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Indian pharma's search for the magic pill

While MNCs are invading India in a desperate quest for new markets, Indian pharma firms are struggling to expand and rise up the value chain in a tough, competitive environment.

E. Kumar Sharma        Print Edition: November 29, 2009

Today’s top-tier Indian pharma companies will either cease to exist in their current form or find the way they conduct their business significantly altered,” says Malvinder Mohan Singh, former promoter of Ranbaxy (and current group Chairman, Fortis Healthcare and Religare Enterprises). At first glance, this comment comes across as little short of sensational. But then, Singh knows a thing or two about the Indian pharma landscape, having opportunistically cashed out by selling his company to Japanese drug giant Daiichi Sankyo in a deal valued at over Rs 9,000 crore. Also, a quick scan of the Indian pharmaceutical landscape reveals that an upheaval has already begun. What could have precipitated the unravelling of an industry that, only ten years ago, was heralded as a future star?

On the home front, the problems are self-evident: Indian firms are still nowhere near producing a new drug. In the generic drug space—most Indian players are focussed on generics—firms have yet to claw their way to the upper tiers of the global generic industry valued at around $100 billion (Rs 4.8 lakh crore) and occupied by companies such as Teva and Watson. At one point, a decade or so ago, Indian generics were buoyant at the prospect of numerous drugs going off-patent, hoping to quickly capitalise by pushing out cheap, generic versions of them. What they did not anticipate were canny moves by foreign pharma to protect their turf by churning out ‘authorised’ generics, selling ‘branded’ (but not patented) versions of their original drugs for higher prices and taking the battle to the upstarts by also wading into the generics business.

If all of this weren’t enough to produce bouts of anxiety amongst Indian firms, foreign pharma giants, struggling with growth rates of 3-4 per cent in their own markets (the global pharma market is valued at around $800 billion, US alone at $300 billion ) are storming the citadel of Indian generics—a market of $8 billion (Rs 38,400 crore) but growing rapidly at around 14 per cent. India, with the 4th largest pharma market in terms of volume and 13th in terms of value is obviously the place to be today. “Developing countries like India, with their growing middle class, represent a vital opportunity for geographic expansion, given that only 35 per cent of the population has access to medicines,” says Ranjit Shahani, President of the Organisation of the Pharmaceutical Producers of India (OPPI) and the Vice President and Managing Director of Novartis India. This means a rash of deals where MNCs are either looking aggressively for acquisitions, or some kind of partnership with Indian firms.

Perhaps the biggest catalyst for Indian Pharma was the Hatch Waxman Act in the US—legislation passed in 1984 that, while protecting the intellectual property of innovators, also opened up opportunities for companies to develop safe and affordable generics. This transformed the US drug market and electrified generic companies—including Indian ones. Firms like Teva, Sandoz and Mylan emerged as the biggies to beat in the generic game. Many Indian players, led by Ranbaxy, Dr Reddy’s and others, also started aggressively filing ANDAs (abbreviated new drug applications) in the late 1990s, while chasing drugs that promised 180-day market exclusivity. The flip side of all of this is that today, competition in the US is cutthroat as the generics market has become heavily commoditised, compelling Indian companies to acquire a global footprint—especially in growth markets such as Latin America and Africa—instead of just relying on the US.

Singh says that he was able to read the tea leaves about this impending shake-out way back when he was meeting regularly with CEOs and chairmen of Big Pharma. “It was clear that they would need a strong presence in the emerging markets and build a model that sees the coming together of innovation and generics,” says Singh. How accurate was he? After the Daiichi Sankyo deal, Singh points out that Sanofi picked up the largest branded generics company in Central and Eastern Europe (Zentiva), one in Latin America (Medley in Brazil), Shantha Biotechnics in India and is still scouting for others. Moreover, GSK picked up a company in Egypt, in Pakistan (Bristol-Myers Squibb Pakistan), took a stake in a company in South Africa (Aspen Pharmacare) and now has an alliance with Dr Reddy’s. Pfizer—largely seen as the one company not inclined to get cozy with generics—now wants to enter the generics market as well. Merck, too, is talking about getting into biogenerics.

