The Indian pharmaceutical industry is entering its second year under a new patent regime, and has taken significant steps to secure a more balanced growth platform as a player in the global industry. The pharma business environment is very competitive with a long time horizon and high financial risk, but the Indian industry has already demonstrated an ability and willingness to pursue opportunities well beyond its own borders.
The global pharmaceutical industry is an estimated $535 billion business in 2005, divided into patented/innovator drugs, generic (off patent) prescription drugs and OTC (over the counter) medicines, and growing at 7%-9% per annum. Industry revenue is split 78% patented, 12% generic and 10% OTC, with an estimated 76% of pharmaceutical sales made in the United States and Europe (see below). The industry is forecast to grow at over 8% per annum from 2005 to 2011 to a total of over $950 billion dollars globally.
Historically, the pharmaceutical industry was characterized as a high growth and high margin business with significant return on investment from new drug discovery and development. Over the past two decades, the industry has dealt with the emergence of the generic segment, as products brought to market largely since the sixties went off patent, and firms emerged to produce knock-offs that sold at much lower prices (today at about 15-20% of initial price at product launch). The global pharmaceutical industry has also found challenges in:
o The rising cost of new drug discovery and development through final FDA approval; estimated variously at $800 million to over $1 billion for each new product
o A declining product pipeline and the withdrawal of several blockbuster drugs, e.g., Vioxx and Celebrex, from the market due to harmful side effects impacting a tiny percentage of users
o Legislative scrutiny on drug pricing and spending on marketing and sales, particularly in the US and EU, while prices in many regions are far less
o Increasing emphasis on FDA enforcement of cGMP as a result of some recent problems
o Increasing complexity of drug molecules as the industry selectively targets specific diseases, with the result being declining target patient populations and revenue potential
o Complexity of managing clinical trials globally while ensuring uniform standards and genetic diversity controls
o Declining earnings as research and marketing costs increase while new drug approval rates decline and patent expiries drive expansion of the generic sector, and
o The emergence of a biotechnology based pharma industry that is both a threat and an opportunity for traditional synthetic drug developers.
One additional trend of note is that there has been rapid growth of the domestic demand for pharmaceutical and supporting fine chemical manufacturing in both India and China. Today each of these countries represent only about 2% of the global pharmaceutical market, but it is projected that by 2010 China will become the fifth largest regional market while India will be a strong contributor of contract services.
Pharmaceutical fine chemicals: Coming of age
The Indian pharmaceutical industry has been evolving through well defined stages and is now poised for a new wave of growth and globalization. As illustrated below, the industry is now operating under a new intellectual property protection regime that is changing the playing field in significant ways, and thus we must ask "what does the future hold for the industry"?
From the perspective of an outside observer, Indian pharmaceutical and fine chemical players have served their apprenticeship and are now embarking on their own 'voyage of conquest' in this global industry. Between 1970 and 2005, Indian firms developed skills in organic synthesis and process development while creating new pathways to patented drugs introduced in the United States and Europe. They built capabilities to supply low cost modern medicines to the Indian market, and they established a position in the high growth global generics market, particularly as suppliers of intermediates and APIs (active pharmaceutical ingredients). In recent years, several leading players, including Ranbaxy, Dr. Reddy's Laboratories, Nicholas Piramal, Wockhardt, and others have ventured far from India's borders and established global positions. Today, many other Indian participants are also expanding their scope of activities as they follow in the footsteps of these early explorers in areas ranging from production and distribution of generic drugs to generic API manufacturing, contract research and manufacturing services (CRAMS), contract development clinical research services (CROs) and discovery research.
Looking back to the early 1990s, a handful of modest sized Indian companies, including firms such as Ranbaxy and Dr Reddy's Laboratories, first appeared on the radar scope of industry participants in the United States and Western Europe. These Indian 'upstarts' looked to be an emerging threat to western fine chemical players, particularly European generic API makers, as well as some discovery based drug companies, based on manufacturing and skilled labour cost advantages and limited protection for intellectual property. At the time there were questions about consistent quality, lack of FDA certification and even lax environmental practices that slowed their progress in international markets. But today we can say that the Indian pharmaceutical and fine chemicals industry has learned its lessons well and many players are achieving cGMP quality standards while maintaining low cost and increasing innovation. A brief survey of the situation, as we start 2006, reveals an Indian industry that has:
· Revenues of an estimated $8 billion split 50:50 between the domestic market and exports
· Many moderate to large players (250-300) with a varied range of participation
· Management and financial resources to pursue acquisitions in other countries
· Capabilities in building blocks, advanced intermediates and active ingredients to the global branded and generic drug markets
· The largest number of FDA cGMP certified plants (74) outside the United States and an improving track record with other regulatory agencies
· Skilled technical labour that can now support not only fine chemical process development and production but also clinical development and contract research, and
· Emerging capabilities in drug discovery and biotechnology based pharmaceuticals
As Indian firms expand participation globally, they are encountering an industry that is emerging from a very difficult economic period. In the late 1990s, pharma fine chemical production (primary manufacturing of active ingredients) was expected to realize a "golden era" of growth in outsourcing and contract manufacturing - triggered by a wave of innovation due to breakthroughs such as the human genome project, coupled with an increasing number of older drugs that would go through patent expiry and expand opportunities for generic suppliers. As a result, Lonza (a first mover and "model supplier" to the pharmaceutical industry) and others - both technology start-ups and divisions of large chemical companies - jumped in to take advantage of the growing outsourcing opportunity. New cGMP capacity was built by suppliers of all sizes, and in the late 1990s several large chemical companies (e.g., Degussa, Rhodia, Clariant and DSM) made significant acquisitions to establish themselves as leading fine chemical and active ingredient suppliers to the pharmaceutical industry.
