 "Success strategies for Indian pharma industry in an uncertain world")
Fragmented Indian pharmaceutical market is facing high volatility and uncertainty. Increasing number of drugs in National List of Essential Medicines (NLEM) and price controls, changing FDI Policy, compulsory licensing, aggressive acquisition investments by MNCs, and declining global generic market opportunity is creating a new normal. Pharmaceutical companies need to re-visit their traditional growth strategies to succeed in a volatile world.
Indian pharmaceutical industry is valued at $ 12 billion in 2013. The market is primarily driven by exports to regulated as well as semi-regulated markets. Currently, India exports drugs to more than 200 countries and vaccines and biopharmaceutical products to about 151 countries. Globally, India ranks 3rd in terms of volume and 14th in terms of value.
Indian pharmaceutical industry is fairly fragmented with top 10 companies contributing to 41% of total sales. The next ten companies contribute to 22% of sales while the remaining companies contribute to 37% of the total sales. Urban regions (metros and tier I cities) contribute to about 60% of total sales while the remaining country contributes to the balance 40%. Tier I cities are growing at approximate 10% per annum (PA) while rural areas are growing at about 14.5% PA. The growth has been driven by increased access to healthcare, improved infrastructure and greater penetration of pharmaceutical companies into tier 1 cities and rural areas.
Changing market dynamics
The year 2013 has seen deceleration of industry growth rate from 16.6% in 2012 to 9.8% in 2013. During the year, the industry faced a different type of regulatory headwind; the patent office ruled against the intellectual property rights (IPRs) for several notable drugs, including Pfizer’s Sutent, Bayer’s Nexavar, etc. A still more daunting challenge for MNCs operating in India has been compulsory licensing and uncertainty about patent validity.
ALSO READ: Indian bulk drug industry: Maintain quality conscience to face competition
Domestic companies, on the other hand, have been equally impacted by the Drug Prices Control Order (DPCO) and the ensuing stalemate of stocks stuck at various levels in the distribution chain. The Parliamentary Standing Committee recommended multiple mandatory conditions for allowing FDI in brownfield projects while allowing 100% FDI in greenfield projects.
Industry estimates show that generic drug user fee amendments in USA, compulsory licencing and National Pharmaceutical Pricing Policy (NPPP) have increased the legal expenditures of the top 10 drug makers in India by about 50% in the past three years. NPPP is expected to lead to value erosion to the tune of Rs 1,600 crore post implementation for 2013-14.
With the notification of the order, the NPPP 2012 comes into effect and 348 drugs under NLEM, which account for 60 percent of total domestic pharmaceutical market amounting to nearly Rs 29,000 crore, would come under price control.
These factors, coupled with general elections in 2014 and a host of high-profile M&A deals and aggressive investments by MNCs in India clearly indicate that the industry is going through a period of significant volatility and uncertainty which has created a new normal for the companies.
In such an uncertain playing field, it is imperative for companies to ask ‘How do we grow our business from here?’ Companies will need to reinvent their business model or take on some disruptive new approach as traditional strategic approach would have limitation in this transient world.
Strategies for success in uncertain and volatile environment
Review product portfolio: The new pricing mechanism as specified in the NPPP 2012 would impact near term earnings of companies. The companies most affected will be the ones with higher dependence on Indian market, premium pricing approach and having higher share of acute therapy segment. On the other hand, the impact of the new policy would not be substantial on companies that have sizeable share of earnings from regulated markets, especially US generics. Therefore, it will be vital for companies to re-look at its geographic spread and to re-new their portfolios by focusing on; therapeutic class synergies, increasing share of prescription, adding innovative and better margin products.
ALSO READ: Bio based chemicals gaining ground to reduce carbon footprint
Build customer centricity: To succeed in such a complex environment, companies will need to take a customer centric view to re-look at the value proposition for each major customer segments. For each customer segment in the value chain, be it channel partners, practicing physicians, or direct patients, companies need to look at building distinctive forms of customer connect through advanced mechanisms of sales force engagements, consolidation of field force, strengthen marketing channels with adoption of digital marketing, and organise patient education programs. Companies should not just promote their products but see themselves as a disease prevention and management company.
