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Pratik Kadakia, Jeffry Jacob and Ankur Singhai of

Tata Strategic Management Group

Emerging Opportunities In The Indian Pharmaceutical IndustryGlobal pharmaceutical companies are increasingly under pressure due to a host of factors, including relatively dry pipeline for new drugs, higher R&D costs and increasing pressure from Governments for reduced healthcare costs. The industry is bracing itself for some fundamental changes in the market place and is looking at newer ways to drive growth. These global trends will have serious implications for domestic pharmaceutical companies. However with the right strategy, Indian companies are very well poised to take advantage of these changes and successfully navigate the future.

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Global Pharma under pressureEven before the current economic

downturn set in, global pharmaceutical companies were under pressure. Global pharma majors are hit by a double whammy of drying New Chemical Entities (NCE) pipeline and patent expiry of top selling drugs over the next few years. In 2007, the FDA approved just 19 new drugs, the lowest in over two decades. Declining productivity, relatively dry pipeline for new drugs, higher cost of approval for new drugs, and a host of other factors have been leading to lower profitability.

The developed markets comprising of US, Europe and Japan, which have traditionally been the stronghold of patented drugs, are expected to witness lower growth going forward. Impending policy changes promoting use of generics is expected to further dent the top-line and bottom-line of global pharma majors.

The global companies have responded to the dwindling sales and dry product pipelines by acquiring their peers and in the process creating global pharma goliaths. In order to sustain growth, most companies are looking at M&A as the way forward. Innovator companies are increasingly buying out generic companies (e.g. Daiichi Sankyo’s acquisition of Ranbaxy) or entering into strategic alliances (eg. GSK-Aspen) to participate in the fast growing generics market. As per Merck Chairman and CEO Mr. Richard T Clark, the USD 41 billion acquisition of Schering Plough will provide Merck “benefit from a formidable research and development pipeline, a significantly broader portfolio of medicines and an expanded presence in key international markets, particularly in high growth emerging markets”.

Leading pharma companies are also looking at newer areas like biologics and increasing their presence in emerging economies to fuel future growth. Cost competitiveness has become more important than ever and companies are

looking at outsourcing all non-critical elements of the value chain.Opportunities for Indian pharmaceutical companies

These global trends have far reaching implications for Indian pharmaceutical companies across the entire value chain, from generic players like Dr. Reddy’s to contract manufacturers like Piramal Healthcare. Indian companies need to re-look at their strategies carefully and see how best they can respond to the new scenario. Some of the ways the Indian players can take advantage of the emerging opportunities are:

Leveraging the domestic market opportunityWith the growth in US and developed

economies expected to taper off, emerging economies like India are expected to drive future growth. The key growth drivers in these countries are increasing per capita income, growing insurance penetration, be t te r hea l th awareness , h igher government expenditure, adherence to IPR norms and shift in disease profiles.

The Indian market was estimated at USD 8 billion in FY2008 and is expected to grow at 10-12% CAGR for the next five years. Life style related or chronic therapeutic segments are expected to grow at a much faster pace than the more

traditional acute segments. Crisil forecasts the Anti Diabetic segment to have a CAGR of 19% over the period 2008-13 compared to 14% for the Anti-Infective segment. This has led to MNCs such as Pfizer, GSK, Roche and Sanofi Aventis launching almost 15 on-patent products in India with an eye on high value life style related therapeutic segments.

Indian companies are well positioned to partake of th is huge domest ic opportunity. Indian companies need to broaden their product portfolio to include growing therapeutic segments such as anti-diabetics, central nervous system and cardiovascular. Companies can now sell premium products to aspiring Indian middle and high class, while at the same time continue their focus on low value but high volume bottom of the pyramid class

Moving up the value chain in CRAMSIndia is today recognized as a global

manufacturing hub, with nearly 40-50% lower production costs than the US and the largest number of FDA approved facilities outside the US. Several Indian companies jumped on to the CRAMS bandwagon during the first phase, which was characterized by manufacturing low value high volume intermediates, APIs and carrying out clinical trials. Strong domestic and international competition has already brought down margins in these traditional segments. The global consolidation may trigger optimization of assets both in manufacturing and research thus affecting the future business of contract service providers. CRAMS companies could be at a disadvantage during negotiation of contracts with the consolidated entity as the quantum of work offered by a single entity would potentially increase.

