Strategic Shifts

Strategic Shifts…Opportunities and Challenges for India

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Strategic Shifts in the Global Pharmaceutical Industry: Opportunities and Challenges for India.

Abstract The global pharmaceutical industry over the past few years has braved dwindling growth rates, spiraling R&D costs, pricing pressures and drug safety concerns. Ominous signs for an industry accustomed to high growth rates driven by innovation, unmet medical needs and premium pricing.

As the Top 10 pharma majors (Big Pharma) recoup to face these challenges, the successful models of the past need an overhaul. This fast changing scenario is driving strategic shifts across the global pharmaceutical industry value chain. As a result, huge opportunities beckon developing nations with proven pharmaceutical proficiencies.

Amid this landscape, can India fast track its famed reverse engineering skills, adroit intellectual capital, treatment naïve patients, quality capabilities and cost efficiencies to achieve pole position.

Key global pharmaceutical industry issues Today, the new-drug discovery and approval process takes longer than ever (15 years), costs more than ever ($ 1 billion each), but produces fewer new molecules than ever (only 30 in 2004, from 46 in 1998). Compounding the drug discovery dilemma is the plethora of drug safety issues, fuelled by rising patient and physician concerns, and R&D productivity.

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Patent expiry management remains a key area to protect the near total sales erosion of blockbuster drugs, post expiry. Affordable pricing of generics is leading to faster growth and wider acceptance by governments and medical insurance companies.

The higher number of generic approvals, mean more generic competition from cost efficient players of developing countries, who are undeterred by the prospect of imminent exorbitant litigation costs from the innovators.

Huge drug discovery investments are facing uncertain returns, or not paying off profitably. Competitive intensity is severe and value pricing is an emerging reality. Established successful strategies need an overhaul, to increase productivity as well as operational and cost effectiveness.

Strategic Shifts Consolidation to convergence The plethora of mergers and acquisitions (M&A) in the world pharmaceutical market has led to a consolidation. Big Pharma like Novartis, GSK and Pfizer achieved No.1 rank through M&A and it remains an attractive growth option. But very few deals have ensured sustained market share growth or shareholder value. Most M&A face problems due to the deal premiums, overestimation of synergies and integration failures.

Companies have maintained or increased market share, principally due to convergence deals. Convergencei entails sustained long term planning and periodic, smaller,

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smarter, strategic acquisitions and alliances, which are complemented with capabilities to speedily integrate and internalize opportunities.

Convergence has emerged as the preferred choice across the pharmaceutical value chain, with every company in the global Top 10, operating with atleast ten cumulative convergence deals each, over the past decade. Typical convergence areas include drug design and delivery, promising pipelines, biotech, gene-tech and contract research. Conspicuous convergence successes have been Johnson & Johnson (J&J), Roche, SanofiAventis and Boehringer Ingelheim, all pharma majors who have doubled their world market share over the past two decades.

Blockbusters to nichebusters Blockbusters or brands with annual sales in excess of $1 billion, continue to drive world pharmaceutical growth. Big Pharma markets more than 80% of the total 80 plus blockbusters, predominantly spread across chronic or long term therapy areas.

Companies with blockbusters command the respect of physicians, patients and the trade. Significant value addition and reach can be achieved if a drug can quickly attain blockbuster sales. But the exit of a blockbuster through patent expiry or due to safety concerns, can have traumatic implications, even threatening a company’s existence. Companies dominant in the blockbuster arena have to be extremely proactive to protect their franchise.

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Increased competition from same-in-class molecules has led to diminishing market share, and hence shorter brand reigns. Mature drugs in me-too segments do not command a price premium, unless radically different.

Generic companies are getting better at attacking franchises and taking a significant percentage of the market in an increasingly shorter time frame, leading to swifter blockbuster sales erosion.

To protect their franchise, major players are targeting high value, technologically innovative and lucrative, nichebusters. Potential areas for nichebusters include cancer, virology (hepatitis, HIV), mental health (depression, psychosis, schizophrenia, Alzheimers, anticonvulsants), metabolism (diabetes, osteoporosis, anemia, obesity) and genitourinary (sexual dysfunction, bladder control) drugs.

Ownership to partnership Outsourcing the value chain to cost efficient but quality conscious players from developing nations, is fast emerging as a key strategy. Almost a third of the drug discovery chain is now outsourced to smaller partners, significant, because less than ten percent was outsourced five years back.

Contract manufacturing, through site variations to developing nations, where quality capacities and capabilities exist, is being increasingly preferred by Big Pharma. Big Pharma has perfected the art of in-licensing promising early stage molecules from smaller players, and commercializing them by leveraging their research and marketing

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muscle. This strategy frees up major resources blocked in cost and time intensive, but failure prone, early clinical trials.

Big Pharma extensively co-markets approved molecules of smaller players lacking reach and penetration. Regionally dominant large players like the Japanese majors, comarket or out-licence their innovations through Big Pharma. Today, bulk of the Top 50 brands worldwide, are not marketed by their innovators, but by Big Pharma.

Big Pharma has focused on new product development in diseases with future potential, new indications, new delivery systems and high unmet clinical needs. There is an increasing shift towards dosage variations, multiple indication drugs and combination drugs across chronic therapy areas. These are areas where developing nations like India with their quality capacities and capabilities, can add value.

Alternate therapies The acceptance level of herbals by consumers and physicians is very high as herbals are traditionally perceived to be pure, efficacious and devoid of side effects. Word of mouth publicity and faith across generations fuel the demand for these drugs.

Amid growing drug safety concerns, alternate therapies are being increasingly recommended across all medical specialties. The herbals market is already 16 % of the world pharmaceutical market, and growing. Europe and Asia are dominant in the herbals market, unlike the pharmaceutical market, where the US dominates.