This aggressive capacity building and industry consolidation, coupled with the improving quality of Indian and Chinese manufacturers - and the surprising slowdown in new drug approvals and the associated outsourcing - created strong price competition and severe margin pressure on the pharma fine chemicals industry. Margin pressure was further exacerbated by low productivity of the pharma drug pipeline, and the net result has been a wholesale consolidation of both fine chemicals and pharmaceutical industry participants.
While this industry evolution has played out largely in "the west," India's pharmaceutical industry and thus its fine chemicals industry has also had to adapt to new realities. For many years the Indian drug pipeline was regularly filled with new "me-too" products copied from global pharmaceutical majors. Today, India's passage of a new Patent Law has raised the IP (intellectual property) hurdle so that Indian firms cannot produce patented active ingredients and dosage form pharmaceuticals in advance of patent expiry. This suggests a possible near term slow down in growth in the domestic pharmaceutical market, which could impact both pharma companies and the fine chemical supply network. However, to better balance growth opportunities, larger players in the Indian pharma fine chemical industry have been building their export businesses and establishing foreign operating positions, often via acquisitions or alliances, and are thus poised to take a larger role in this globalizing industry.
At present, Indian fine chemical companies can enter foreign markets both organically (leveraging their cost advantage and adding further sophistication) and inorganically - several of the high-cost acquisitions of the past 10 years are being written down by firms such as Degussa, Rhodia, DSM and Clariant, and mid-size European and North American based companies are putting themselves on the block. Several notable strategic actions have already been taken by Indian fine chemical and pharmaceutical players and many more can be expected over the next few years:
· Shasun Chemicals and Drugs Ltd acquisition of Rhodia's pharmaceutical custom synthesis business
· Nicholas Piramal's acquisition of Avecia's API business and part ownership of Canadian company, Biosyntech
· Dr Reddy's acquisition of Roche's API manufacturing at Cuernavaca, Mexico
· Sun Pharma's acquisition of raw materials and dosage form manufacturing operations from Valeant Pharmaceuticals in Hungary
· Ranbaxy's establishing of 8 subsidiaries in Europe to extend the reach of its generic pharmaceuticals business
· Torrent's acquisition of Heumann Pharma and Matrix's acquisition of Docpharma
The opportunities for Indian participants can be further understood by looking at key market drivers, which focus on the research and development pipeline, costs and regulatory requirements:
While Indian pharma fine chemicals companies can continue to position themselves as low cost commodity suppliers, the opportunity is open - through innovation, strategic thinking, and global expansion - to move up the value chain in multiple ways. The path shown by Ranbaxy (and, as an analogy, Bharat Forge in the auto industry) is a very valid example.
Operationally, Indian fine chemicals companies can also aspire to a global position by paying attention to capabilities beyond their traditional skills in complex, multi-step organic synthesis; these include the ability to:
· Provide gram and small kilo quantities of intermediates or actives for testing
· Develop cost-effective process routes to both new molecules and new generics
· Manage FDA and similar regulatory requirements
· Scale-up processes and produce commercial API quantities at an attractive cost
· Manage complex customer relationships over an extended time frame (up to 10 years in development and testing and beyond) in commercial production
· Source low-cost intermediates and efficiently manage a multi-national supply chain on behalf of the pharma customer
· Balance capacity utilization, availability for rapid response and long lead times on new business
Beyond traditional fine chemicals, additional skills such as the following can result in substantial rewards, as the experience of Biocon has shown:
· Capabilities in various biotechnology research disciplines
· Capacity for fermentation and mammalian cell culture
· Process expertise in chiral synthesis and separations technology
· Enzymatic catalysis and other technologies that might lead to reduced environmental footprint
In summary, the Indian pharmaceutical and fine chemical industry faces both an opportunity and a challenge as the global industry evolves. Indian pharmaceutical firms that remain focused on the local market will face moderate growth prospects and increasing competition from domestic subsidiaries of global pharma majors. It will be difficult for the local firms to support their own discovery research and they may be passed over by foreign firms as potential licensing partners if they do not grow in size. Fine chemical specialists may be cut off from outsourcing opportunities for both advanced intermediates and generic actives if they do not establish stronger global supply chains and customer relationships. In both cases, Indian firms will have to examine, evaluate, adopt and effectively execute bolder strategies for participation in an increasingly international industry if they are to emerge as global leaders as the 21st century unfolds. But, the better players in the Indian pharma industry will respond well to these challenges, and hence, the future indeed looks very bright for India's pharma industry.
(David Hurwitz is partner and Dr Anil Khurana is managing partner of Access International Partners, LLC) Courtesy: Access International Partners, LLC