Tag Archives: generics

Have the successive ‘Drug Policies’ of India delivered? If not, why not?

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January 11, 2011 edition of ‘The Lancet’ in its article titled, “Financing health care for all: challenges and opportunities” commented as follows:
“India’s health financing system is a cause of and an exacerbating factor in the challenges of health inequity, inadequate availability and reach, unequal access, and poor-quality and costly health-care services. The Government of India has made a commitment to increase public spending on health from less than 1% to 3% of the gross domestic product during the next few years…. Enhanced public spending can be used to introduce universal medical insurance that can help to substantially reduce the burden of private out-of-pocket expenditures on health.”
The “Drug Policy “of India:
The new ‘Drug Policy’ of India, which is long overdue, should address all these key issues, as articulated by ‘The Lancet’. Unfortunately, outdated ‘1995 Drug Policy’ is still operational, since last fifteen years. The reason for inordinate delay in putting a new, robust and more reform oriented ‘Drug Policy ’in place is still not known to many, as it is probably languishing in the prison of indecision of the bureaucracy of the country.
The ‘Drug Policy 1986’ clearly enunciated the basic policy objectives relating to drugs and pharmaceuticals in India. After around 25 years, should not the government, at the very least, ponder to assess whether the successive drug policies have delivered to the nation the desirable outcome or not?
In my view, the objectives of the new ‘Drug Policy’ should help accelerating the all-round inclusive growth of the Indian pharmaceutical industry to make it a force to reckon with in the global pharmaceutical space. The drug policies are surely not formulated just to implement rigorous price control measures for drugs. The policy should also formulate other key measurable initiatives, assigning specific accountabilities, to contribute significantly towards achieving the healthcare objectives of the nation. The policy should also encourage working closely and in tandem of all the related ministries of the government.
Financial protection against medical expenses for all is very important:
One of the very major issues in the healthcare space of the country is high out of pocket expenses by the majority of our population. “Financial protection against medical expenditures is far from universal with only 10% of the population having medical insurance” in India. (Source: Lancet Jan 11, 2011).
A comparison of private (out of pocket) health expenditure: (Source: Lancet)
1. Pakistan: 82.5% 2. India: 78% 3. China: 61% 4. Sri Lanka: 53% 5. Thailand: 31% 6. Bhutan: 29% 7. Maldives: 14%
The key issue remains unresolved:
The above edition of ‘The Lancet’ has highlighted that outpatient (non-hospitalization) expenses in India is around 74% of the total health expenses in India and the drugs account for 72% of this total outpatient expenditure. The study has also highlighted that 47% and 31% hospitalization in rural and urban areas respectively are financed by loans and sell of assets.
Drug Prices in India:
The cost of medicines, especially the essential medicines in India, is one of the lowest in the world, even more economical than our neighboring countries like, Bangladesh, Sri Lanka and Pakistan. Moreover, as per DIPP data the inflation index of medicine in 2009 was much lower at 112.32 against the same for all commodities in the same year at 127.47. National Pharmaceutical Pricing Authority (NPPA) also indicated that there was almost no rise (+0.5%) of drug prices in 2010 over the previous year because of effective ‘Drug Price Monitoring mechanism’ by the regulator and fierce market competition.
Around 38% – 40% of Indian population can’t afford to spend on medicines:
While framing the ‘Drug Policy’, the government should also keep in mind that a population of around 38 to 40% of India, still lives below the poverty line and will not be able to afford any expenditure towards medicines. Adding more drugs in the list of essential medicines and even bringing them all under stringent price control will not help the country to resolve this important issue, in the prevailing situation.
The key focus area of successive ‘Drug Policies’ of India has been just ‘price’:
The reform initiatives enunciated by the government in the successive drug policies have been considered by the pharmaceutical industry, in general, as far from satisfactory. In the era of globalization, where market forces play a dominant role to control prices, including the essential commodities, the rigors of stringent price control on pharmaceuticals need to be addressed urgently. This was re-enforced even in the ‘National Economic Survey Report of 2009′.
Will continuation of the same focus be able to resolve the issue?
I do not think so. Continuation of the focus on price since last four decades has certainly enabled the government to ensure that drugs prices in India are cheapest in the world. However and very unfortunately the ‘Drug Policies’ with focus on price alone have not been able to ensure even today that 47% and 31% of hospitalization in rural and urban areas, respectively, are financed by robust healthcare financing systems and not by private loans and selling of assets by individuals.
Expectations from the new ‘Drug Policy’:
Adequate and immediate policy measures to respond to the needs of a robust healthcare financing model for all strata of the society are absolutely critical to address this pressing issue. Effective penetration of health insurance, will, therefore, be one of the key growth drivers not only for the Indian pharmaceutical industry, but also to ensure its inclusive growth, as desired by many.
Conclusion:
Unfortunately, the ‘Drug Policies’ of India have not been able to keep pace with the globalization process of the country as compared to even those industries, which are dealing with the essential commodities, like pharmaceuticals. The amended Indian Patents Act came into force in the country in January 2005. The drug policy of India, for various reasons, has not been able to articulate, as yet, specific key measures to encourage innovation, giving a new thrust to the pharmaceutical R&D space of the country, as much as it should have been.
The ‘New Drug Policy’ should have clear and transparent provisions of stringent drugs ‘price monitoring’ mechanism by the NPPA. The policy should also include an equally transparent system to ensure that errant pharmaceutical players, if any, who will be caught with profiteering motives, under any garb, at the cost of precious lives of the ailing patients, are brought to justice with exemplary punishments, as will be defined by law.

