As with any other industry, the pharmaceutical companies too face a multitude of challenges. While not all of these challenges are factors for each and every company, certainly each organization face a few of these.  These challenges include:

• an acute shortage of domain expert skills
• challenges in recruiting, training
• retaining and managing knowledgeable associates in a context of contractors vs permanent staff.
• pressure from external market factors and internal pressure to reduce costs and enhance shareholder value
• focus resources on core activities like R&D and marketing.
• reduce infrastructure expenses not directly related to core functions
• reduce IT expenditure
• reduce overheads to free up resources to invest in new research
• accelerate development and time to market cycle times

The list above is not expected to be a comprehensive list of challenges faced by pharma companies today but a snapshot into some of the major issues and pressures faced by most industries. Outsourcing is a method by which companies try and overcome or at the very least mitigate some of the detrimental effects of these challenges. The BPO industry has specific expertise to address a lot of these issues as they were some of the very first issues that they had to overcome as they came into their own.

Increasing span of price control
The draft National Pharmaceuticals Policy, 2011, currently underway and awaiting approval from the Parliament, intends to bring 354 drugs under price control, which is in addition to the 74 bulk drugs already notified under price control. The price control as proposed in the policy is likely to cover at least 50-60 per cent  of the domestic market under price control. The proposed control on prices is set to impact the industry margin significantly, especially those players having only local operations. However, to secure the profitability, firms will have to increase their scale of production.

The number of drugs under price control had come down from nearly 400 in the 1970s to 72 in 1995, and further reduced to 29 in 2002. This decision was however stalled by the Supreme Court, asking the Department of Fertilisers and Chemicals, GoI, to identify the essential and life saving drugs that need to continue remaining under price control. The Department listed 354 items that it purchases for its hospitals called the National List of Essential Medicines (NLEM). The new draft policy consists of these 354 drugs that are likely to be under the cost based price control.

Price erosion in generics
Indian generics market is witnessing a margin pressure in most of the product categories due to two main reasons: the proposed price control likely to be imposed by the Government and the stiff competition among domestic players. In fact, India has witnessed a fast rise in the number of players over a period of time. Moreover, the expansion of capacities by certain leading players has also fuelled competition in certain product categories, which restricts margins of the smaller players.

The fall in prices of generic drugs are not limited to India only. The US, which is the world’s largest pharmaceutical market, is also experiencing a sharp reduction in prices of generic drugs due to stiff competition. Some other developed countries like the UK and Germany have also witnessed the same scenario. The erosion in prices is to the extent of 90 per cent in some cases. Indian players, which have been operating in these markets, have also witnessed erosion in margins in certain therapeutic segments.

Generic substitution is a policy for healthcare cost containment. National reimbursement and insurance bodies are providing physicians and pharmacists with incentives for prescribing cheaper generic drugs. There is increased pressure on revenues for Pharmaceutical companies,  which have to concentrate on lifecycle management. The pharmaceutical industry will experience a significant reduction in the revenues associated with their blockbuster products as generic competition captures market share. As a result, given that R&D productivity is low and the cost of developing new drugs at an all time high, the pharmaceutical industry faces considerable hurdles with respect to maintaining revenue and earnings growth in the future.  

Low R&D productivity
Despite the increasing expenditure on R&D, the introduction of new molecules by Indian players has been limited. It is, in fact, a hit-and-miss situation in the field of discovery and developments of new chemical entity (NCEs), where misses are more than hits. Very few discoveries reach the final stages of approvals, and in most of the cases, the claim for patent gets stuck in legal battles.  In spite of the rising expenditure in R&D, the level of investment in R&D is still low, at average four per cent as compared to the global practice of spending 12-16 per cent  of sales on R&D.

The changing global pharmaceutical industry has transformed prospects of Indian pharmaceutical companies. The leading pharma companies in India have been actively extending the frontiers of scientific knowledge and going global through mergers and acquisitions. In 2005, acquisitions by the Indian pharmaceutical companies were the highest, with 20 buyouts abroad. A similar trend was observed during 2006, which include Dr Reddy’s buyout of Germany’s Betapharm and Ranbaxy’s purchase of Romania’s Terapia. Europe has emerged as the most preferred destination for acquisitions by Indian companies.

The European generics market has emerged as a major attraction for acquisitions by Indian companies. According to reports, margin erosion in Europe is much less compared to the US when a drug or formulation becomes generic.

Consolidation is inevitable and is expected to bring in economies of scale and provide access to newer geographies to regional players. The Government has estimated that by year 2012, the industry has the potential to achieve a size of US$ 38 bn.

Underdeveloped new molecule discovery programme
The main weakness of the industry is an underdeveloped new molecule discovery programme. Even after the increased investment, market leaders such as Ranbaxy and Dr. Reddy’s Laboratories spent only 5-10 per cent of their revenues on R&D, lagging behind Western pharmaceuticals like Pfizer, whose research budget last year was greater than the combined revenues of the entire Indian pharmaceutical industry. This disparity is too great to be explained by cost differentials, and it comes when advances in genomics have made research equipment more expensive than ever.  The drug discovery process is further hindered by a dearth of qualified molecular biologists. Due to the disconnect between curriculum and industry, pharmas in India also lack the  academic collaboration that is crucial to drug development in the West

IP leakage
IP leakage is one of the major concerns by companies outsourcing research work to India. So any major incident of IP leakage by Indian company can taint the image of whole Industry.