Strong medicine

Why Indian pharma companies believe they can withstand the China threat.

First, the bad news. Global pharma executives aren't as enamoured of the Indian pharma industry as we would like to believe.

In fact, they're more likely to head towards our northern neighbours than stick around waiting for us to improve practices and lower costs. Those are the broad findings of a survey released last month by management consultancy Bain & Co.

The survey, which questioned 179 respondents across North America, Asia and Europe, had some very unwelcome numbers. Given a choice between India and China, 90 per cent preferred China for its low-cost drug manufacturing. And even while half the respondents felt that India has developed faster than China, only 14 per cent believed it had a cost advantage.

The report quotes Bain & Co Managing Director Ashish Singh: "The Indian pharmaceutical industry now stands at crossroads. If India is looking to be the home for quality generic drugs, it needs to step up its innovation game."

Now for the good news. Indian pharma companies aren't overly worried by the report. Hear these voices:

"Indian companies continue to have a head start, particularly in the highly developed and regulated markets where a strong front end and integrated play remain key factors of competitive advantage." Malvinder Singh, CEO and MD, Ranbaxy Laboratories.

"The Indian pharma industry has evolved from being seen as iffy quality and dismissed as a no-threat to being looked at with respect." Amar Lulla, Cipla co-managing director.

"The Indian pharmaceutical industry is now recognised in the US and Europe as an important supplier of low-cost, high quality medicines."

Habil Khorakiwala ,chairman, Wockhardt.
What possibly can explain this optimism?

Go generic

At $50 billion, the global generics (copies of off-patent drugs) market is less than 10 per cent of the total pharma market ($556 billion). But it's growing faster (12 per cent) than the overall market (7 per cent).

In the next three years, another $60 billion worth of drugs will enter the generics space and the market will grow at 13.3 per cent to cross $83.9 billion by 2010 (Source:Vision Gain).

What does this mean for India? A lot. India accounts for close to 15 per cent of the global generics market. Last year, the combined turnover of Indian pharma companies was $8 billion, of which nearly 55 per cent was from global sales. And this is completely generics driven, since India doesn't have any new drugs of its own.

Indian pharma companies are investing substantially to bolster their presence in the generics business. In February, the Rs 1,947-crore Dr Reddy's Laboratories spent over ¤480 million to acquire Betapharm, the fourth-largest generics manufacturer in Germany.

And the Rs 5,188-crore Ranbaxy has been on a shopping spree for most of 2006: Terapia in Romania for $324 million, Ethimed NV in Belgium and Allen S.p.A in Italy, all in March, followed by Mundogen, GlaxoSmithKline's generics business in Spain, in July.

Meanwhile, what's happening in China? The generics business there is huge "" more than 95 per cent of the market is accounted for by off-patent drugs. However, nearly all Chinese companies operate only in the $14 billion domestic Chinese market.

A 2004 report by Newport Strategies ("China and India: Where is the value in the global supply chain?") puts the issue in perspective: "China does not have a Ranbaxy, Cipla or DRL. No Chinese pharma company has attained the global reach or has the development, launch, regulatory or IP capabilities of the integrated companies."

The thought is echoed in a 2005 Ernst & Young report ("Unmasking China's pharmaceutical future"), "China has not evolved in the same way as Indian companies. Most Chinese companies are focused on the domestic markets and are not prepared to compete with multinational generic companies."

Still, there are important reasons why China is on everybody's radar, and why the Bain survey rated the country's prospects higher than India. It is expected that China will be the world's largest pharmaceutical market by 2050, and the fifth largest by 2010.

Agrees Nicholas Piramal Executive Director, custom manufacturing group, Michael Fernandes, "China's domestic market is nearly three times the Indian market. Margins, too, are higher, which is why most firms want to be in China."

Low cost is in

China is low cost for everything, and pharma is no exception. So Indian companies, too, have no choice but to reduce costs. "In the 1990s, Indian engineering companies started squeezing costs. But we had robust growth then and didn't follow them. Now most Indian pharma companies are trying to use techniques like TQM and just in time to reduce costs," says Saumen Chakra-borty, CFO, Dr Reddy's Laboratories.