By: Tapan J 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.

The traditional ‘Business Models’ of R&D focused Global Pharmaceutical majors are undergoing a metamorphosis

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Mounting pressure on the P&L account, as the products go off patent:

Patented new products are the prime growth driver of the research based pharmaceutical companies of the world. Since last few years, because of various reasons, the number of launch of such products has been greatly reduced. To add fuel to the fire, 2010-12 will witness patent expiries of many blockbuster drugs, depleting the growth potential of the most of the research based pharmaceutical companies.

The existing model of growth engine needs a relook:

The blockbuster model of growth engine of the innovator companies effectively relies on a limited number of ‘winning horses’ to achieve the business goal and meeting the Wall Street expectations. In 2007, depleting pipeline of the blockbuster drugs hit a new low in the developed markets of the world. It is estimated that around U.S. $ 140 billion of annual turnover from blockbuster drugs will get almost shaves off due to patent expiry by the year 2016. IMS reports that in 2010 more than U.S. $ 30 billion will be adversely impacted because of patent expiry. Another set of blockbuster drugs with similar value turnover will go off patent the year after i.e. 2011. It will not be out of context to mention, that last year around U.S. $ 27 billion worth of patented drugs had gone off-patent.

Decline in R&D productivity is not related to investments:

The decline in R&D productivity has not been due to lack of investments. It has been reported that between 1993-2004, R&D expenditure by the pharmaceutical industry rose from U.S.$ 16 billion to around U.S.$ 40 billion. However, during the same period the number of applications for New Chemical Entities (NCEs) filed annually to the U.S. FDA grew by just 7%.

Total global expenditure for pharmaceutical R&D was reported to have reached U.S. $ 70 billion in 2007 and is expected to be around U.S. 90 billion in year 2010. 75% of this expenditure was incurred by the U.S alone. It is interesting to note that only 22 NMEs received marketing approval by the US FDA during this period against 53 in 1996, when R&D expenditure was almost less than half of what was incurred in 2007 towards R&D.

Be that as it may, the pressure on the P&L (Profit and Loss) accounts of these companies is indeed mounting.

The silver linings:

However, there seem to be following two silver linings in the present scenario, as reported by IMS:

1. Number of Phase I and Phase II drugs in the pipeline is increasing.

2. R&D applications for clinical trials in the U.S. rose by 11.6% to a record high of 662 last year.

Significant growth of generic pharmaceuticals is expected in near future, far surpassing the patented products growth:

Patent expiry of so many blockbusters during this period will fuel the growth of generic pharmaceutical business, especially in the large developed markets of the world. The market exclusivity for 180 days being given to the first applicant with a paragraph 4 certification in the U.S. is, indeed, a very strong incentive, especially for the generic companies of India.

Healthcare reform of March/April 2010 in the USA is expected to give a further boost to this trend.

Pressure on traditional Marketing strategies:
The marketing expenditure for pharmaceutical of the global pharmaceutical companies as reported by Scrip is U.S. $ 57.5 billion. However, an industry association reported that research based pharmaceutical companies in the U.S. spent $ 29.4 billion on R&D and $ 27.7 billion on promotional activities.

New Product Differentiation could be a big issue:

Products in R&D pipeline could face problems of ‘differentiation’ in terms of value offering to the patients, once they are launched. This issue is expected to surface especially with products in the oncology disease area. IMS Health reports that about 55 oncology projects are now in Phase III and 8 in the pre-registration stage. Thus about 50 new oncology products are expected to hit the market by end 2010. Many experts anticipate that there may not be significant brand differentiation between the brands of the ‘same basket’, leading to cut-throat competition and further pressure on expenditure towards marketing of brands.

