As population grows and ages, new areas of medical need emerge. The diseases in the developing countries are growing increasingly similar to those of the developed world.

Demand for new anti-infectives is mounting, especially for diseases like multi-drug resistant tuberculosis. Global warming can bring diseases such as malaria, cholera, diphtheria and dengue fever to more developed regions. These changes will generate opportunities for the global pharma industry over the next decade.

Despite robust demand for its products, the industry is facing unprecedented challenges. The impending patent cliff which could see big companies lose over US$ 118 billion worth of patented drug sales by 20152 is a cause of great concern. Compounding this is the increased cost for developing new drugs and requirements of regulators for enhanced safety and efficacy monitoring.

The governments of developed economies with huge fiscal deficits are also under pressure to reduce spiralling healthcare costs. At the same time, healthcare payers and providers everywhere have recognised that current  healthcare expenditure levels are also unsustainable unless they deliver more demonstrable care and cost benefit over the long term. Payers are demanding evidence of outcomes from pharma companies before including the medicines in pharma benefit plans.

According to PwC’s pharma 2020 report, Challenging business models, global pharma companies will have to fundamentally change their operating model to capitalise on future growth opportunities.

Most large companies have traditionally done everything from R&D to commercialisation themselves. By 2020, however this model may no longer work for many organisations. If they are to prosper, they will need to improve their R&D productivity, reduce costs, tap the potential of emerging economies and switch from selling medicines to managing outcomes. Alliances and partnerships with firms within and outside the pharma industry is a key requirement of the pharma operating model of the future.

Several pharmaceutical firms like Lilly and BMS have already begun to use more collaborative models. The pressure to change to new business models, triggered by internal and external factors has led to increasing mergers, acquisition, alliances and partnerships in the pharmaceutical sector.

The Indian context
The Indian pharma industry is today, the third largest market globally in terms of volume and 14th largest by value. According to PwC’s report Capitalising on India’s growth potential, the domestic pharma market is expected to grow at CAGR of 15 to 20 per cent  annually to be a US$ 49 billion to 74 billion market by 2020.

India is an attractive market for a variety of reasons:

• India’s economy continues to show signs of robust growth. The increased spending on healthcare needs is expected to drive revenue growth for pharma companies.
• The emergence of chronic diseases like cancer, diabetes, Cardio Vascular System (CVS)and Central Nervous System (CNS) disorders is likely to drive demand for newer
• therapies.
• With increasing pressures on curbing healthcare costs in the US, India’s low-cost manufacturing capabilities coupled with attention to quality (India has the highest number of FDA-approved manufacturing plants outside the US.) will be sought by MNCs.
• India has a large pool of scientific manpower which can be used in drug discovery, development and clinical trials.
• India’s diverse genetic pool of treatment-naive population is attractive for clinical trials.

Indian generic pharma companies have strong product development skills and have set up world-class active pharma ingredients (API) and formulation manufacturing facilities to cater to the price-sensitive India market and global generics market. Many of these dominate India’s domestic market through a large sales team, strong relations with physicians and medical institutions. Indian pharma companies are now seeking to move up the value chain to drug discovery and development by leveraging the country’s scientific talent. Given the strengths of Indian and and global pharma companies, it makes sense for them to come together to develop India’s domestic market, source products for global market and to discover & develop new drugs and therapies.

MNCs and Indian companies are stepping up their play in the market through various kinds of partnerships to achieve the following:

• Capitalise on the opportunities provided by the Indian market
• Make the most of India’s capabilities in drug discovery, product development and sourcing to serve overseas markets.

Serving the Indian market
Given the growth slowdown in developed countries, pharma companies are keen to address the opportunities offered by the growing Indian market.

Mergers and acquisitions
The Abbott acquisition of Piramal Healthcare’s domestic formulations business in 2010 is a good example. Other examples include Reckitt Benckiser’s acquisition of Paras Pharmaceuticals and the acquisition of the nutrition business of Wockhardt by Danone in 2011. Addressing the opportunities in the Indian market was also one of the key drivers behind the acquisition of Ranbaxy by Daiichi Sankyo (though Ranbaxy did have a global presence).

However, given the scarcity of assets, valuations in the sector have gone up over the last 12 to 18 months. Companies are now exploring other methods of partnership.

Alliances & partnerships
Germany’s Bayer Healthcare announced a 50-50 joint venture with Zydus Cadila to create a new company, Bayer Zydus Pharma focussed on the India market. Bayer Healthcare’s pharma division will contribute its sales and marketing business in India to the new company while Zydus will contribute its women’s health products, diagnostic imaging and other products.

Lupin has signed a deal with Eli Lilly for anti-diabetic drugs. Under the deal, Lupin will market and distribute the entire range of Huminsulin brand of Eli Lilly in India and Nepal. Lupin will deploy 300 sales representatives from its formulations business to promote the product and will also provide education to physicians and patients.

Novartis has signed a deal with USV Ltd to market Galvus (Vildagleptin) in the Indian metros. USV will manage marketing activities in Tier II and Tier III cities in the next phase. Also entering the fray is Belgium’s Omega Pharma, which formed a JV with Modi-Mundipharma Group to create Modi Omega Pharma India. Eight brands from Omega’s product portfolio will be manufactured in India by the Modi-Mundipharma Group. The marketing strategies and sales team will be provided by Modi Omega Pharma India.

Serving the global market
Pharma MNCs are facing challenges of impending patents and rising R&D expenditure. They are looking for opportunities to increase the drug pipeline and reduce costs. In addition, given the pressures of reducing healthcare costs and the increasing use of generics, pharma MNCs are also looking to partner with companies with superior product development capabilities. At the same time, Indian companies are also looking to move up in the value chain by discovering new drugs. These drivers have created the need for collaboration between MNCs and Indian pharma companies to target global opportunities.

