Indian pharma firms prefer alliance pill for expansion

Marketing alliances in emerging markets continue to be at the heart of the expansion strategy of Indian generic players

After the initial spurt of acquisitions that started in 2003, Indian pharmaceutical companies are increasingly focusing on alliances to expand their global presence. An example is the recent tie-up of Dr Reddy’s with Merck Serono, a subsidiary of German pharma multinational Merck KGaA, to develop and market biosimilars worldwide.

While this underscores the scope in the biosimilar market, alliances in the traditional generics route, too, have been on the upswing, with companies focusing on markets such as Brazil, Commonwealth of Independent States, South Africa and Mexico.

Subrata Ray, senior vice-president and co-head (corporate sector ratings), ICRA, says, “After giving preference to acquisitions in the initial phase, Indian companies are entering tie-ups with MNCs (multinational companies) to scale up presence in these markets. These include Dr Reddy’s-GSK Pharma, Sun-Merck and Cadila-Abbott.”

The emerging markets pie
Indian companies are eyeing the market in emerging countries, as this is expected to increase from $150 billion to $285-$315 billion in three years, says an ICRA report on the sector. Compare this with the low, single-digit growth in developed markets, in which the patented product portfolio is drying up. Therefore, while MNCs are eying new products to boost sales growth, Indian companies are eyeing new markets to expand their geographic footprint. Also, given these geographies offer opportunities similar to the domestic formulations segment and the fact that about three quarters of the key emerging markets are accounted for by branded generics and command high margins, expansion seems logical. Balaji Prasad of Barclays Research says Indian companies could adopt any of the three options available to these for their ‘pharmerging’ (non-US, non-India) expansion —alliances with global pharma companies, acquisitions and organic expansion.

GOING THE ALLIANCE ROUTE
	Strategy

Dr Reddy’s –
Merck SeronoTo co-develop a portfolio of biosimilars 
in oncology segment for multiple markets Sun Pharma –
MerckTo develop & market branded generics
for emerging markets Dr. Reddy’s – 
GSKTo develop & market branded generics
for emerging markets CadilaHealthcare – 
Abbott To market branded generics in
emerging markets Aurobindo –
 AstrazenecaSupply agreement for 
emerging markets The list is only indicative reflecting major deals Source: ICRA and other reports

Acquisitions: A mixed bag
While initially, the preferred route was acquisitions, these did not deliver the desired results. With the exception of Sun Pharma’s acquisition of Taro, which is paying rich dividends, those like Dr Reddy’s acquisition of Betapharm for $570 million have not been fruitful. While Dr Reddy’s is struggling with the tender-based model in the German market, Wockhardt’s acquisition of Negma Labs ($265 million) hasn’t lived up to expectations.

Big-bang acquisitions without testing the waters have hurt companies. Given their experience, Indian companies are likely to adopt a cautious approach. Prasad of Barclays Research says, “In our view, inorganic opportunities that arise from here could be on a smaller scale, with regard to capabilities and technologies, compared with earlier acquisitions.”

Alliances: The preferred route
The reason for the jump in alliances between Indian companies and innovator multinational companies has been the ‘win-win’ outcome for both, say analysts. Credit Suisse’s Anubhav Aggarwal says alliances are logical, as MNCs that already have a sales and distribution set-up get more products to sell in emerging markets, while Indian companies can bank on the network without adding costs for setting up their own front-end in new geographies. The alliances can continue as long as both parties benefit. Prasad agrees, saying he expects more alliances due to complementary strengths and believes organic expansion would be the least preferred option, given the complex regulatory process, as well as market dynamics. Expect more alliances going ahead, as the combination of low-cost, Food and Drug Administration-approved India facilities and MNC marketing muscle proves irresistible.

KEY EMERGING MARKETS
Countries	Market size ($ bn)	Generics market		Major presence
		($bn)	(% of total)
Brazil	23.0	12.0	50.0	Torrent, Cadila, Ranbaxy, Glenmark
Mexico	10.0	4.0	40.0	Ranbaxy, Torrent, Glenmark, Sun Pharma
Russia	14.0	5.0	35.00	Dr Reddy’s, Ranbaxy
South Africa	4.0	1.0	30.0	Cipla, Ranbaxy, Lupin
Philippines	3.0	0.5	15.0	Lupin, Glenmark
Source: Barclays Research, other reports

Not according to plan
While on the face of it, this strategy makes sense, things have not turned out as anticipated in some cases. Consider the Pfizer-Biocon alliance. The two called off their $350 million alliance for developing and marketing biosimilar insulin. With Pfizer changing its focus from insulin products to monoclonal antibodies, Biocon would now have to look for another partner to market its insulin products globally. Though Biocon is likely to retain a large part of the $200 million it received from Pfizer, it would have to chalk a separate path.

The Napo-Glenmark alliance, too, hit a roadblock as the foreign licensing partner terminated the agreement, alleging breach of contractual terms due to delay in regulatory filings. The matter has gone into arbitration and is pending with the American Arbitrations Association.

While some alliances have not clicked, analysts say these would take time to develop, given marketing products across boundaries requires complying with the countries’ laws and getting products registered, which is a time-taking process.

Going alone
Some companies plan to go solo, while others may follow suit in the longer run. Analysts say companies are probably using alliances as the first step to building long term presence in these markets. Says Aggarwal of Credit Suisse, “Alliances are only the first step for Indian companies to enter more emerging markets; eventually, Indian companies would enter with their own front-ends in these markets.”

Given the patent cliff that would lead to a fall in exclusive generic opportunities in the US, front-end presence in emerging markets would be required, as it helps lower the risk to growth in the event of a break-up with the partner. Additionally, says Hitesh Mahida of Fortune Research, “Companies which invest in front-end infrastructure would be able to benefit the most, as this turns into a major revenue source, which could partly make up for the off-patent opportunities.” The second issue favouring direct presence in emerging markets is the question of control. Mahida bets more on companies that have direct front-end presence and marketing control, rather than contract manufacturers for pharma majors.

Companies such as Glenmark, which have presence in markets such as Brazil, Mexico, South Africa, Russia and Philippines, are also in favour of setting up their own front-end, rather than market through tie-ups. Glenmark Chairman and Managing Director Glenn Saldanha says, “Glenmark has always believed in investing in its own front-ends, registering differentiated products and selling these through its own sales force. This business model takes some time for fruition, but this, we feel, is a more sustainable business model and reaffirms our commitment to the market.”

Other companies, however, are adopting a twin strategy of direct presence in markets where these are entrenched, while tying up with pharma majors for other markets. An instance of this is Dr Reddy’s, which has strong front-end presence in Russia, while it has tied up with GSK Pharma to market about 100 drugs in fast-growing therapeutic segments in parts of emerging markets such as Africa, West Asia, Latin America and the Asia-Pacific, regions where the company does not have major presence.