The changing business strategy of global pharmaceutical companies during this trying time:

In this trying time, the global pharmaceutical companies are resorting to an interesting strategy, combing both old and the new ones. I shall touch upon the following seven strategies:

1. Mergers and Acquisitions (M&A):
Mega M&A strategies are still being actively followed by some large Pharmaceutical companies mainly to enrich R&D pipeline and achieve both revenue and cost synergies.
However, some of these large global companies have started realizing that ‘powerhouses’ created through past mega mergers and acquisitions have now become too large to manage effectively for various reasons. Mismatch between two different organization cultures also throws a great challenge to obtain desired output, many a times. Moreover, the merged R&D set up could become too large to manage, impacting the R&D productivity very adversely.

2. Extension of the Product Life Cycle and Effective Product Life Cycle Management:
Many global pharmaceutical companies are now engaged in ‘product life cycle management’ of their existing products by extending the ‘product life cycle’, effectively. In that process they are trying to maximize the brand value of these products in the international markets. For example, AstraZeneca has developed once daily treatment with their anti-psychotic drug Seroquel XR. This extended-release formulation of the same drug will help patients avoid 5 to 7-day titration required with the immediate-release version.
Towards similar initiative, Pfizer has also recently set up a dedicated “Established Product Business Unit” within worldwide pharmaceutical operations, to hasten business growth in the international markets.

3. OTC Switch:
Prescription to ‘Over the Counter’ (OTC) switch is another business strategy that many innovator companies are now imbibing, at a much larger scale.

This strategy is helping many global pharmaceutical companies, especially in the Europe and the U.S to expand the indication of the drugs and thereby widening the patients base.

Recent prescription to OTC switches will include products like, Losec (AstraZeneca), Xenical (Roche), Zocor (Merck), etc.

4. Emerging of Preventive Therapy, like Vaccines:
Many large global companies, like GSK, Sanofi Aventis and Merck are getting attracted by the emerging opportunities in the fast developing vaccines market. This trend has been triggered primarily by heightened awareness and greater focus on preventive medicines almost all over the world. It is estimated that in 2011, the vaccines market will grow from U.S.$ 13 billion to U.S.$ 30 billion registering a growth of 18% each year during this period. PricewaterhouseCoopers (PwC) estimates vaccine market to be U.S. $ 42 billion by year 2015 based on data of 245 pure vaccines and 11 combination vaccines currently under clinical development. It is interesting to note that 90 of these are therapeutic vaccines for cancer.

5. Entry into highly contentious market of Biosimilar drugs:
The Generic Pharmaceutical Association (GPhA) has estimated that it is possible to save US$ 10 billion – 108 billion over a period of 10 years with biosimilars in the top 12 categories of biological drugs. Some of these biological are already off patent and for others the patents will expire shortly.
Only a few biosimilar drugs have reached the global markets as on date because of their regulatory restrictions in most of the developed markets of the world. Even those biosimilar drugs, which have since been launched in Europe like, human growth hormone (HGH) Somatropin and Epoetin alfa for anemia, are yet to make a mark in the market place.

IMS Health reports that Omnitrope (somatropin) of Sandoz, the first biosimilar drug launched in the developed world, has registered less than 1% of the U.S. $ 831 million HGH market in Europe. Moreover, the launch of 3 more biosimilar versions of epoetin alfa in 2007, made almost negligible impact in the market. Such a low acceptance of biosimilars in the western world, so far, could well be due to lingering safety concern of the medical profession with such types of drugs.

Currently, Japan and USA are working on formal guidelines for biosimilar drugs, whereas Health Canada has already issued draft regulatory guidelines for their approval in Canada.

In April 2010, Reliance Life Science has already announced its intent to enter into the Biosimilar market of the EU in not too distant future.

6. Entry into Generic Markets:

Some large global pharmaceutical companies have already made a firm commitment to the generics market. Novartis paved the way for other innovator companies to follow this uncharted frontier, as a global business strategy. Last year the generic business of Novartis (under Sandoz) recorded 19% of their overall net sales, with turnover from generics registering U.S$ 7.2 billion growing at 20%.

Keen business interest of Sanofi Aventis to acquire Zentiva, the generic pharmaceutical company of Czechoslovakia; it’s very recent acquisition of the generic pharmaceutical company Laboratorios Kendrick of Mexico and Shantha Biotech in India and acquisition of Ranbaxy Laboratories of India by Daiichi Sankyo, will vindicate this point.

Pfizer has also maintained its generics presence with Greenstone in the U.S. and is using the company to launch generic versions of its own off patent products such as Diflucan (fluconazole) and Neurontin (gabapentin).

