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Pharma: Survival of the fittest!

Aug 17, 2005

January 1, 2005 saw the advent of the product patent law in India. This will put an end to the reverse engineering methods followed by Indian companies over the years and will compel them to focus on creativity and innovation led processes to launch products in the country. However, considering the fact that domestic companies will not be able to launch their own patented products in the next 3 to 4 years atleast, each company has adopted different strategies to survive till such time. In this article, we take a look at some of these strategies. Generics: The generics market will offer tremendous opportunities to domestic companies in the next 2 to 3 years as large number of blockbuster drugs (drugs with annual sales of over US$ 1 bn) go off-patent. It must be noted that US, which is the largest generics market is under pressure to reduce its healthcare costs and the US government, therefore, is allowing for a faster entry of generics into the country. However, while intense competition and severe price erosion will dent realisations, volumes will be the key in gaining and/or retaining market share. Low cost advantage and new product introductions will play a key role in keeping the head above water in this increasingly tough market. Ranbaxy and Dr.Reddy’s are the top domestic companies having made a significant foray into the generics market. Just to put things in perspective, Dr.Reddy’s had received a 180-day exclusivity period on the drug ‘Fluoxetine Axetil’ which enabled the company generate significant revenues to the tune of US$ 67 m contributing to 21% of the total turnover in FY02. Currently, while 45 abbreviated new drug applications (ANDAs) so far are pending for approval (29 Para IV), which address a potential market of US$ 25 bn (as per IMS, a global pharma audit agency), in the case of Ranbaxy, 50 ANDAs are pending for approval. Ranbaxy has followed a much more stable model of creating a balance between Para IV and non-Para IV filings. The company recently challenged Pfizer’s blockbuster drug ‘Lipitor’ and is awaiting a court decision on the same.

Contract manufacturing: Companies like Cipla and Nicholas Piramal have adopted a more stable contract manufacturing model to take advantage of the generics opportunity. Rather than directly competing with generic companies abroad, these companies have forged tie-ups with top generic companies for the purpose of supplying bulk drugs to them. These companies, therefore, do not need to invest in making ANDA filings. In contract manufacturing, the plants have to be approved by the US FDA and India currently is the only country outside the US to have the most number of plants approved by the US FDA. To cite examples, Cipla has entered into alliances with top US generic companies like Watson, Ivax, Mylan and Barr. Not to be left behind, Nicholas Piramal has secured 2 contract manufacturing agreements, one with a fortune 500 company and the other with Allergan Inc USA.

Contract research: India’s competitive strengths in research services include English-language competency, availability of low cost skilled doctors and scientists, and a large patient population with diverse disease characteristics. Therefore, contract research offers tremendous opportunities to domestic companies to boost their revenues. Biocon is one company, which has taken the lead in this regard. The company has established 2 subsidiaries, Syngene and Clinigene, for custom and clinical research respectively. In fact, research services were the main growth drivers for Biocon in 1QFY06, which registered an impressive 36% YoY growth.

New drug discovery research: Though risky, new drug discovery is essential for any company aspiring to be an innovator company. It must be noted that new and patented products have the potential to generate considerable revenues, which can once again be invested into R&D initiatives of the company. While it takes 10 to 12 years (out of a patented period of 20 years) for a drug to enter the market, the remaining 8 to 10 years (the commercial life of the drug) more than make up for the heavy R&D expenditure incurred. However, the downside is that the development of the drug can be discontinued at any phase if any adverse effects are observed. Amongst domestic companies, Ranbaxy and Dr.Reddy’s have been the pioneers on the drug discovery front. Both these companies currently have 2 molecules in their respective therapeutic areas undergoing Phase II clinical trials. Also taking a leaf from the book is Nicholas Piramal, whose anti-cancer drug recently entered Phase I clinical trials.

Collaborations and licensing arrangements: The fact that a majority of the Indian pharma majors are open to the idea of bringing outside expertise to the table can be gauged by the kind of collaborations and licensing deals entered into by these companies. Ranbaxy has entered into an in-licensing agreement with an Indian company, J.B Chemicals, for the purpose of marketing the latter’s highly successful Doktor Mom range of products in Romania. Glaxo has tied up with Eisai (a Japanese company) for marketing its product ‘Paritec’ in the Indian markets. As far as collaborations are concerned, Ranbaxy and Glaxo have entered into an alliance for the purpose of new drug discovery and development. Biocon has also formed a partnership with Nobex Corporation (US) to jointly develop oral insulin on a global scale.

Acquisitions: Another route followed by companies for gaining access to either markets or products is acquisitions. For example, Dr. Reddy’s acquired Trigenesis in FY05, a dermatology products company, in order to access the fast growing US dermatology market and cater to the specialty segment. Ranbaxy acquired RPG Aventis in 2004 and established a strong presence in the French generics market. In fact, this acquisition resulted in the company’s European region sales clocking a strong 115% YoY growth in 2004.

New patented products launch: MNC companies will be one step ahead of their domestic counterparts in launching patented products in India, as the parents of these companies are innovators with significant breakthroughs on the R&D front. Considering the fact that domestic companies are not likely to introduce patented products in the next 3 to 4 years, MNC companies, with their strong marketing and distribution network, will be a force to reckon with going forward. However, MNC pharma majors such as Glaxo, Pfizer and Novartis plan to launch products from their parent’s folio only after 2007.

What lies ahead?
Thus depending on their strengths and capabilities, Indian pharma majors are adopting a wide range of business models to survive the post 2005 era. Many Indian companies have identified the business line that would yield optimum returns. From here on, success for Indian companies in the pharmaceutical industry will be a factor of viable long-term strategies.

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