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Global API manufacturers are poised to penetrate the Indian market in a bigger way – will the API ‘marketing warfare’ be even more intense, in future?

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India currently plays a relatively dominant role in the Global Active Pharmaceutical Ingredient (API) Market with China being ahead of India. While this is the current scenario, many experts in this field contemplates that important players from the regulated markets will soon start making significant inroads in India.Current API Market situation in India:In 2007 the API output value in India was around US $4.1 billion registering a 5 year CAGR of around 19% and ranking fourth in the world API output. According to the Tata Strategic Management Group, Indian API export value is expected to increase to US $12.75 billion in 2012.

Currently in India about 400 different types of APIs are manufactured in around 3000 plants, Ranbaxy Laboratories, Lupin, Shasun Chemicals, Orchid Chemicals, Aurobindo Pharma, Sun Pharmaceuticals Ipca Laboratories and USV being the top API manufacturers of the country. Indian domestic companies source almost 50 percent of their API requirements from China, because of lower cost in that country.

In terms of global ranking, India is now the third largest API producers of the world just after China and Italy and by 2011 is expected to be the second largest producer after China. However, in Drug Master File (DMF) filings India is currently ahead of China.

In addition, India scores over China in ‘documentation’ and ‘Environment, Health and Safety (EHS)’ compliance. All these have contributed to India having around 100 US FDA approved world class manufacturing facilities, which is considered the largest outside the USA.

Indian API manufacturers are facing a cut throat competition from their Chinese counterparts mainly because of lower costs in China. Considerably higher economies of scale and various types of support that the Chinese API manufacturers receive from their Government are the main reasons for such cost differential.

Growing competiton from the regulated markets:

We now observe a new trend within the API space in India. Many of the global innovators and generic companies are keen to enter into the API space of India.

It is known that API manufacturers from the regulated markets are already selling their products in India. However, at present, the numbers of Indian registrations for API applied by some of the large global companies, as reported by ‘Thomson Reuters Newport Horizon Premium’, are quite significant, which are as follows:

1. Novartis, Switzerland:20
2. Pfizer, USA:16
3. Sanofi-Aventis, France: 26
4. Teva, Israel: 45
5. Schering-Plough, USA:39
6. BASF: 37
7. DSM: 26
8. E.ON AG: 16
9. Kyowa Hakko: 23

All these companies who are entering into the API business space in India, I am sure, have worked out a grand design to compete not only with the the low cost domestic API manufacturers, but also with the cheaper imports, particularly from China.

What will then be the competitive edge of these companies in India?

It appears that each of these companies has weighed very carefully the existing strategic opportunities in the API sectors of India, both in terms up technology and also in terms of domestic demand.

Strategic gap in API manufacturing technology:

India, undeniably, is one of the key global hubs in the API space, with competitive edge mainly in ‘non-fermentation technology’ product areas. This leaves a wide and perceptible technological gap in the areas of products requiring ‘fermentation technology‘.

Significant demand from domestic formulations manufacturing :

India is much ahead of China in pharmaceutical formulations manufacturing, especially in the area of exports to the regulated markets like, the USA and EU. Over 25 domestic Indian companies are currently catering to exports demand of the U.S market. However, it is interesting to note that the global manufacturers like Sandoz, Eisai, Watson, Mylan have already set up their formulations manufacturing facilities in India and some more are expected to follow suit over a period of time. Hence, fast growing domestic demand for APIs, especially for exports, will drive the business plan of the global API players for India.

Is the cost advantage in India sustainable?

Indian API manufacturers although currently have a cost advantage compared to their counterparts in the regulated market, this advantage is not sustainable over a period of time because of various reasons. The key reason being sharp increase in cost related to more stringent environmental and regulatory compliance, besides spiralling manpower and other overhead costs.

Indian regulatory requirements for the global API players:

To sell their APIs into India, global companies are now required to obtain the following regulatory approvals from the Indian authorities:

1. Foreign manufacturing sites for the concerned products
2. APIs which will be imported in the country

The Drug Controller General of India (DCGI) has stipulated a fee of U.S$1,500 to register the manufacturing premises and U.S$1,000 to register each individual API. Since January 2003, around 1,200 registration certificates have been issued in India. Large number of Indian registrations is attributed by many to the strategic technology gap in India, as stated above, demand of high-quality API for finished formulations required by the regulated markets like the U.S and EU, and relatively cheaper product registration process.

As we see above Teva has gone for maximum number of Indian registrations, so far and most probably selling the APIs to their contract formulations manufacturers in India. Similarly, Schering-Plough and Sanofi-Aventis, if not Pfizer are perhaps catering to the API demand of their respective formulations manufacturing plants in the country.

Whatever may be the reasons, these global players are now exporting APIs at a much larger scale to India and in that process have started curving out a niche for themselves in the Indian API market. Impressive growth of the domestic pharmaceutical formulations manufacturing market fueled by increasing domestic consumption and exports to the regulated markets, coupled with gradual improvement in the regulatory environment of the country, is expected to drive the growth of API business of the global players.

