Innovative SMEs

EXIM ZONE/ VIEW POINT

Need to challenge existing ways of business

Today small and medium enterprises (SMEs) are justifiably obsessed with the quest for the right business model in a rapidly-changing and highly-competitive environment where the scales seem to tilt in favour of larger corporates.

The Indian pharmaceutical industry is no exception. The recent demise of loan licence manufacturing triggered by the government, decreeing minimum quality standards comparable to Good Manufacturing Practices (GMP) of the World Health Organisation, has necessitated many SMEs redesigning their business models to choose between being single product formulation companies or expanding their scale of operations, simply merging with larger companies or remaining as small specialised research oriented outfits. Business restructuring, including consolidation is gathering momentum as M&As, both domestic and cross border are occurring in the pharmaceutical industry.

Seventy-five per cent of the global pharmaceutical industry is accounted for by developed countries and two per cent by India. A major trend sweeping the world is tighter regulation of the industry as part of the global and national goal of enhancing availability of health care with reduced cost. This has led to the development of a huge generics market in developed countries, which many Indian companies are targeting. SMEs will need to develop their business models against the backdrop of global industry trends.

With product patents in force from January 2005, MNCs are looking at India as a major source of products and services. Price pressures, low profitability, declining payoffs from heavy investment in R&D, coupled with the shifting to Asia of a large number of production units are incentivising MNCs to develop a mature supplier base in China and India. The greater the customisation, the greater the probability of requirement of small volumes of the product. This has resulted in a growing new business genre of Contract Research and Manufacturing Services (CRAMS) in the last few years.

Another potential area for SMEs in India is clinical research. MNCs are discovering that clinical research can be done cost effectively whilst maintaining required standards in order to secure the necessary regulatory approvals. The combined turnover of Indian clinical research organisations is currently estimated at over Rs 500 crores with an annual growth rate of 60 per cent.

SMEs can help create and diffuse innovation and challenge existing ways of doing business. The pharmaceutical industry has barriers to entry in the form of specialised knowledge, international quality standards. Thus SMEs which can generate reasonably innovative processes or products and develop competencies which complement large scale producers and create synergies can survive and create linkages with MNCs.

As distinct from outsourcing model is the independent manufacturer. The cluster model, adopted by many SMEs across product groups, is applicable to a limited extent in pharmaceuticals. Generally the model works on known bulk drugs and differentiates itself in the products with high marketing concentration, some with their own brands . The key driver of such SMEs is again customer centric innovation ability.

The SMEs in Germany or 'Mittlestand" as they are called have often been referred to as 'hidden champions' due to their ability to leverage their accumulated specialised knowhow and innovation which have made them compete effectively in the global market despite cost handicap. SMEs in the Indian pharmaceutical sector need to review their business models for innovation driven manufacturing and marketing.