Popping ‘Growth’ Pills

Buoyed by increasing life spans & lifestyle diseases, the global pharma sector posted a robust YOY growth of 7% for 2006 to register turnovers of $643 billion, and there’s no doubting the sustainability of this growth story. But the same can’t be said for individual players, big or small, who are looking up every strategy in the book to churn out those magical numbers.

They came, they saw, they conquered, they bloated and then they fell like a pack of cards. The R&D giants of the pharma industry have faint memories of the heady days in the 1990s, when the blockbuster drugs were making a killing in the market and making headlines. Today, these companies are still making headlines… but not for blockbuster drugs, but blockbuster restructuring plans! The story is the same, be it Pfizer, Merck or GlaxoSmithKline. Furthermore, they are facing an unprecedented scourge from developing economies, keen on invoking the compulsory licensing clause of the TRIPs agreement, a further blow to their efforts towards discovering new drugs. As pharmaceutical giants continue to grope in the dark on their way towards revival, there are quite a few ominous indications that the entire landscape of the global pharmaceutical industry is undergoing massive transformation.

Indian pharmaceutical players have been among the frontrunners that have moved in for the kill, more so in the post-liberalisation era. They are not just reveling in the plethora of opportunities that have opened up, thanks largely to a number of patents expiring. Indian companies, irrespective of their size, are taking up the cudgels in every sphere of the gargantuan pharma space, and they even have a war chest ready to enable them to gobble-up First World companies, as and when required. However, on the other hand, the Indian players have also learned (the hard way) how tough the generic business can be. This is a space that has seen murderous price wars (particularly in the US), despite the fact that China, the undisputed master of the pricing game, doesn’t account for much in the pharma sweepstakes. Even though they are enjoying their day in the sun, these firms still lack the financial and R&D muscle of the beleaguered pharma giants. Will Indian firms ever be able to metamorphose into giant killers? We take a closer look…

Who’s pills are they anyway?

Driven by the increased longevity of populations, strong economies and innovative new products, the pharmaceutical industry has been performing robustly for quite some time now and last year was no exception too. In 2006, the market in North America, which accounts for 45% of global pharmaceutical turnover, grew 8.3% to $290.1 billion, up from 5.4% the previous year. While the five major European markets - France, Germany, Italy, Spain and UK grew by 4.4% to reach $123.2 billion, sales in Latin America grew by 12.7% to $33.6 billion. Asia Pacific (excluding Japan) and Africa too grew at a steady pace of 10.5% to reach $66 billion. However, a price cut by the government forced the Japanese market to witness a marginal decline of 0.4% in its revenue from the previous year to $64 billion. Pharmaceutical sales in China also grew by 12.3% to $13.4 billion in 2006, but that surely was a steep decline, when compared with the 20.5% growth pace in the prior year (IMS Health).

Transitioning from a developing market to an emerging one, India was one of the fastest growing markets in 2006, with pharmaceutical sales increasing 17.5% to $7.3 billion (IMS Health). Representing 8% of the global industry total by volume, putting it in the fourth place worldwide, it accounted for 13% by value (according to a KPMG report). Being one of the top five manufacturers of bulk drugs in the world, it also ranks amongst the top 20 pharmaceutical exporters. Further, with drug exports growing at around 30% annually, the industry has truly stood adequately high to get noticed.

Elixir of life

So while standing tall provides the Indian pharmaceutical industry with the required visibility, it’s the vibrancy that boosts its growth, a fact that has been instrumental in its huge success across the globe. Now with a more than two years of existence under the product patent regime (introduced in January 2005), a lot of things seem to have changed. A shift in focus for growth in the marketplace (away from mature markets to emerging ones and from primary care classes to biotech and specialist-driven therapies) has been the order of the day globally, with India being no exception. One of the most evident examples of this is the shift from US market towards Europe. Indian pharma majors, who made their fortunes in the US during the last vestiges of the previous century, now for the last couple of years, seem busy focusing on other markets, particularly Europe.