Strengthen operational capability: Companies will need to revisit their operations to ensure that no complacency has set in. The legacy processes might be driving up costs due to outdated technologies or high environmental factor or e-factor (which is defined as ratio of mass of waste generated per unit of product). Companies will need to focus on process innovations by adopting latest technologies such as micro reactors or critically evaluating and reducing the number of process steps. Furthermore, benchmarking of manufacturing processes and supply chain optimisation will help in establishing the extent of improvement required to be achieved by the company.
Value creation by JV/M&A: Companies need to look for inorganic value creation and speed to market opportunities. Alliances could help in deeper customer and market penetration with value creation happening in many forms such as co-production to reduce compliance costs, co-marketing through use of common marketing channels and co-promotion to reduce advertisement & promotion costs by leveraging common distribution channels. It will also help companies to capitalise on licensing opportunities presented by international pharmaceutical players as they increasingly invest in emerging economies. Recent JV/M&A activities highlight the consolidation trend in the industry.
ALSO READ: Process equipment makers ready to ride investment cycle boom
Organisational agility: To successfully respond to uncertainty, companies will have to create a culture of agility and innovation. They will need to take a fresh look at their organisational structure, especially the number of layers in the organisation, the relationship between business units, and the mix of organisational boundaries. They will need to significantly redefine business processes to enable quick decisions and lower cycle times while also meeting increased compliance requirements. The leadership team and senior management will also have to be trained to accept the new normal as a ‘way of life’ and respond to change quickly.
Way forward
The regulatory environment in the pharmaceutical sector is more challenging now than ever before. To meet the new normal, companies will have to invest in re-establishing their competitive position. Optimisation of product portfolio to target high return products and building distinguishing capabilities to stay ahead of competition would be the key to success.
Both domestic and multi-national players will need to look at inorganic growth opportunities including value creation through partial carve outs as it would play a key role in defining the long term sustainability of the companies. The winning companies will be the ones which analyse their competitive position and meet the rapid changes happening in the industry by evaluating and speedily implementing the five levers outlined above.
____________________________________________________________________________________________________
Manish Panchal is the Practice Head at Tata Strategic Management Group (TSMG), a management consulting firm
Charu Kapoor is the Principal at TSMG
Mansi Mahajan is the Associate Consultant at TSMG
Indian pharmaceutical industry is valued at $ 12 billion in 2013. The market is primarily driven by exports to regulated as well as semi-regulated markets. Currently, India exports drugs to more than 200 countries and vaccines and biopharmaceutical products to about 151 countries. Globally, India ranks 3rd in terms of volume and 14th in terms of value.
Indian pharmaceutical industry is fairly fragmented with top 10 companies contributing to 41% of total sales. The next ten companies contribute to 22% of sales while the remaining companies contribute to 37% of the total sales. Urban regions (metros and tier I cities) contribute to about 60% of total sales while the remaining country contributes to the balance 40%. Tier I cities are growing at approximate 10% per annum (PA) while rural areas are growing at about 14.5% PA. The growth has been driven by increased access to healthcare, improved infrastructure and greater penetration of pharmaceutical companies into tier 1 cities and rural areas.
Changing market dynamics
The year 2013 has seen deceleration of industry growth rate from 16.6% in 2012 to 9.8% in 2013. During the year, the industry faced a different type of regulatory headwind; the patent office ruled against the intellectual property rights (IPRs) for several notable drugs, including Pfizer’s Sutent, Bayer’s Nexavar, etc. A still more daunting challenge for MNCs operating in India has been compulsory licensing and uncertainty about patent validity.
ALSO READ: Indian bulk drug industry: Maintain quality conscience to face competition
Domestic companies, on the other hand, have been equally impacted by the Drug Prices Control Order (DPCO) and the ensuing stalemate of stocks stuck at various levels in the distribution chain. The Parliamentary Standing Committee recommended multiple mandatory conditions for allowing FDI in brownfield projects while allowing 100% FDI in greenfield projects.
Industry estimates show that generic drug user fee amendments in USA, compulsory licencing and National Pharmaceutical Pricing Policy (NPPP) have increased the legal expenditures of the top 10 drug makers in India by about 50% in the past three years. NPPP is expected to lead to value erosion to the tune of Rs 1,600 crore post implementation for 2013-14.
