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"If the top 15–20 Indian pharma companies don’t build a research base, who will? " - Views on News from Equitymaster
 
 
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  • Aug 22, 2000

    "If the top 15–20 Indian pharma companies don’t build a research base, who will? "

    A graduate from the Bombay University, Mr. Surendra Somani is the founder of the Parijat Group, which has interests inter alia in pharmaceuticals. Kopran has had a sizeable presence, in the past, in the penicillin–based antibitotics but has, over the years, widened its ambit to gain a substantial share in cardiovascular and respiratory drugs.

    Last year, the company spun off the low margin yielding semi synthetic penicillin (SSP) business into a joint venture with Synpac Pharma one of the largest penicillin manufacturers in the world.

    Mr. Somani has been the driving force behind the restructuring initiative at Kopran. We spoke to him to get a first hand feel of how Kopran is gearing up to face the challenges of the new millennium.

    EQM: The generic export market is being touted as a big opportunity for the Indian pharmaceutical companies. However, isn’t it a fact that Indian companies have been able to capture hardly 5% of the CIS market, a market where Indian companies were presumed to have certain advantages. So, is the hype on the generic market warranted?

    Mr. Somani: You cannot compare the two markets. The CIS was primarily tapped because of the barter trade between the India and the former Soviet Union. The fact is that even the Russian market preferred US goods.

    The USA and European market are quality conscious and yet competitive. The Indian companies can synthesise bulk active substances at the least cost and meet highest standards. The opportunity also arises from the fact that the law does not prevent Indian companies from synthesing patented molecules. This has enabled us to be ready with the product and file a dossier for registration the moment the product goes off patent. We are the least cost producers due to relatively lower cost in terms of the capex required as well as the cost of manpower. Besides, for the purpose of exports, we can source raw materials at international costs. Of course, where integration is not complete Indian companies can tie up with foreign companies but the fact remains that we in India are producing the basic materials such as rifampicin, ampicillin etc. The issue for the Indian companies would basically be regulatory issues such as getting their plants and products approved

    There will obviously be competition from companies from other parts of the world but India, like many other countries, such as Canada has an advantage of being able to develop products prior to their patent expiry and file for registration. They have to be in time to get approvals by the time the patent expires.

    The other advantage India has pertains to the integration advantage since we make the bulk actives too.

    EQM: The newer therapeutic areas such as gastro–entology, cardiovascular, CNS, diabetes, have shown almost 20% plus growth while antibiotics, vitamin supplements, quinolones seem to have struggled last year. Are we witnessing a structural change in domestic dosages?

    Mr. Somani: Yes we are. And the change is not complete. The fact is that antibiotics are becoming a commodity and the (pharmaceutical) industry is going through a major restructuring. We are also witnessing a difference in consumer behaviour between short course therapy diseases and chronic disorder. In the latter case, brand loyalty does exist for doctor prescriptions. As far as the short course therapy is concerned, the generic market has eaten into the brand market. How long will this continue and is this permanent? At this stage it’s a little premature to answer this. Abroad with health insurance in place there are companies, which are approved suppliers of generics for the Heath Management Organisations (HMO). Here, it’s a free for all as far as generics are concerned. At some point in time in the future there will be an issue of borderline quality. This could possibly lead the doctor as well as his patients demand a brand.

    Personally, I foresee a new segment of branded generics, which would have an element of doctor prescription and a competitive price. Pharma companies may not incur high sales promotion expenses for this segment. I foresee segments such as paracetomol, ibuprofen, cough and cold antibiotics be catered through this way. So pure generic companies may not have the cake.

    EQM: How much of an opportunity does the domestic OTC market represent? What would be the strategy required to be successful here?

    Mr. Somani: For allopathic drugs, the emergence of an OTC market would depend on the how soon the Drug Controller of India declares the list of drugs that do not form part of the scheduled drugs. The potential of the OTC market is huge. Our ‘Smyle’ has been a notable success as also some other domestic companies’ products.