For the first time in its history, Ranbaxy reported a 78% year-on-year jump in European sales at $93 million for the quarter ended March 2007, while its revenues from the US grew by a miniscule 3% to $86 million. It was not the only Indian pharma major. 50% of Wockhardt’s revenue was from Europe and even Dr Reddy’s Labs (whose maximum revenues were still from US), witnessed a significant rise in sales from Europe. Its revenues from European generics (including betapharm) stood at $223 million, as against $56 million in FY ’06.

In addition, a majority of other players too seemed to be attempting hard to follow the trend. This is due to none other than the increasing pricing pressure in US and one may thank one’s stars for this phenomenon. For quite some time now, the quest for newer avenues, also made the Indian pharmaceutical industry witness a significant rise in the number of mergers & acquisitions, well supported by a number of strategic tie-ups and licensing deals. According to a report by the US International Trade Commission, in only 2005-06, 18 Indian companies shelled out approximately $1.6 billion to acquire generic drug manufacturing firms in Europe, North America, and Mexico. These companies included Ranbaxy, Dr. Reddy’s Labs, Nicholas Piramal, Sun Pharmaceutical and Jubilant Organosys. Strategically, most of these M&As involve Indian companies looking for means to penetrate global markets, diversify and enhance product portfolios, improve manufacturing capabilities, increase their presence and profile globally, improve R&D capabilities, taking over potentially strong brands and of greatest significance, to gain access to highly regulated markets, without the hassles of having to start from scratch.

“We expect that the industry will further witness consolidation and only players with strong technical and research capabilities and a global vision will survive,” Ramesh Adige, Executive Director, Global Corporate Affairs & Communications, Ranbaxy, shared his views with B&E. Moreover, the industry’s long-established position as a preferred manufacturing hub for multinational drug makers has also now started spreading into various other areas of outsourcing activities in the pharma domain. It’s the soaring costs of R&D and administration that have forced multinational giants to increasingly move more of their discovery research and clinical trials activities to India, capitalizing on the country’s high levels of scientific expertise coupled with low wages.

More to come!

Malvinder Singh, MD & CEO, Ranbaxy Laboratories, prophesises, “India will surely witness the rise of a few pharma giants, who will make it globally in the coming years...” With its continuously growing reputation the world over as a producer of high quality, cost-effective medicines, India is now in a position to pitchfork itself as a global hub for the entire slew of upstream & downstream activities in the pharma business and the world, too, has lot to offer it. According to a recent KPMG study, a number of primary care classes are experiencing slowing or below market-average growth due to entry of lower-cost, high-quality generics and switches to over-the-counter products. Last year, generics represented more than 50% of total pharmaceutical products sold in seven key world markets. This trend presents a huge opportunity for the Indian pharma industry in an area where it has gained tremendous expertise. Prescription drugs worth $40 billion in the US and $25 billion in Europe are due to lose patent protection by 2007-08 (KPMG) and according to the Assocham forecasts, Indian firms are likely to gobble around 30% of this emerging pie. Needless to state, low production costs equip India, which currently accounts for 22% of the world market in generics (KPMG), an edge over other generics-producing nations, especially China & Israel. Over-the-counter drugs and bio-generics are among the most promising emerging areas for Indian drug manufacturers. According to G. V. Prasad, CEO, Dr. Reddy’s Labs,“Bulk of the drugs coming off patent in the future will be biotech drugs and in the coming years, we will see biologics playing an even more important role in therapy.”

Dr. Kamal K. Sharma, MD of Lupin Limited agrees that generics will continue to play a major role. “The generics market is witnessing rapid growth opening up immense opportunities for companies. This is further bolstered by the fact that generics worth over $60 billion are going off patent in the coming few years...,” he tells B&E. Moreover, defeats faced by generic players in the patent infringement litigations over their key products have also shaken Big Pharma to quite an extent now. Ranbaxy and Dr Reddy’s Labs have already bowled out challenges from GlaxoSmithKline (GSK) and Eli Lilly with regard to patents of their respective drugs ‘Ceft in’ and ‘Prozac’ in the past. The recent victory by Ranbaxy in a patent litigation case against Pfizer in Norway for a cholesterol lowering drug called Atorvastatin (marketed by Pfizer as Lipitor) has once again boosted the confidence in generic players. Even a relatively small firm like Lee Pharma has tasted blood against the mighty Eli Lilly with regards to Olanzapine, the generic version of Zyprexa.