Since 2004, Dr Reddy's has implemented execution excellence processes in its operations, which helps it identify lead and lag indicators in key business process.

For instance, by tracking prescriptions, the company can know the geographies where doctors prescribe a drug and where they don't. Distribution of the drug can be finetuned accordingly, helping Dr Reddy's save on inventory and transportation costs. Chakraborty says on-time deliveries are now up to 90 per cent, from under 75 per cent two years ago.

Some pharma companies are investing in cost management. Last year, the Rs 790-crore Glenmark Pharmaceuticals set up a 15,000-sq ft clinical research unit at Turbhe, Navi Mumbai, to conduct bioequivalence and bioavailability studies on human volunteers (these tests are conducted to ensure the generic drug is identical to the off-patent original).

Glenmark considers the Rs 4 crore investment money well spent. The cost of clinical trials by the company, usually $800,000-750,000 a trial, has come down nearly 20 per cent.

Says Glenmark Vice President, strategy and investor relations, Vikram Janakiraman, "Not only does the facility reduce cost, it also helps in timely filing of generic dossiers."

But not all cost-cutting strategies begin at home. Some begin in... China. Some Indian pharma companies have discovered the best way to keep their overheads low is by sourcing intermediate products, such as solvents and coating agents, from Chinese manufacturers.

Bulk drugs, too, are 15-20 per cent cheaper in China compared to India. China has been a significant source of materials for companies like Ranbaxy and Dr Reddy's.

"We continuously implement newer technologies and leverage our scientific capabilities to squeeze costs and extract greater efficiencies from our operations," says Ranbaxy's Singh. Analysts approve. "While China has a cost advantage in large scale chemical manufacturing, India enjoys a clear edge in drug formulation. So it makes sense for India to source material from China and formulate them here," says Bain's Singh.

Smart research

New drug research is a gamble: the discovery of a single new molecule can change a company's fortunes, but there's no guarantee that a discovery will be made. No Indian pharma company has till date discovered a new drug.

In spite of that, companies have only increased their R&D spends year after year. In 2001, Dr Reddy's invested Rs 40 crore in research; last year, it spent Rs 172 crore. Ranbaxy's R&D kitty, too, is swelling: from Rs 51 crore in 2001 to Rs 486 crore in 2005.

Those are big numbers, but analysts say they're nowhere close to what is really needed. The cost of a single new drug, estimates Datamonitor, is $1 billion.

It will be a long while before Indian pharma companies can afford to spend that kind of money, but they do have options. There are currently about 60 new compounds in various stages of development.

Rather than invest further in taking them to drug stage, Indian companies can license discovered molecules to multinationals, which can afford the several rounds of expensive clinical trials. That's what Glenmark did in 2004.

It licensed its molecule Oglemilast (GRC3886) to Forest Laboratories for $190 million, granting rights to sale in North America. Forest is now taking the drug through the various clinical trials. Last year, Glenmark received $20 million from Forest and another $6 million from Japanese pharma major Teijin, for sales in Japan.

But the key to the research conundrum may lie in changing the nature of research. Rather than invest more in drug discovery, it may be better value for money to invest in researching drug delivery systems.

New drug delivery systems essentially mean finding newer ways of rendering the medicine "" launching tablets in syrup form, for instance, or working out lowered dosages for existing drugs. More than 10 per cent of Ranbaxy's sales come from novel drug delivery systems (NDDS) products where the company owns patented property.

In fact, Ranbaxy was quick off the mark in realising the potential of this line of research: its first success in NDDS was back in 1999, when it sold the global licence for its once-a-day ciprofloxacin (an antibiotic that had a thrice-daily dosage) to Bayer AG.

Says Ranbaxy's Singh, "It will be our endeavour to build a proprietary prescriptions business based on NDDS and new chemical entity research."