However, the moot question is how significant will this competition be?

By Tapan Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Global Pharmaceutical Industry: Capturing the micro-trends, having potential to become future mega-trends.

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The situation:Almost the entire developed world is reeling under recession… Slowed down business growth… Gradual drying up of research pipeline… Skyrocketing R&D cost… Pressure on product price …Market capitalization going south… Cut throat market competition… Depressed business sentiments…Past M&As are no longer yielding desired results… Global pharmaceutical companies are to lose nearly US$100 billionin sales as many blockbuster drugs are set to go off-patent over the next five years. Sounds quite like a dooms day! No, in my view, the industry including in India, is going through a transformation process. Is any trend emerging through this process? Yes, of course. Let us now try to capture these micro-trends, which have a potential to become tomorrow’s mega-trends.The response:

Before we delve into that, let us see how the global pharmaceutical industry has been responding to such a situation during this trying time. A strong instinct of survival, in such a situation, will undoubtedly prevail. This instinct is driving some of the large companies, with reasonably deep pocket, towards consolidation. This is happening through mergers, acquisitions and even through hostile takeovers.

Globally, from 2008 to date about 58 mergers and acquisitions have taken place, mega, big or small. Amid the biggest financial crisis since the Great Depression, Pfizer Inc., Merck & Co. and Roche Holding AG could raise a mindboggling amount of US $155 billion to expand and survive in their business.

This month Merck & Co acquired Schering Plough for US$41.1 billion in a cash-and-stock deal that will create the second largest pharmaceutical company in the USA. Richard Clarke, Chairman and CEO of Merck said that the merged company would benefit from the rich R&D pipeline, a significantly broader product portfolio and a wider presence in the global markets.

Besides enriching R&D pipeline and achieving substantial revenue synergy, the merged entity is expected to achieve significant cost synergy of about US$ 3.5 billion by 2011. This deal comes just six weeks after Pfizer Inc swallowed up Wyeth for a record US$68 billion. This move of Pfizer’s is not only expected to enlarge its product portfolio, but also to significantly reduce its dependence on Lipitor, which goes off-patent in 2011.

Just after these, Roche clinched a deal to acquire 44% of Genentech Inc with US$ 46 billion. In 2008 almost 75% of Pharmaceuticals sales of Roche were contributed by the products brought in from Genentech stable. This signifies the importance of acquisition of Genentech by Roche.

Will the M&A strategy be viable in the longer term?

All these companies are basically looking for various avenues to tide over the impending crisis, especially in their R&D pipeline by acquiring other suitable companies. However, looking at the past records, it appears that many of these mega mergers may not fetch a sustainable longer term gain. Insatiable desire to merge or acquire another company for various reasons, keep coming back to these companies after a little while, once again. Pfizer, GlaxoSmithKline (GSK), Sanofi Aventis etc will stand as good examples. Some believe that merging just for the sake of width and depth of the R&D pipeline could have its underlying risks, as business compulsion of two different research cultures to come together may cause a serious adverse impact on ‘the climate of innovation’. Such a congenial environment very often plays a critical role in the process of discovery of breakthrough drugs. Probably because of this reason many questioned whether Genentech’s productive R&D culture can flourish under Roche’s full control.

Let me now deliberate on emerging micro-trends in the global pharmaceutical industry. All these micro-trends, in my view, are having potential to get transformed into mega-trends in not too distant future.

Micro-trend 1: Reorganization of large R&D set-ups into smaller units to foster innovation.

Despite creating large R&D set-up through mega mergers, we have also witnessed that some pharmaceutical majors like, GSK, are reorganizing the large R&D set-ups into smaller units to foster innovation, under the leadership of Andrew Witty, the current CEO. This strategy is expected to reap rich harvest.

Micro-trend 2: From concentrating exclusively on innovative medicines to expansion into low risk generic medicines.

Not so long ago Global R&D companies focused only the business of innovative prescription medicines. Low margin generic business was not their cup of tea. Today the scenario has made a 180 degree shift. Low risk, low cost and high volume turnover of generic business is now attracting many R&D based companies.

We are now witnessing another model of mergers and acquisitions, which was pioneered by Novartis some time back. An increasing number of companies are planning to spread their business in less risky generics pharmaceutical businesses. This business model will not require going through lengthy R&D and ever increasing stringent regulatory approval process for their entire product portfolio, in the developed markets of the world. Following this business model Daiichi Sankyo acquired Ranbaxy, in India. Sanofi-Aventis is in the process of acquiring the generic company of Eastern Europe, Zentiva. GSK acquired Pakistan operations of Bristol Myers Squibb, other generic business in South Africa and Egypt and mature products business of UCB in some selected markets of the world. Pfizer has also recently made somewhat similar move in India by entering into a strategic alliance with Aurobindo drugs for sourcing generic formulations for their global markets.