Another area picking up very fast amongst the Indian pharma companies is contract research and manufacturing services (CRAMS). Apart from few big names like Nicholas Piramal, Aurigene (Dr Reddy’s) and Ranbaxy, it’s particularly the small & medium size companies that are concentrating on developing their CRAMS businesses. At present, India accounts for around 6-7% of the total CRAMS market globally and is expected to command at least 15% of the market by 2010 (US International Trade Commission). Globally too, the segment is estimated to grow at an annual average rate of 10.8% to reach $168 billion by 2009 (KPMG).

Moreover, as weird as it may sound, India has one of the largest pool of patients suffering from cancer, AIDS and diabetes, and this is working as a double- edged sword. Coupled with our large population and poverty, the scenario becomes perfect! Confused? Th e reality is that for pharmaceutical giants from across the globe, this group of patients is a potential market for the clinical trials of their products. India has become one of the premier outsourcing hubs for the same. Testing of standard drugs in India costing 60% lesser than in countries like US & UK. In 2003, the number of Indians undergoing clinical trials was 2,000 and the revenue generated was $35 million. By 2010, experts estimate these numbers to surge to 2 million people and over $1 billion in revenue. According to Dr Ajit Dangi, Director General, Organisation of Pharmaceutical Producers of India (OPPI), “Conducting global clinical trials in India is a major outsourcing opportunity as we have abundance of technical & scientific manpower, well trained medical professionals, a large and naïve patient population towards drugs & cost competitiveness.”

The intellectual property rights regime also proffers India a chance to grow further. According to C. L. Rathi, MD, Advanced Enzymes Technologies Pvt Ltd., “The industry can grow through intellectual property, IP region is the best way to grow by creating novel technology and becoming a technological force.” Dr. Dangi sums it all up saying, “India can easily reach a total market size of about $20 billion. By 2010, we can become the global leaders in supplying good quality medicines at affordable prices.”

Are we there yet?

As good as the above statistics may sound, we should not forget that compared to international standards, we are still lagging behind. According to the US International Trade Commission, India’s pharmaceutical companies dedicate less than 2% of their annual turnover to R&D, compared to between 15% and 20% allocated by their western counterparts. Ranbaxy is the leader with around 7%. Anindya Acharya, Deputy Director, Pharmaceuticals Division, CII explains, “The advantage these companies (read Big Pharma) have over Indian firms is their size. With India being a highly cost competitive market every company wants to limit their R&D spending. After all, at the end of the day, every company would like to show profit to attract shareholders. As a result, the huge gestation time for R&D acts as a deterrent.”

It is feared that price competition will catch up in Europe as well. Unless Indian companies move up the value chain, they will always be at risk of hitting rock bottom. Acting prudent, leading players like Ranbaxy, Dr. Reddy’s Labs et al have started evaluating other emerging markets across the globe like Brazil & Russia, along with some East-Asian, African and CIS countries, where the markets are emerging and remunerative. Popular destinations include parts of East-Asia like China, Singapore, Thailand and particularly Japan. Indian pharma majors like Ranbaxy and Zydus Cadila have marked their presence in the Land of the Rising Sun. While Ranbaxy has acquired majority stake in Nihon Pharmaceuticals Industry, a JV with Nippon Chemiphar, Zydus Cadila took over the Japanese Nippon Universal Pharmaceuticals Ltd. to gain a foothold in the $3 billion Japanese generics market. Dabur has also expanded eastward by acquiring Biosciences, a drug distributor company. Clearly a lead for the rest of pharma players to follow suit.

