Pharmaceuticals firms change the prescription

Last year, when Nicholas Piramal chairman Ajay Piramal was shopping for companies, at home and abroad, little did he know that he would soon have to change his strategy and switch over to an organic growth model.

Ditto with Dr Reddy's (DRL). Till recently, DRL was banking on opportunities where it could contest a patent in the US market and if successful, launch its products.

Now its strategy for the Us market hinges upon high-tech products which are not easy to make and replicate.

Similarly, Elder Pharmaceuticals could barely predict that its consumer healthcare division would be its future growth driver.

Glenmark Pharmaceuticals' decision to set up a research and development (R&D) centre in Switzerland was beyond anyone's comprehension as Switzerland is a high cost location.

After all, Swiss drug major Novartis AG has shifted its research base to India. Clearly, domestic pharmaceutical companies are re-designing their business strategy to align themselves in a new environment of intellectual property protection.

With the scope for reverse engineering diminishing, R&D investment by domestic companies is gaining momentum. Already, average spend on R&D has increased from 5-6 per cent of their turnover an year back to 8 per cent, currently.

Then, there is an emerging world of opportunity in generics. Drugs worth $30 billion are going off-patent in the next three to four years. The challenge for Indian companies is to develop and make the generic versions of these drugs available at the lowest possible cost.

Companies are experimenting with ways and means to meet these challenges in the most non-disruptive way.

"Although mergers and acquisitions really contributed to the building of our company, we are now bringing in a sharper focus on organic growth. Acquisitions make sense only when the acquirer can manage and grow the assets better than the seller," says Piramal.

The company is transforming itself from bulk or active pharmaceutical ingredients (API) supplier to custom manufacturer, providing end-to-end solution from custom chemical synthesis, intermediate development to manufacturing bulk drugs and APIs and even formulations.

Glenmark setting up its R&D base in Switzerland is indicative of the rate at which domestic companies are increasing their focus on R&D.

Companies such as Matrix Laboratories, Wockhardt, Orchid Chemicals, Torrent Pharma, Nicholas Piramal, Sami Labs, Suven Pharmaceuticals, Shashun Chemicals are all committing more and more funds towards basic and development research.

"Our research spend on innovation-based projects has increased to over 50 per cent of our R&D budget, with investment of Rs 75 crore planned for this year and the next. We expect international market for both formulations and bulk actives, to account for a much larger part of our turnover. We expect much higher sales from the regulated markets from the present level," says Dilip Shanghvi, chairman of Sun Pharmaceuticals.

The change in DRL's business strategy is, however, largely linked with the short-term profitability crises along with a shortage of funds investing in building a pipeline for the future. An unfavourable US court verdict on Amlodipine has forced the company to re-engineer its US strategy.

Elder Pharmaceuticals' business model has so far been based on strategic marketing alliances. Now it is acquiring brands. The idea is to have assured money churning properties as marketing alliances are time-bound.

Says Anuj Saxena, director, Elder Pharmaceuticals, "We are working on a strategy to grow our consumer healthcare division from around Rs 20 crore at present to over Rs 400 crore in the next three years. The division will be the company's future growth driver."

Industry bigwigs such as Ranbaxy, Dr Reddy's and Sun Pharmaceuticals "" all basic research driven companies "" are ramping up their bulk drugs and formulations manufacturing capacities back home and even abroad. Ranbaxy, for instance, plans to invest close to $100 million in setting up new manufacturing capacities.

"The company's foray into novel drug delivery systems (NDDS) has led to proprietary 'platform technologies' resulting in a number of products under development," says a Ranbaxy spokesperson.

Cross-border partnerships, be it in the field of R&D, manufacturing or marketing, are a common strategy for the entire industry. Most of the companies are in talks with potential partners for alliances.

There are compelling reasons for Indian companies and MNCs joining hands.

"While the Indian companies bring on to the table distribution, sales and marketing support covering the length and breadth of the country, an MNC facilitates development of a molecule on global basis. Alliance in terms of outsourcing helps MNCs cut cost considerably," says Rajiv Gulati, chairman and managing director, Eli Lilly (India).