    The growth of the segment would depend on the literacy levels and media exposure. Already we have seen products such as ‘Crocin’ ‘Dispirin’ and ‘Benadryl’ create niches for themselves in the OTC market. In future you may also see ibuprofen–based drugs also creating a niche for themselves in the OTC segment.

    EQM: It is stated that it would be advantageous to conduct clinical trials in India keeping in mind the availability of volunteers, the quality of scientists and the cost of setting up infrastructure. But the results of clinical trials held in India are not accepted in quite a few countries. Do you expect this situation to change in the future?

    Mr. Somani: The fact is that the clinical trials that have been done in India are as per the Drug Controller of India. But if any company conducting clinical trials in India were to follow the protocol laid down by the US Food & Drug Administration there is no reason why the results of those trials will not be accepted in the USA. (The protocol basically specifies a checklist which lays down the number of volunteers, the analytical tools followed for the trial etc.)

    EQM: You demerged the bulk drug business of Kopran into a separate company last year. Could you elaborate on the scheme and the benefits that will accrue to the shareholders via the demerger?

    Mr. Somani: The demerger of the bulk drug business (semi–synthetic penicillin business of Kopran) was to facilitate a joint venture with Synpac Pharmaceuticals UK– one of the largest penicillin manufacturers in the world.

    Their biotechnology capability has been proven with the licensing of their 1st, DNA recombinant –Pompase–a drug for enzymatic deficiency in children which has fetched them a down payment of $ 19.5 m and would give them a revenue of $ 400m to $ 600m in the future.

    Hence the penicillin integration advantage and the biotechnology experience would provide a platform to enhance values in KDL Biotech. Every shareholder of Kopran Ltd. got one share of KDL Biotech free for two shares held in the nature of a bonus.

    Kopran Ltd. as an entity is now focused on value added business of formulations and specialty bulks primarily focused on five therapeutic areas – cardiovascular, respiratory, gastroenteritis, antibiotics and pain management.

    EQM: Do you anticipate any changes in the DPCO? What percentage of Kopran’s revenue accrues from products under the DPCO?

    Mr. Somani: Not in the near future at least. Of our domestic dosage sales around 20% accrues from products under the DPCO.

    EQM: Where do you see the Indian pharmaceutical market in general and Kopran in particular, five years down the line?

    Mr. Somani: Our aim is to become research–based company with a strong brands in the five therapeutic areas that we operate in (cardiology, respiratory, gastrointestinal, antibiotics and pain management). Our research efforts are basically three pronged: the first is based on the development of new chemical entities (NCEs) and novel drug delivery systems (NDDS). The second is based on the synthesis of already developed molecules and thirdly we plan to develop new dosage forms development. We have developed a twice a day amoxycillin (antibiotic) dosage which we plan to license to another company possibly an MNC. We have also developed a zero impurity atenolol (cardiovascular). We will grow by around 25% in the current year and we expect this growth rate to continue in the future.

    As far as the Indian pharmaceutical companies are concerned, most of the companies are aiming to build a research base. If the top 15–20 companies don’t build a research base, who will? We cannot wish away one fact. That India has possesses some of the best scientists in the world. You give them infrastructure, ideas and they will deliver. I however foresee integrated companies who are players in the international market and have licenses/co–marketing agreements with MNCs emerging. Only some of the top fifty Indian pharmaceutical companies will exist in the shape that they are existing today.

    The biggest problem for achieving this vision would be the inadequacy of capital. When you look at the consolidation that is happening the world over, Indian companies look (in terms of their sales) relatively small vis-à-vis their international peers.

    EQM: Which are the personalities that have influenced you the most? And a word on your favourite books…

    Mr. Somani: As far as books are concerned Stephen Covey’s ‘Seven Habits of Highly Effective People’ is a favourite.

     

     

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