A suitable alternative

Resulting in global pharma companies asking questions about how this issue can be resolved. One potential solution could be to outsource the research and manufacturing arms of their business. Indeed, according to industry sources, the global pharmaceutical outsourcing market, which currently stands at over $20 billion, could reach in excess of $50 billion by 2010.

The usual suspects (read: China) are attracting all the attention in relation to suitable outsourcing venues. But, as with the proliferation of call centers, it is India that is making the most noise and attracting the attention of the major players – 2005 witnessed a large number of deals between Indian and multinational pharma companies, in the form of mergers, acquisitions and outsourcing contracts and this activity is set to continue, the deal earlier in the year between GVK-Biosciences’ and Wyeth, being proof in point.

Indeed, India has overtaken Germany and China as the pharmaceutical industry we are most talking about, so much so that the country now has R&D capacity second only to the US, at one-fifth of the cost – cost savings can be as much as 85 percent on R&D conducted in the West – and the highest number of FDA-approved drug manufacturing plants outside the US.

With the world’s fourth largest reservoir of scientific manpower and 150,000 MSc Chemistry graduates per year, India is also filling a hole being left in the EU and US, where graduates are abandoning science for more lucrative careers in business. Indian graduates also offer multinational companies the advantage of speaking English and the productivity benefits they can offer are continually being recognized.

But as with most new ventures, there are risks with investing in India, such as is its heavy reliance on oil consumption, and whether or not it can further develop adequate infrastructure and regulatory rules that will satisfy foreign pharma investors according to news reports.

Furthermore, despite attempts to prevent the practice, producing counterfeit drugs is also a concern, although India does not feature in the top five countries that are responsible for producing fake drugs, even though, according to commentators, the US does.

India still has a long way to go before it is a dominant pharma industry figure, but the potential is there, and the country is actively grabbing its chance to be the next big thing. Which is why NGP asked Utkarsh Palnitkar, Partner & Industry Leader, Life Sciences for Ernst & Young, to examine the shifting realities of India’s complex market and discuss the trends in its pharmaceutical future.

Pharma’s passage to India

Indian companies are going global while at the same time global companies are putting their India strategy in place to tap the opportunities that the market offers.

Three main changes have happened over the years:

• Change in IP (intellectual property) regime from process to product based.
• Co-optition: focus on alliances (be it licensing, contract research and manufacturing, co-development, co-marketing, etc.) as a means to grow and sustain business.
• Indian companies going global: adoption of inorganic avenues of growth.

Present perspective
India’s pharmaceutical market ranks fourth in the world in volume and thirteenth in domestic consumption value. Three forces are shaping confidence levels of foreign multinationals looking for local opportunities:

• Legislative reforms (IP alignment with global standards)
• Contract research and clinical trial capabilities
• Growing middle class and prospects for health insurance

The domestic industry has evolved substantially and transformed itself from a reverse-engineering led industry; focused on the domestic market, to a research driven, export-oriented industry with a global presence.

Generics dominate, but brand opportunities increasing

The Indian pharmaceutical market is dominated by generic medicines, which currently account for 70 percent of overall sales. However through a combination of multinational and large, R&D-focused manufacturers the country is on course to emerge as a global innovation-intensive pharmaceutical giant. The re-introduction of a product patent regime caused a turning point in the domestic market. Indian companies are re-evaluating their business models – either by choice or by necessity.

Background

The industry has been consistently charting a high growth rate in the 1990s and 2000s. The industry, which was severely controlled by the Government in the 1970s and 1980s to ensure that medicines were sold at affordable prices, has gradually been liberalized in the 1990s and 2000s.

The companies have their strategies in place to leverage opportunities and appropriate values existing in formulations, bulk drugs, generics, Novel Drug Delivery Systems (NDDS), New Chemical Entities (NCE), Biotechnology, etc. The industry has thrived so far on reverse engineering skills exploiting the lack of process patent in the country. This has resulted in the Indian pharmaceutical players offering their products at some of the lowest prices in the world. The quality of the products is reflected in the fact that India has the highest number of manufacturing plants approved by US FDA, which is next only to that in the US.

The highly competitive nature of the domestic pharmaceutical market imposes strong low-cost manufacturing discipline, which is a key strength in this industry.

The inherent characteristics can be clubbed into three broad headings:

1. Regulatory (Government price controls, intellectual property systems and practices)
2. Importance of price sensitivity (negated by rise in disposable incomes and a growing middle class of around 300 million people with increasing healthcare expectations. Around one third of these can afford to pay for good quality private healthcare and this number is growing)
3. Low-cost manufacturing base and access to highly trained skilled manpower

India story: opportunities and challenges

The industry is on the threshold of strong growth, driven by consolidation in the global generics market and untapped potential in the domestic market.

Prospects for MNCs

India presents major opportunities for multinational pharmaceutical companies in clinical trials, contract research and manufacturing. The licensing opportunities for big pharmaceutical companies as well as the collaborative business model including services give access to low cost smart intelligent base, indigenous technology and most importantly the large domestic market.

The most important advantage India presents is low cost that includes the low development costs, low fixed asset costs, low clinical trial costs and low cost workers.