Some issues also need to be addressed from the regulatory point of view. One of the most controversial policies has been the Drug Price Control policy. Since the last 30 years, the span of price control has been slowly reduced to around 20%, whereas it was 100% at one point. However, the National Pharmaceutical Policy 2006 shows us the way ‘backward’ by proposing to expand price control to all the 354 essential drugs, in addition to 74 currently controlled. Opines Dr. Dangi, “The government should move away from micromanaging ‘cost based price control’ to ‘price monitoring’.”

Compulsory licensing is another haunting issue. A compulsory licence allows a generic drug-maker to make a copycat version of an original drug. However, he has to pay a certain amount of royalty to the innovator or the original manufacturer. The TRIPs agreement permits governments, in special cases like national emergency, to waive licences. There are countries including India, Thailand & Brazil where this may be invoked, even if government feels the product price is not reasonable, among other issues. While this does offer short term gains, it could act as a deterrent for Indian players, when their patented drugs face such regulation in other countries.

Pharmaceutical manufacturers feel that they should also be given the added benefit of data protection, which disallows their data to be shared with any third party generics manufacturer. According to Dr. Smarta, MD of Interlink Consultants, a top pharmaceutical consultancy, “Data exclusivity is fair from the manufacturer’s point of view. Suppose I conduct clinical trials, I would not appreciate if my research is taken advantage of by others. The data protection act needs to be worked on and purpose of the policy should be well considered.” In India, the debate over data protection has raged on for years, while our counterparts in China, Taiwan, South Korea et al have already implemented it and are reaping benefits. Ranbaxy’s Ramesh Adige says, “Establishment of acentral autonomous body to regulate all aspects of the Indian pharmaceutical industry and permission to conduct in-country Phase-I clinical trials for compounds discovered outside India (in case an Indian company is in strategic partnership for discovery and development process with a foreign company) are some of the industry’s needs that needs to addressed on urgent basis.” Another niggling problem is the fragmented structure of industry, with over 24,000 registered units. While we may have made nearly $7.3 billion in sales in 2006, this amount is distributed between all the units in varied quantities. This type of a structure obstructs the potential to grow in a uniform manner. No matter how well we are performing on the global front, but when it comes to India, it still remains untapped to its full potential. “The market size in India is so large that there is a scope for tremendous growth out here,” opines Mohan Motwani, Executive Director, Megha Healthcare.

The pharmaceutical industry has been performing robustly for quite some time, but ultimately, the progress of Indian pharmaceutical sector will be determined by how well it penetrates several regions, its forward and backward integration capabilities and consolidation through M&As. Of course, without the R&D focus, they will never be immune to rude pricing shocks that have now become the norm in this industry. Short term pains on the shareholder front will have to be borne to enable long term gains. Ask Big Pharma what it means to fall from those ‘Indomitable Heights’! It sure hurts, and in all the wrong places!

Big daddy in trouble

Now it’s not a secret that the ‘Big Pharma’ are struggling to maintain their traditional double-digit growth rate. Employee lay-offs & plant shutdowns have become the order of the day, besides other cost-cutting measures. Delivering a weighted average return of -2.4% per annum between January 2001 and March 2007 to its shareholders (PricewaterhouseCoopers report), the so-called Big Pharma seems to be in ill-health. Despite continued expansion of the pharmaceutical market, financial health of this branded drug industry, dominated by giants like J & J , Pfizer Inc., Merck et al is a reason for concern as blockbusters worth $65 billion are set to expire in next few years (KPMG report). An estimated $157 billion worth of sales of Big Pharma is set to be exposed to generic erosion worldwide (PwC) and it’s not a wonder that the generic companies are gearing up to grab a pie of this huge emerging market, where the leading pharma players are supposed to lose between 14% and 41% of their existing revenues (PwC). Moreover, with only few blockbuster products on the anvil to replace these older products whose patents are expiring, there seems to be another cause of worry. According to PwC research, only 9 of the total 18 new treatments launched in the US in 2006 came from the labs of Big Pharma, a pattern that has barely changed over the last few years. In 2006, only two Big Pharma companies earned more than 10% of their revenues from products that are less than three years old. Still worse, those 38 products generated only $10 billion of the $316 billion Big Pharma earned from its entire medicines portfolio.