Indian companies need to sustain their competitive advantage by consistently focusing on reducing costs and moving up the value chain. CRAMS players need to look at niche areas such as oncology

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and other high-potency APIs. Antibody drug conjugates (ADCs), which are monoclonal antibodies linked to cytotoxic small molecules, is another area where contract manufacturers could look to expand. Increased outsourcing in the biopharmaceutical space also presents the contract manufacturing companies with new avenues for growth. Finished product/ Dosage form, injectables manufacturing and lypholization services are the other promising areas for contract manufacturers.

Focusing on meeting end to end needs of innovator companies and venturing into new areas in the CRAMS space would allow Indian companies to differentiate from other low cost manufacturing nations and provide it the ability to give better value and charge higher margins.

Increasing foothold in BiologicsThe biologics market was estimated

to be nearly USD 70 billion in 2008. Though this appears small compared to the overall pharma market, there were 150 deals announced in 2008 alone worth nearly USD 94 billion. These deals mostly involved pharma majors like Roche (Genentech), Eli Lilly & Co. (ImClone Systems), etc. Closer home, global majors GSK and Sanofi Aventis were in detailed discussions to acquire Shantha Biotech. Four biologics made the top ten and seven biologics made it into the top twenty selling drugs of 2008. US biopharma companies alone spent over USD 65 billion in R&D last year. This has lead to a very robust product pipeline with several drugs in late stages of development. Even with the current debate on Biosimilars (generic version of biologics), the market opportunity post patent expiry for most biologics in 2017 is expected to be immense.

Indian companies cannot afford to miss the bus on biologics. This market is still in nascent stage and offers a first mover advantage to companies which can get their strategy right. However unlike the traditional pharma segment,

entry barriers are very high in this space due to the investment involved. Biologics based companies in the west, which have previously received funding from venture capitalists may now find it difficult to raise cash under the current economic scenario. This presents a good opportunity for Indian pharma companies with significant cash on their balance sheet to scout for suitable targets to gain market and technology access.

Opportunities for M&A and strategic tie-ups I n c r e a s i n g n u m b e r o f g l o b a l

acquisitions have been made in the recent past by Indian companies for strategic objectives like market entry, technological or manufacturing expertise and distribution facilities. The global market continues to offer these opportunities for domestic companies looking to expand their international presence.

Strategic tie-ups with global companies offer several opportunities for Indian companies to create ‘win-win’ situations, particularly in R&D and distribution.

The consolidation amongst global majors is expected to translate into stronger competition for Indian companies, especially in the global market. This may result in more frequent and longer litigations for generic drug manufactures, thereby increasing costs and making them financially vulnerable. With increasing interest in the generics portfolio of these companies, global majors will look at acquisition opportunities. This may provide financially lucrative opportunities for domestic companies looking to cash out.

Strategy: Key to successfully compete in the new environment

R&D divisions of Indian pharma companies have started making the move from reverse engineering to development of new molecules. India is developing its capability in New Chemical Entities and is looking to launch its own patented

drugs going forward. Domestic pharma companies should continue their focus on innovation to develop New Chemical Entities/ New Molecular Entities (NCEs/NMEs) which offer sustainable revenues going forward. Increasing collaboration with global pharma companies help in sharing costs and risks, while ensuring better results. In-licensing/ out-licensing by pharma companies is an area that should be actively considered.

Indian companies need to develop their long term strategy in international markets on an individual country basis. Their decision to compete either in high value markets like US or in volume markets like Russia, Brazil will determine their options, whether it is physically setting up operations in these countries or operating through strategic and marketing alliances.

Higher value segments like cancer related drugs or high potency APIs in the bulk drug space are other areas Indian drug manufacturers could look at. The Indian industry needs to develop and improve capabilities in novel drugs and delivery mechanisms. Biologics is another area where Indian companies can look at actively serving the market.

In CRAMS, India has already made a mark with contract manufacturing of generic drugs. Contract manufacturing of innovator drugs is an area that offers great potential for the future. Indian CRAMS companies need to continue focusing on cost competitiveness, but at the same time they should increasingly move up the value chain and offer higher value added products.

T h e c u r r e n t e n v i r o n m e n t i s challenging, but at the same time it throws up several new opportunities for the Indian pharmaceutical companies. What worked in the past may not necessarily hold them in good stead in the future. Companies which take cognizance of the fundamental changes the industry is going through and re-jig their strategies accordingly will be able to successfully navigate the future.