
We will be leasing our R&D centre at Gagillapur comprising laboratories
with requisite infrastructure, manpower and inputs to global MNCs. This
income represents a win-win for both parties: our clients do not need to
invest in R&D infrastructure or manpower. They can monitor research
operations and retain an easy exit option. For us, this will translate into
sustainable annuity revenue,
Contract research and custom synthesis:
Our ready infrastructure, cutting-edge technology and intellectual capital
provide us with the confidence to partner with leading global innovator
companies for drug development.
The large number of products going off-patent provides us with a huge
generic opportunity for utilising our intellectual capital to shrink the
product lifecycle and make products cost-effective.
2. Solution-led growth:
NCE research and manufacturing costs are eroding margins of global
pharmaceutical majors. We are expanding capacities and providing world-
class infrastructure. For instance, we invested a substantial amount in a
technologically sophisticated, US-FDA compliant greenfield facility at
Vijayanagaram in Visakhapatnam. This mylti-product, multi-capability unit
is expected to be commissioned in March 2009. This facility could be used
for cost-effective product manufacture by our clients. In the interim, we
have one US FDA-approved, dual-line facility, which can be used for product
manufacture. This would complete the entire basket of services and position
us as a preferred CRAMS partner to global pharmaceutical majors.
Other growth drivers:
Our other knowledge-driven growth areas comprise the following:
We expect this therapeutic segment to emerge as a key business driver,
growing at over 25% annually over the last five years, the highest among
We are working on the oncology segment since 2002 and have developed
significant competencies in this segment.
* In 2003, we patented one process for an important oncology product.
* We developed two process patents each in Gemcetabine and Imatinib.
* We recently developed improved cost-effective processes in Capcitabine
and Bicalutamide, which enabled us to market the product at a third of the
existing cost, without a concurrent compromise in quality and
Existing Indian players in the oncology segment have created dedicated
blocks in multi-product facilities for oncology. But this is going to
change. Oncology will require completely dedicated facilities as these
products are cytotoxic in nature. While this is a global practice, it is
expected to become mandatory in India through the approval of regulatory
policies. We have provided for the growing needs of tomorrow today.
Our business model:
We invested a substantial amount in a dedicated oncology facility in Pharma
City, Visakhapatnam, which will manufacture oncology APIs and formulations.
For the client, formulations complete the entire bouquet of services. The
client benefits from the entire value chain - from research to
manufacturing APIs to FDFs - at a single location without any capex,
leading to a highly cost-effective solution.
The arrangement positions us as a preferred business partner for the
growing CRAMS opportunity. Besides, an entry into formulations
strengthens our profitability.
Our cost effectiveness:
Although oncology products are required in small quantities by mid-sized
companies (between 5-10 kgs per month), they need a technologically
superior facility benchmarked with global standards, requiring a huge capex
(between Rs.2,500-Rs.3,000 lakhs) making it unviable.
Our plot is more than sufficient for the API facility so the cost of
setting up a formulations unit would be lower than others. Our huge
formulations capacity will enable us to derive significant economies of
scale and deliver a cost-effective solution. More importantly, our API
plant is designed to make two products simultaneously, reducing overheads.
2. New therapeutic segments:
In addition to the anti-ulcer segment, we are looking at other high-growth
therapeutic segments (anti-migrane, anti hypertensive, anti-fungal, anti-
diabetic, cardiovascular, retroviral and anti psychotic, among others). Our
R&D is in the process of developing several new products, which are
expected to be commercialised over the next 36 months.
3. Inorganic growth:
We were a single-product company only as recent as two years ago; we are
now a 25-product organisation due to two factors: research-led growth and
Sreenivasa Pharma's merger (added nine products to our portfolio). We
needed operational capacity to manufacture these products for which we
acquired Plant Organics, comprising 40-plus multi-capability and multi-
capacity reactors. We can shift some of our products or intermediates from
the existing plants to this new unit, releasing capacities for
commercialising the new products, which is expected to contribute to our
business growth from 2008-09 onwards.
4. Geographic diversity:
Our successful extension into Latin America in 2007-08 substantially
contributed to our topline during the year under review and this is likely
to increase over the coming years.
Rationale for our Latin American entry:
Latin America has the potential to dominate the generics market. Most of
the continent's APIs are imported from India, China, the US and Europe.
Besides, these markets are growing at an average of 13% and are expected to
reach USD 50 billion by 2011. Mexico established itself as the 10th largest
pharmaceutical market in the world, followed by Brazil and . Argentina, SMS
Pharma is establishing its presence in the regulated markets. One of our
units received the US-FDA approval; we filed 11 DMFs up to 2007-08 and
expect to file six DMFs in 2008-09. We plan to file 20-25 DMFs from our
Vijaynagaram plant to cater to regulated markets during the medium term.
Rationale for our US entry:
Valued currently at over USD 712 billion, the global pharmaceutical market
is growing at around 6-7% annually. As per a study from the Centres for
Medicare and Medicaid Services, US healthcare costs are expected, to grow
at an average of 6.7% annually-from a total of USD 2.2 trillion in 2007 to
USD 4.3 trillion in 2017. The per-person spending on prescription drugs is
expected to more than double from USD 761 in 2007 to USD 1,537 by 2016.
Message to shareholders:
Going ahead, our blueprint will transform SMS Pharma from a manufacturing
presence to a knowledge-driven organisation, from a single API company to a
presence in high-growth multi-therapeutic segments, as well as from a
supplier of APIs to a preferred business partner, to global pharmaceutical
majors providing solutions across the pharmaceutical value chain.
I would like to emphasise that SMS Pharma is going through a strategic
churn, the result of which will progressively reflect over the coming
years, enriching shareowners and vindicating our conviction that knowledge
is the most effective capital.
With warm regards,
Ramesh Babu Potluri
Chairman and Managing Director