Mergers and acquisitions
Pharma MNCs have acquired Indian companies to maximise their capabilities in serving the global market. The acquisition of Matrix Laboratories by Mylan in 2006 is one of the earliest examples of this trend. More recent examples include the acquisition of the injectables business of Orchid Chemicals by Hospira and Sanofi’s acquisition of Shantha Biotechnics.

Alliances & partnerships
Previously, A&P were formed to source out products. Today, it has expanded in R&D as well.

Research & development
Pharma MNCs are looking for opportunities to co-develop drugs, buy or in-license molecules from Indian companies. Such deals have helped India shed the tag of a cheap manufacturing base and gain the title of a genuine intellectual contributor.

Glenmark Pharmaceuticals became the first Indian company to out-license a biological product. The company licensed its biotech drug, which has the potential to generate revenue worth US$ 613 million to French company Sanofi Aventis. Glenmark sold the marketing rights for North America, Europe, Japan, Argentina, Chile and Uruguay, while it retained co-marketing rights for Russia, Brazil, Australia and New Zealand. In India, the company retained its exclusive rights.

Another example is of Jubilant. The company entered into a three-year drug deal with US-based Endo Pharmaceuticals for developing oncology drugs. Under the deal, Jubilant will receive research funding and milestone payment on successful completion of predetermined targets. Endo will own the developed drugs and will pay royalties to Jubilant on the successful commercialisation of the drugs.

Product sourcing
Manufacturing deals are common in India because of the country’s legacy in research chemistry, efficient production and cost advantage manufacturing. These skills coupled with the fact that India has the highest number of USFDA-approved plants outside the US, make manufacturing alliances an attractive proposition. There are several examples of such alliances in India.

GlaxoSmithKline (GSK) expanded its market share by striking a deal with Dr Reddy’s Laboratories16 and gaining access to a portfolio of more than 100 drugs. For Dr Reddy’s, the deal will help increase its product reach in regions where, till now, it only had negligible market presence.

Similarly, Pfizer signed licensing deals with Aurobindo Pharma , Claris Life Sciences, Biocon and Strides Arcolab. The deal will strengthen Pfizer’s position in emerging markets and expand its medicine portfolio in established products business units (EPBU). The Indian companies will benefit from a steady revenue flow and the possibility of receiving significant upfront payment and royalties.

Sun Pharmaceutical Industries and Merck and Co Inc entered into a JV agreement to develop, produce and market innovative generics in emerging markets.

Benefits of collaboration
Pharma MNCs collaborating with Indian companies bring to the table new products, latest technology, higher investments, quality systems and the knowledge of regulatory processes. On their part, Indian companies provide local market knowledge, cost advantage and local scientific talent.

Such alliances have the potential to bring significant benefits to both parties and add value to society as a whole. Such partnerships bring in new drugs and therapies to the market and increase patient’s awareness about diseases and wider treatment choices available.

Success drivers
PwC’s survey of opinion leaders in the Indian pharma industry revealed that issues related to quality, management control, corporate governance, valuations, cultural issues and understanding local regulations were crucial for any form of collaboration.

Importance of quality
As a result of increasing alliances and the growing importance of Indian pharma globally, prominent Indian pharma companies have come under the scanner of the US Food and Drug Administration (USFDA) for varying degree of quality issues.

In India, USFDA audits and pre-approval inspections typically focus on the following:

• Management roles, responsibilities and training of personnel operating in USFDA-approved facilities
• Filed application integrity with specific attention to records, manufacturing systems and laboratory test results
• Monitoring of impurities in APIs and drug products
• Stability studies and investigation of out-of-specification (OOS) incidents
• Safety and integrity of the supply chain

While the impact of this regulatory crisis on alliances formed cannot be muted, the more critical issue is its impact on future alliances and on the overall image of the Indian pharma industry.

Given the mounting internal and external pressures on pricing and healthcare costs, MNCs are still bound to look at India as a low-cost manufacturing destination as well as a strategic partner for specific operations. The key consideration for such MNCs is to choose a partner after conducting a thorough investigation and with due diligence. While financial diligence is a standard and an integral part of all deals and alliances, the pharma industry needs a more in-depth operational approach prior to selecting a partner.

Aspects to focus on include the following:

• Historical review of internal and external regulatory audit data
• Extent to which audit findings have been remediated
• Mechanisms put in place to ensure implementation of adequate corrective and preventive actions
• Regulations in place to ensure sustainability of quality system improvements
• Overall review of quality systems implemented

Companies often require domain specialists to understand the true nature of the above issues. A thorough operational diligence can help understand the appropriate measures that can be implemented to mitigate any risks associated with quality.

Transaction-related drivers
In addition to quality related issues, attention needs to be focussed on the following determinants too. These need to be discussed and resolved to the satisfaction of both the parties involved in the A&P:

• Management control
• Corporate governance
• Expectations of valuation
• Cultural differences
• Local regulations

M&A along with A&P have a major role to play in changing the dynamics of the industry and taking it to the next level of growth.

A&P are likely to be more popular, as they are mutually beneficial to both stakeholders. It can help Indian companies scale the innovation curve, while at the same time helping to increase the drug pipeline curve for global players. India’s low-cost manufacturing capabilities will also help pharma MNCs meet the increasing global demand of generics.

To ensure successful partnerships, issues such as quality, valuations, management control, corporate governance and cultural differences need to be identified, discussed and resolved through an in-depth financial, tax and operational diligence.

No one size will fit all and companies will have to choose and implement the path that best meet their strategic objectives.