If foreign competition wasn’t already tightening the screws on Indian pharma, other developments have dragged these former high-fliers down to earth. Glenmark Pharmaceuticals has faced two major setbacks in the last year—its trial for ‘Oglemilast’, aimed at treating patients with chronic obstructive pulmonary disease (COPD) didn’t achieve satisfactory results; it also had to suspend clinical development of GRC 6211, which was to treat osteoarthritis pain. Even more damaging, the Rs 4,300-crore Sun Pharma faced some heat in June this year when the US Food and Drug Administration (USFDA) seized drugs manufactured by its US subsidiary Caraco Pharmaceutical Laboratories at its Michigan facilities for “repeated manufacturing standards violations”. Reports suggest that Caraco isn’t the only one at the receiving end of the FDA’s wrath. “The regulatory environment is far more rigorous than was hitherto imagined,” says Utkarsh Palnitkar, Partner, Ernst & Young India.

India, of course, will remain a hot zone for companies peddling drugs, but how will Indian companies fare in this new landscape? “India will continue to play a key role in the global pharmaceutical landscape in R&D (innovation and generics), manufacturing and in the global generic market as a provider of high quality, cost effective medicines,” says Singh. “But will it be Indian companies who will play a key role? That is a question which is up for grabs,” he adds. E&Y’s Palnitkar says that global pharma have the choice of looking at Indian companies either as contract manufacturing organisations (CMOS) or as acquisition targets. However, he thinks that acquisitions may be cumbersome, due to existing contracts with competitor global pharma firms.

Others feel that the sheer expanse of the generics market in India and the expertise of Indian firms in catering to this market make these firms indispensable. “If you look at the generic companies globally, Indian companies are one of the biggest in the world and have the scale and the footprint to be able to partner a global company,” says Dr Hasit Joshipura, MD, GSK India and VP, South Asia, GSK. That to him is one reason why GSK tied up with Dr Reddy’s in India for catering to its emerging markets needs. Some, like Wockhardt, are not even interested in a partnership. “We have received offers but I am not interested in selling out as I believe that there is a great opportunity ahead,” says Habil Khorakiwala, Chairman ,Wockhardt. (At the time of writing, Pfizer was reported to be taking a close look at Wockhardt’s biotech business.) His logic is simple but compelling. “In 2001, about 80 per cent of the industry’s global growth in dollar terms came from the developed countries. In 2008, 84 per cent of the growth came from emerging markets. There is a tectonic shift taking place. Today, emerging markets contribute 21 per cent of the global pharma industry. In next 20-25 years, it will be 50 per cent. In this emerging market reality, India plays an important role,” he adds.

So what will Indian pharma look like in five years? We take a look at Wockhardt whose problems—including huge debt because of acquisitions and currency hedges gone horribly awry—are emblematic of many Indian firms today (see Saving Wockhardt, pg 116). Its fortunes could very well inform how Indian Pharma evolves. Another feature explores a lessheralded stalwart of the pharma landscape, Mankind (see The New Face of Indian Pharma, pg 120), which through its unusual business model, has been able to take the battle to global as well as local generics.

Whichever way you look at it, for Indian pharma to keep abreast of the rapidly changing dynamics of this global industry, they need to grow right—build scale, file more ANDAs and enter both new therapies and new markets. This means adopting both value as well as scale as a strategy, according to a recent Morgan Stanley report, and targeting what the report calls “higher hanging fruit”—difficult markets (Japan, Latin America, Africa), complex generics (controlled release, combination drugs, hormones) and incremental innovation (new molecules, novel drug delivery systems, better-targetted drugs) which are substantially more high-value products than lowmargin generics. This may be a tall order for Indian Pharma, but in order to survive—and come out on top— in the years ahead, any other plan of action may be a prescription for a quick demise.

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