Micro-trend 3: From only prescription medicine business to businesses like, OTC, Nutrition, Diagnostics, Animal Health products, to reduce the business risk.

Some research based companies are now trying to somewhat insulate themselves from high risk R&D business by focusing on, besides generics, other low risk areas like, over the counter medicines (OTC), nutrition products, diagnostics, animal health businesses etc. Companies like, GSK, Pfizer, Roche will be good examples for such strategy.

Micro-trend 4: From sharp business focus mainly on top 10 markets of the world to extension of focus on key emerging markets of the world.

Not so long ago, large multinational companies (MNCs) used to have major focus on top 10 markets of the world. Now a days many of these companies are extending their business focus on emerging markets, like, India, Brazil, China, Russia, Turkey, Mexico etc, which are riding high on a very strong growth curve, unlike USA, Europe or Japan.

In these markets to gain a critical mass, the MNCs will need to enter the generic business and the best way to do it is by acquiring a good generic company. For this reason, in India we may soon start witnessing MNCs acquiring large to mid-size domestic Indian pharmaceutical companies. Daiichi Sankyo has just shown the way by acquiring Ranbaxy in India. This process has not started in full swing, as yet, probably because of expected very high valuation for their respective companies, by the Indian promoters following Ranbaxy deal.

Micro-trend 5: Gradual shift in R&D focus from infectious to chronic to preventive (vaccines) to personalized medicines.

Global pharmaceutical industry got a head start with the innovative drugs to treat infectious diseases. It gained growth momentum by changing its R&D focus on non-infectious chronic disease areas. We now observe a micro-trend to move towards preventive therapy like vaccines even for cervical cancer. With the emergence of stem cell research in the USA and with the rapid progress of RNAi technology, very soon we may enter into the area of personalized medicines, as well. Thus, in my view preventive and personalized medicines will be the high growth pharmaceutical business of future. At that time, the pharmaceutical business model will change significantly though, to adapt to the changing business environment.

Is the era of Blockbuster drugs over?

Let me now reiterate that contrary to the belief of many, future R&D pipelines of the global pharmaceutical companies are not too dry, either. I am not in agreement with many pontificating that the future of blockbuster drugs is over. Published reports indicate that 581 primary-care driven NCEs covering disease areas like, Central Nervous System (CNS), Cardiovascular, Vaccines, Respiratory, Anti-infective etc, are currently in Phase I and Phase II stages. Similarly 637 specialist-care driven NCEs covering disease areas like, Oncologics, Autoimmune agents, HIV, Immunostimulants, Alzheimer, Immunosuppressive etc, are also in phase II and Phase III clinical trial stages. Altogether 1218 NCEs are currently in Phase II and Phase III stages of clinical trial.

Indian Pharmaceutical Companies – are they in a dilemma?

In sharp contrast to prevailing scenario in the global pharmaceutical industry, in India, after a paradigm shift to a new IPR regime, the domestic pharmaceutical industry seems to be in a great dilemma, to some extent they seem to be in a state of identity crisis. Many domestic companies seem to be getting too overawed by the change in their ‘reverse engineering’ business model, as a fuel for growth.

At this stage, it is very important for all these companies to appropriately change their business model based on their competitive strength and quickly adapt to the new paradigm. Instead of considering the research based global companies as competitors, they should look at them as potential collaborators for various outsourcing opportunities; starting from contract research, contract manufacturing to contract marketing, as well. Why not?

Need to move from fragmentation to consolidation for leveraging the business growth:
Indian pharmaceutical industry is now highly fragmented. This is the high time to move away from fragmentation to consolidation, which will help the domestic pharmaceutical industry to attain adequate scale to invest significantly in their well considered business model to fuel the growth engine.

India is making progress in pharmaceutical R&D:

In India some domestic pharmaceutical companies have made significant progress towards R&D output. Published information indicates that Biocon, Piramal Healthcare, Glenmark, Ranbaxy and Suven Life Sciences have between them 45 NCEs. Most of these fall under oncology, infectious, metabolic and respiratory disease areas. Out of these 19 NCEs are in pre-clinical and the balance are in Phase I& Phase II clinical trial stages.

To sum-up, I witness the following micro-trends globally, which we should keep tracking with interest:

 Reorganization of large R&D set-ups into smaller units to foster innovation.

 From concentrating exclusively on innovative medicines to expansion into low risk generic
medicines.

 From only prescription medicine business to businesses like, OTC, Nutrition, Diagnostics, Animal
Health products, to dilute the business risk.

 From sharp business focus mainly on top 10 markets of the world to extension of focus on key
emerging markets of the world.

 Gradual shift in R&D focus from infectious to chronic to preventive (vaccines) to personalized
medicines.

WILL THE BALL GAME BE QUITE DIFFERENT TOMORROW?

By Tapan Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.