7. Collaboration with the Indian Companies:

Another emerging trend is the collaboration of MNCs with the Indian pharmaceutical companies to market generics in the global market, like, Pfizer with Aurobindo and Claris, GSK with Dr. Reddy’s Laboratories (DRL), Astra Zeneca with Torrent. I guess that similar trend will continue, in future, as well.

Conclusion:
Another ‘new pharmaceutical sales and marketing model’ is gradually emerging in the global markets. This model emphasizes partnership by bundling medicines with services. The key success factor, in this model, will depend on which company will offer better value with an integrated mix of medicines with services. PwC indicates that in this ‘new pharmaceutical marketing model’, besides required medicines, the expertise of a company to effectively deliver some key services like, patient monitoring and disease management could well be the cutting edge for future success.

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.

Generics’ Lobby, Innovators’ Lobby and the Pharmaceutical Data Protection in India – A Perspective

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To meet the unmet needs of the patients and improve access to healthcare in India mere discovery of a new pharmaceutical entity is not enough. The journey from mind to market is indeed an arduous one.

For the patients’ sake:

From the viewpoint of patients, proper evaluation of the safety, quality and efficacy of medicines are critical. Towards this direction, substantial clinical data needs to be generated through extensive pre-clinical and clinical trials to satisfy the regulatory authorities for marketing approval of a New Molecular Entity (NME).

Reasons why the innovators data will need protection:

Irrespective of what has been indicated in Article 39.3 of TRIPS, Data Protection (DP) is justifiable on the following grounds:

a. Generation of data by the originator to ensure safety and efficacy of the drugs for the patients involves considerable cost, time and efforts.

b. Submission of detail clinical data is a regulatory requirement for the interest of the patients. Without such obligation to the Government, the data would have remained completely under control of the originator. It is, therefore, a reasonable obligation for the Government to respect confidentiality of the data in terms of non-reliance and non-disclosure.

c. Since the data is proprietary during the patent period, any access to such data for commercial use by the second applicant without the concurrence of the originator is unfair on grounds of propriety and business ethics.
d. Any failure by the Government to provide the required protection to the data would lead to “unfair commercial use”.

e. Without DP, the originator of the innovative drugs would be placed at an unfair commercial disadvantage as compared to their generic counterparts. Generic players do not incur similar huge costs for meeting the mandatory requirements of the regulatory authorities for NMEs.

Patent Protection and Data Protection – two different IPRs:

The distinctiveness of the two incentives, namely, Patent Protection and Data Protection or Data Exclusivity is recognized in countries which are leading in research and development in pharmaceuticals.

Data Protection will provide substantial benefits to the stakeholders:

Benefits to Patients:

DP ensures stringent evaluation of overall safety and efficacy of drugs launched in the market. Mere proving of Bioequivalence/ Bioavailability (sometimes on as low as 12 healthy volunteers in India) does not guarantee drug safety as the impurities profile of the duplicator’s drug is likely to be different than that of the originator.

Benefits to Doctors:

Doctors continuously seek scientific information. Clinical evaluation becomes valuable from this perspective. Once provisions for DP are made, comprehensive and quality data can be collected and the detail scientific information be provided to the doctors to update their knowledge for the ultimate benefits of the patients.

Benefits to Researchers:

Clinical researchers in India can win substantial share of this global market with DP as an effective driver in the evolving scenario. There will be increased R&D collaborations. India’s cost arbitrage, speed and skills in clinical trial and research could be leveraged more effectively.

An Expert Committee under the Chairmanship of Dr. R.A. Mashelkar, an eminent scientist, also highlighted the significance of DP, as follows:

“In order to ensure enabling environment, the regulatory division dealing with the applications concerning new drugs and clinical trials would be required to develop suitable mechanisms to ensure confidentiality of the submissions.”

Benefits to Pharmaceutical Industry:

Research is a key driver for the Pharmaceutical Industry. Scientists prefer to work in research laboratories in those countries which provide full-fledged protection to IPR. DP is one of the Intellectual Property Rights. Reversal of brain drain and retention of scientific talents will help the developing economies, like India intensify its R&D efforts. More Indian pharmaceutical companies, while globalizing the business, will engage themselves in partnerships and collaborations with research based global companies.

Indian scientists would need DP to protect their Intellectual Property as many Indian pharmaceutical companies have already started increasing their R&D budgets.

Benefits to Governments:

Once India moves from a stand-alone position to one which aligns itself with the world in terms of IPRs, including DP, India is likely to increase trade not only in ASEAN (Association of South-East Asian Nations), MERCOSUR countries (Argentina, Brazil, Paraguay & Uruguay) and NAFTA (North American Free Trade Agreement), but even in regulated markets like USA and Europe. There will be increase in scientific education, technology transfer and quality employment.