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Demographic shifts A fast growing, aging population is driving the demand for indications like cancer as well as neurological, kidney and ophthalmic disorders. The working age group, due to stress, sedentary lifestyles and changing food habits, is getting increasingly vulnerable to cardiovascular, mental health, diabetes and obesity ailments, at a very young age.

The lifestyle segment is set to take-off, as an image conscious but aging society is willing to pay high prices to slow down the natural aging process. Drugs for obesity, depression, sexual dysfunction, skin wrinkles and smoking cessation comprise this segment.

Ubiquitous technology has ushered in revolutionary changes, but drastically reduced physical activity, under the garb of convenience. Startling facts have emerged from an obesity survey, published in the Times of India, Mumbai, dated 6th March, 2005.

“ New data emerging in the field of obesity in Mumbai suggests that a family can gain 8 kilos for every mechanical gadget acquired. If a family has a television, air conditioner and car, we are looking at an accumulation of around 24 kg of extra weight.”

Such evident demographic changes drive worldwide drug demand in chronic therapies. But these trends assume significance, as they would open up huge drug research opportunities in countries with treatment naïve patients and diverse disease profiles, like India.

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Advantage India

The Opportunities The Indian pharmaceutical industry has evolved into a highly skilled, but value-wise insignificant, player on the world stage. A combination of regulatory measures, home bred entrepreneurial skills and technological tenacity, have propelled India to the fourteenth largest market by value, fourth largest by volumes and a 1 % market share.

The ensuing world wide strategic shifts are in sync with Indian capabilities. If India can leverage its skills across the pharmaceutical value chain, it can swiftly move up the pharma

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The competitive intensity in India is the highest in the world with more than 10,000 players. However, recent years have seen dwindling growth rates and margins, due to pricing pressures and the spectre of product patents. These resistors have led Indian companies to expand globally, and invest in quality capacities locally.

The Indian pharmaceutical export foot-print encompasses 150 countries. Indian companies account for a third of all the drug master file (DMF) applications and Indian players have helped in the drug development and discovery of top blockbuster drugs.

India’s buoyant, active pharma ingredient (API) industry churns out 400 bulk actives, probably the world’s most prolific producer, but certainly the most economical. India’s quality credentials in formulations and APIs are vindicated in the distinction of having the largest number of USFDA approved plants, outside the US. Contract manufacturing for Big Pharma has commenced in India, and can provide higher value realization.

A great generic opportunity beckons quality Indian players as patents worth $ 60 Billion, 12 times the size of the current Indian pharmaceutical market, expire over the next 5 years. Generics entail no discovery procedures, nor time and cost outlays, but only cost efficiencies and reverse engineering skills, areas where Indians enjoy pole position.

India’s thriving Biotech industry has crossed the $ 1 Billion mark and looks set to achieve its goal of $ 5 Billion by 2010. Policy and regulatory measures conducive to growth are being enacted across the pharmaceutical spectrum, which will propel the Indian pharmaceutical industry into a significant pharmaceutical hub.

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Indian demographics are also driving the demand for chronic therapies and areas of unmet medical needs. Indian players could help find affordable solutions through alliances, generics, contract research and novel drug delivery systems.

India’s billion plus population, long considered a liability, can actually help propel India’s pharmaceutical aspirations. India offers the most diverse disease profile in the world and a treatment naïve patient population, ideal factors for clinical research. Organizing clinical trials and analyzing data is much faster and cheaper in India than in western countries.

India teems with the world’s largest intellectual capital, endowed with superior chemistry, info-tech and English speaking skills, which can provide synergy in bolstering India’s presence in the lucrative drug discovery value chain.

Alternate therapies have been prevalent in India since the dawn of civilization. Ayurveda has been the traditional therapy across India and enjoys the trust of physicians and patients due to its proven safety and efficacy. The Indian herbal market is one fifth of the Indian pharmaceutical market in sizeii. The increasing shift worldwide towards alternate therapies, is a happy augury and opportunity for India, considering its traditional prowess in herbals.

The Challenges Indian industry has to contend with strong external and internal threats that can stymie their best laid plans. Big Pharma and generic majors, realizing the cost advantage that

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Indian firms enjoy, are setting up their own quality research and manufacturing facilities in India to ensure value pricing, and to neutralize the Indian cost advantage.

A domestic shakeout may be imminent through the enforcement of regulatory changes in quality (WHO-GMP, Schedule-M), duties / taxes ( Excise duty on MRP, Excise duty free zones, VAT) and patents (WTO/GATT). The advent of product patents will initially retard growth, as it will arrest the free flow of legally reverse engineered molecules, principal growth drivers in the Indian market for decades.

Quality infrastructural investments in roads, ports and power, a harmonization of the various Indian pharmaceutical regulatory authorities, and rationalization of duty structures to encourage competition is essential. These measures can create an environment, conducive to global business, as India Inc. revs up to take on global competition, by global rules.

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Conclusion

Full Text Word Count - 1925 words Key Words- Strategic shifts, Global pharma industry, Indian pharma industry Document Type- Research paper Geographic Terms- World Pharmaceutical market, Indian Pharmaceutical market

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About the Author Amit Rangnekar is pursuing a PhD in Business Strategy from Narsee Monjee Institute of Management Studies (NMIMS), Mumbai, where he is also a visiting faculty in Marketing. Equipped with a Masters in Marketing Management from Mumbai University and 15 years of progressively responsible pharmaceutical industry experience, his research interests revolve around the key dynamics and demographics, affecting global pharmaceutical strategy and performance. Email- [email protected]

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USFDA www.usfda.gov

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Economist

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Company Annual Reports

References i ii

Mergerstat, February 2003 and Cap Gemini Ernst & Young analyst report, Perspectives on lifescience The Pharma Review- Alternate Medicine October 2003