New health insurance initiatives in India have increased the affordability of the middle class population. There are about half a million people who can afford good quality healthcare expenditure. However, the problem remains as urban areas are the important private sector investment centers and the rural areas still do not have access to good healthcare system. Due to India’s vast rural population, only one third of the country’s inhabitants have access to medical care. Although the Government is investing in healthcare for the underprivileged, around 65 percent of hospitals and 85 percent of hospital beds are in urban areas. This situation is expected to improve in future with access to better medical facility.

The OTC segment is expected to grow with the increasing collaborative pharmaceutical industry and Government initiatives along with proper regulatory framework, which will enhance the business.

The growth opportunities can be seen in the chronic segments such as diabetes, cardiovascular, central nervous system disorders, cancer and other maladies. As second largest population base India presents significant clinical trial opportunities because of the low cost and large diverse pool of untreated patients.

Major pharmaceutical companies such as Aventis, Novartis, GlaxoSmithKline, Eli Lilly, Pfizer and Novo Nordisk have started clinical trials across India especially in Andhra Pradesh and Gujarat.

Drawbacks

Much of this is attributed to shortcomings in the current Indian regulatory environment as India still offers no data exclusivity and there is also the issue of domestic drug pricing.

In an attempt to develop a world-class pharmaceuticals industry, the Prime Minister's Office (PMO) is working on a policy for the sector. The new drug policy is an all-encompassing policy framework that is being drafted by an expert committee to provide guidelines to the pharma industry. The main objectives of this policy are: to ensure availability of essential pharma products at reasonable prices; to strengthen the indigenous capability to produce cost effective and quality products and export pharmaceuticals by reducing barriers to trade in the sector; to strengthen the system of quality control over production and distribution; to encourage R&D in the sector; and to create an incentive framework for the industry which promotes new investment into the industry.

The tipping point

The challenges in product patent regime in the generics business are significant: margin pressure, legal issues, parallel launch of authorized generics, accessing the distribution channels and so on.

Margin pressures continue to rise in the regulated international generic markets, because of a host of factors, such as increasing competition from India and other low-cost destinations; more aggressive brand defense by innovator companies (via authorized generics, for instance); and increasing bargaining power of large distributors in these markets.

Further, the attractiveness of the US market has suffered some setbacks in recent periods, especially for the large generics targeting exclusivity. The reasons include legal challenges by patent holders delaying and increasing the cost of launch; authorized generics taking away large market share and hence profit from the generic patent challenger during exclusivity periods, amongst others. These factors have severely impacted the exclusivity-related profits that generic players seek from the US market.

All this has necessitated a re-look at existing business models and developing alternative models in preparation for the future.

New business models

Drug discovery

Post January 2005, after alignment of the Intellectual Property (IP) system with global standards, Indian companies have started preparing for business in a flat world. They have also already initiated the process of building up a drug discovery program. Some companies had started this process, years ago in the mid-nineties.
The business models involving R&D fall in either one of three categories: basic drug discovery; contract research; and co-development leading to in-licensing opportunities.

Drug discovery is no longer an option but has become a strategic imperative for Indian companies. The effect is apparent in the increase in R&D spending by Indian companies. R&D spending as a percentage of sales has increased dramatically in the past five years, from two to 10 percent

Services

Indian companies have started positioning themselves as a one-stop shop solution services provider from drug development work to large-scale manufacturing. They are doing this by leveraging the advantages that accrue from operating in this geography, that is, speed and cost without compromising on quality.

In a way the service sector has evolved over time, starting from low value intermediates/APIs to higher-end dosage development work. Outsourcing has been incorporated by the MNCs in their strategic plans as a way to tap into best practices and to help them stick to their core competence. Thus, the following years will see the volume of transactions rise manifold.

Key trends

1. In a fiercely competitive market like India, the ability of pharmaceutical companies to continually add new products (internal pipeline/licensing) in line with the emerging demand patterns is the route adopted by MNCs to sustain growth momentum.
   
   Pharma MNCs with relatively smaller presence or with limited sales force in specific therapeutic segments would either have to build up a wide network or in-license to a partner with a strong muscle in that particular therapeutic area.
2. Inorganic avenues of growth are being seriously looked at by domestic pharma companies to take advantages of the flattening world. Indian companies look for pipeline, relationship-building and technological competence as the major influencers in any acquisition.
   Indian companies are pursuing acquisitions to:
   • Improve global competitiveness
   • Move up the value chain
   • Create and enter new markets
   • Acquire assets (including research and contract manufacturing firms), new products or gain technological competence
   • Compensate for continued sluggishness in home markets
3. Business strategies pertaining to adopting a collaborative approach for drug discovery to strategic sourcing to divesting of manufacturing assets with a buyback business are some of the strategies increasingly used to work along with Indian MNCs. To cite an example the divestiture of Mexico facility by Roche with baseload business enable two fierce competitors to collaborate and come together for realization of synergies.

Co-optition denoting collaboration and competition whereby companies collaborate in identifying best practices and sharing the various steps in drug discovery to competing on generics and in the market has been identified by all the leading MNC players and their Indian counterparts.

To cite an example GSK and Ranbaxy have set up an early-stage partnership in drug research, under which GSK will provide the Indian firm with leads, Ranbaxy will conduct lead optimization and animal trials, and GSK will take the drug through human trials. GSK will have exclusive rights to sell any resulting product in developed-world markets, and the two firms will co-promote it in India.