Riding on high tide

After about three decades of an inward focus, the Indian pharmaceutical industry recently seems to have understood the importance of exports. This is due to declining profit margins and the extremely price-competitive nature of the domestic Indian pharmaceutical market. Boosted by the reduced manufacturing costs, India’s pharmaceutical exports grew from $1.9 million in 1999 to $4.7 billion in 2006 (according to World Trade Atlas). Growing at a CAGR of 22.7% over the last few years (according to the government’s draft National Pharmaceutical policy for 2006), exports at present account for over 30% of the industry’s total revenue. At present, India exports pharmaceuticals to more than 200 countries with the vast majority, by value, being destined for the developed economies of the west, particularly US which accommodates 28% of India’s total pharma exports. Apart from Russia, Germany, UK & China, Indian pharma industry is also evaluating opportunities in developing economies including Brazil, Mexico, Australia, south-east Asian countries, and countries of Africa and the Middle East. According to the Associated Chambers of Commerce and Industry of India (ASSOCHAM), Indian companies will capture at least 30% of the aforementioned market. Also, coupled with the amount of mergers, acquisitions, technological licensing agreements and other collaborations, we can safely state that the future is looking bright for Indian pharmaceutical exports.

Retail therapy at work

As the retail boom sweeps across India, the shopping habits of Indians have undergone a sea change. When it comes to purchase of drugs, our neighbourhood pharmaceutical store continues to enjoy its dominance. However, this highly fragmented drug retailing format, comprising some 550,000 traders (according to AIOCD, India’s largest drug retailing body) now seems to be turning towards organized retail therapy for growth. Pegged at around $6 billion at present and growing at 10% YOY, as compared to 7% annual growth for world markets (RNCOS), India presents a very promising scenario. Following success of brands like Global Healthline, Apollo Pharmacy, Dr. Morepen & Subhiksha, names like Reliance-ADAG, Aditya Birla Group, Zydus Cadila, Fortis & Cipla too are planning their retail formats by 2010. Even drug retailing associations have started transforming into corporate entities. “We are in preliminary stages of negotiations with global giants like Pfi zer, Sanofi - Aventis & Indian majors like Wockhardt, Alkem & Lupin for exclusive marketing & distribution tie-ups,” A. N. Mohan, President, AIOCD told B&E. Globally too the drug retail sales have grown by 5% with value pegged at $395.39 billion (IMS Health). Even in a saturated market like US, drug retailing has shown steady growth of around 8% between April 2006 & March 2007. It’s time to stock up!

Bending the rules

If the Patent Act of 1970 infused new life in Indian pharma industry, then adoption of new patent regime in 2005 surely witnessed the return of MNCs to India. The new patent regime not only enabled the development of innovative new drugs leading towards the profitability of international drug manufacturers, but also forced domestic players to focus more on R&D. Moving ahead with reforms, the government now seems committed to make India’s laws & policies relating to IPR, including data protection, fully compliant with TRIPs provisions (Draft National Pharmaceuticals Policy 2006). However, looking at certain issues that remain unaddressed to date, one surely feels Indian pharma still has a long way to go. Issues like definition of patenting, limiting only to New Chemical Entities & compulsory licensing – the processes by which the TRIPs agreement permits governments, in special cases, to waive the patent on a particular medicine, still need to be looked at. The industry currently faces restrictions on imports, high tariff rates & ration requirements. Going by the KPMG report, in future the industry will be defined by the manner in which the prices of patented products are controlled and, therefore, it is critical that the government gets things right. An early establishment of a Food Safety & Standards Authority is also among some of the industry demands. Definitely, the government now needs to provide incentives and allow companies to make additional profits that can be ploughed back by these companies, in order to encourage research. Apart from this, tax incentives should also play an important role in attracting more foreign investment. Well, it is time to let in the fresh air.