Is the US party over for Indian Pharma?

DEBATE

Sanjiv D Kaul,
Managing Director ChrysCapital

The total market capitalisation of the Indian pharmaceutical industry is $28 billion. As the US takes care of about a quarter of the value created by the industry every year, about $7 billion of the market capitalisation is at risk.

The US component of the market capitalisation has a higher degree of speculative value factored in its calculation as compared to the domestic component that has a greater degree of predictability.

It is this component that will see some corrections going forward in line with the trend shown by the global generic sector that has moved into a cyclical downturn characterised by slowing demand, high capital expenditures, over supply and falling prices.

Big, global generic players are now looking to back-end their operations in India to negate some of the downsides associated with this cyclicality. Two fundamental changes in our approach to doing business in the US are needed.

One, the focus has to be on the industry play and not just the marketplace. Two, the mindset has to be collaborative, rather than confrontational. Simply focusing on the marketplace and adopting a confrontational approach will lead to a sub-optimisation of the opportunities.

Hitherto, Indian Pharma has largely looked at the vanilla generics and first-to-file Para IV challenges and has met with initial success. Two of the biggest successes in recent times in the US have been the Cefuroxime story of Ranbaxy and the Fluoxetine story of Dr Reddy's.

But, after those highs, there have been none that could have catapulted Indian Pharma to the next horizon. Skill sets, competencies and mindset required to manage the descending curve of the cyclicality are different from that required to manage the ascending path.

While we should consolidate on the traditional India strengths of cost competencies, formulation development and regulatory expertise, we will be better off focusing on the industry play and adopting a collaborative approach.

Authorised generics is a huge opportunity and Indian Pharma should position itself as a partner of choice with the multinationals in the US. Many of them don't have "generics" subsidiaries and would look forward to such alliances.

Similarly, contract research and manufacturing (CRAM), clinical research and bioinformatics are some areas that India has still not leveraged effectively thus far, and which could be great drivers for value creation in the near future.

Indian Pharma should also use this unique opportunity to push generic industry consolidation forward by leveraging their relatively high market capitalisation levels through the merger and acquisition route, especially in the US.

Indian Pharma has been distinctively laggard here with no immediate signs of aggression visible. Clearly, those that reinvent themselves faster and smarter will emerge as winners.

Until then and for the rest, a question mark will continue to persist alongside a sigh that the lunch is over and dinner is still far away.

H Khorakiwala,
Chairman Wockhardt

The Indian pharmaceutical party in the US is yet to begin. In less than seven years, India has made its presence felt in the US. It is a remarkably short time to penetrate the world's largest, toughest and most sophisticated pharmaceutical market.

This is an outcome of the unique strengths that the Indian industry has built in recent years. It has mastered the scientific skills required in generic pharmaceutical business.

Indian companies have combined this strength with the ability to meet the stringent regulatory requirements in manufacturing and filing for US FDA approval. We talk about patent challenges by leading companies like Dr Reddy's, but seldom hear about the innovation and science that have prompted these patent challenges.

Indian companies straddle the complete value chain "" research and innovation, manufacturing of active ingredients, formulation of dosage forms, testing and filing. We do it to US FDA standards and at costs that few can match. This is a unique, sustainable package that has made the Indian industry stand out in the world.

Few countries outside India can boast of such strengths. That is why you don't hear about Korea, Taiwan or even China posing a challenge to established players in the US.

Besides, American generic companies, the only other players in the US are a handful of European companies and Teva of Israel. The Big Pharma in the US never perceived American generic industry as a threat. But it is now awake to the Indian challenge.

India's leading pharmaceutical companies are truly global players "" they have a presence in major markets world-wide. Except for Teva and Sandoz, most other generic companies are country-specific. Our capacities "" and costs "" are spread over several markets. And, unlike generic companies elsewhere, we have a large domestic market.

The pharmaceutical industry will have its ups and downs, like any other industry. Pricing pressure hurts American and European generic firms more than Indian companies.

The only weak link for Indian companies has been market access to the US. To complete the value chain, Indian companies have been forming partnerships with US firms, acquiring US companies, or setting up marketing subsidiaries. Eight to 10 companies today are active in the US either on their own or through their partners.

Most Indian acquisitions until now have been small. But it is a sign of the times that leaders like Ranbaxy and Wockhardt are now talking about acquiring billion dollar companies in the US.

At the end of the day, the generic industry is price-driven. Cost pressures are fueling consolidation in the global generic industry. It will mean fewer competitors. It will also mean more pricing discipline. India is still a small player in the $25 billion US generic market with a share of only about $1 billion. We have to go a long way before peaking. The party will take some more time.