With the notification of the order, the NPPP 2012 comes into effect and 348 drugs under NLEM, which account for 60 percent of total domestic pharmaceutical market amounting to nearly Rs 29,000 crore, would come under price control.
These factors, coupled with general elections in 2014 and a host of high-profile M&A deals and aggressive investments by MNCs in India clearly indicate that the industry is going through a period of significant volatility and uncertainty which has created a new normal for the companies.
In such an uncertain playing field, it is imperative for companies to ask ‘How do we grow our business from here?’ Companies will need to reinvent their business model or take on some disruptive new approach as traditional strategic approach would have limitation in this transient world.
Strategies for success in uncertain and volatile environment
Review product portfolio: The new pricing mechanism as specified in the NPPP 2012 would impact near term earnings of companies. The companies most affected will be the ones with higher dependence on Indian market, premium pricing approach and having higher share of acute therapy segment. On the other hand, the impact of the new policy would not be substantial on companies that have sizeable share of earnings from regulated markets, especially US generics. Therefore, it will be vital for companies to re-look at its geographic spread and to re-new their portfolios by focusing on; therapeutic class synergies, increasing share of prescription, adding innovative and better margin products.
ALSO READ: Bio based chemicals gaining ground to reduce carbon footprint
Build customer centricity: To succeed in such a complex environment, companies will need to take a customer centric view to re-look at the value proposition for each major customer segments. For each customer segment in the value chain, be it channel partners, practicing physicians, or direct patients, companies need to look at building distinctive forms of customer connect through advanced mechanisms of sales force engagements, consolidation of field force, strengthen marketing channels with adoption of digital marketing, and organise patient education programs. Companies should not just promote their products but see themselves as a disease prevention and management company.
Strengthen operational capability: Companies will need to revisit their operations to ensure that no complacency has set in. The legacy processes might be driving up costs due to outdated technologies or high environmental factor or e-factor (which is defined as ratio of mass of waste generated per unit of product). Companies will need to focus on process innovations by adopting latest technologies such as micro reactors or critically evaluating and reducing the number of process steps. Furthermore, benchmarking of manufacturing processes and supply chain optimisation will help in establishing the extent of improvement required to be achieved by the company.
Value creation by JV/M&A: Companies need to look for inorganic value creation and speed to market opportunities. Alliances could help in deeper customer and market penetration with value creation happening in many forms such as co-production to reduce compliance costs, co-marketing through use of common marketing channels and co-promotion to reduce advertisement & promotion costs by leveraging common distribution channels. It will also help companies to capitalise on licensing opportunities presented by international pharmaceutical players as they increasingly invest in emerging economies. Recent JV/M&A activities highlight the consolidation trend in the industry.
ALSO READ: Process equipment makers ready to ride investment cycle boom
Organisational agility: To successfully respond to uncertainty, companies will have to create a culture of agility and innovation. They will need to take a fresh look at their organisational structure, especially the number of layers in the organisation, the relationship between business units, and the mix of organisational boundaries. They will need to significantly redefine business processes to enable quick decisions and lower cycle times while also meeting increased compliance requirements. The leadership team and senior management will also have to be trained to accept the new normal as a ‘way of life’ and respond to change quickly.
Way forward
The regulatory environment in the pharmaceutical sector is more challenging now than ever before. To meet the new normal, companies will have to invest in re-establishing their competitive position. Optimisation of product portfolio to target high return products and building distinguishing capabilities to stay ahead of competition would be the key to success.
Both domestic and multi-national players will need to look at inorganic growth opportunities including value creation through partial carve outs as it would play a key role in defining the long term sustainability of the companies. The winning companies will be the ones which analyse their competitive position and meet the rapid changes happening in the industry by evaluating and speedily implementing the five levers outlined above.
____________________________________________________________________________________________________
Manish Panchal is the Practice Head at Tata Strategic Management Group (TSMG), a management consulting firm
Charu Kapoor is the Principal at TSMG
Mansi Mahajan is the Associate Consultant at TSMG