Could Data Protection affect the legal generics or delay their launch?

Unfortunately, a bogey is raised to create an impression that DP provisions will act as a barrier to the development of generics, adversely affecting the domestic and export business of the local players. Following facts will prove the irrelevance of the arguments propounded by this lobby:

• DP refers only to new products patented in India. It will not affect the generic drugs already in the market.

• USA is an outstanding example, which demonstrates that research based global companies and the generic industry can co-exist, offering dual benefits of innovative drugs and cheaper off-patent generic medicines to the patients.

• More number of patented medicines will ensure faster growth of the generic industry, after the former goes off-patent. In the USA which has a long standing DP regime, the market penetration of generics is amongst the highest in the world and stands at over half of all the prescriptions. After introduction of Hatch Waxman Act in 1984 that provided for a 5 year period of DP in the USA, there were spurt of development of New Drugs together with quicker entry of generics into the market.

• The apprehension that growth of the generic market will slow down with DP, is ill-founded. Indian companies, on the contrary, are aggressively seeking growth opportunities for generics in markets like the USA and Europe where DP is already in place.

• Domestic Indian companies will be dependent upon implementation of a fully compliant TRIPs regime, including DP for their business growth in these markets.

• DP does not prevent generic manufacturers from submitting their own pharmacological, toxicological and clinical data within the period of DP and thus gain marketing approval for their products.

DP controversy is based on a narrow perspective, as it is not an issue of “Generics vs. R&D based companies”. It is a much larger issue. DP and patents are important for all research based companies irrespective of their Indian or foreign origin.

Data Protection is not ‘Evergreening’:

DP is not ‘Evergreening’ either. In most of the cases, the period of patent protection and DP will run concurrently.

During the debate on the subject some people argue that DP and patents offer “double protection”. They do not. Fundamentally, these two forms of Intellectual Property are like different elements of a house which needs both a strong foundation and a roof to protect its inhabitants. DP cannot extend the life of a patent which is a totally separate legal instrument. While patent protects the invention underlying the product, DP protects the clinical Dossier submitted to the regulatory authority from their unfair commercial use. The duration of DP is typically half or less than that of a patent.

Most WTO member countries have Data Protection:

A review of National Laws relating to the protection of Registration Data in the major WTO Member-States reveals that most of the countries have recognized and appreciated the role of DP.
Although there is no uniform standard that is followed by the countries while enacting and implementing the Laws related to DP. The period of DP is typically between 5 to 10 years.

Conclusion:

Dr. Satwant Reddy Committee Report, dated November 30, 2006, submitted to the Government of India, very clearly recommends that DP will benefit India, as it has done in many other countries of the world, including China. Unfortunately, the report does not specify a timeline for its implementation. Thus having accepted the importance and relevance of the DP, the Government should implement the same in the country, without any further delay.

Data Protection should be provided by making an appropriate amendment in Schedule Y of the Drugs Act to bring India in conformity with the practices of other WTO Members of the developing and developed countries.

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.

Will Global Pharma Majors be successful in their foray into highly competitive generics pharma business offering no (patent) protection of any kind?

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As reported by IMS Health, emerging markets will register a growth rate of 14% to 17% by 2014, when the developed markets will be growing by 3% to 6% during the same period. It is forecasted that the global pharmaceutical industry will record a turnover of US$1.1 trillion by this period.

Mega consolidation process in India begins in 2009:

Fuelled by the above trend, the year 2009 witnessed the second biggest merger, so far, in the branded generics market of India when the third largest drug maker of Japan, Daiichi Sankyo acquired 63.9 percent stake of Ranbaxy Laboratories of India for US $4.2 billion.

This was widely believed to be a win-win deal for both Ranbaxy and Daiichi Sankyo, when Daiichi Sankyo will leverage the cost arbitrage of Ranbaxy effectively while Ranbaxy will benefit from the innovative product range of Daiichi Sankyo. This deal also establishes Daiichi Sankyo as one of the leading pharmaceutical generic manufacturers of the world, making the merged company a force to reckon with, in the space of both innovative and generic pharmaceuticals business.

Another mega acquisition soon followed:

Daiichi Sankyo – Ranbaxy deal was followed in the very next year by Abbott’s acquisition of the branded generic business of Piramal Healthcare in India. This deal, once again, vindicated the attractiveness of the large domestic Indian Pharma players to the global pharma majors.

In May 2010, the Pharma major in the US Abbott catapulted itself to number one position in the Indian Pharmaceutical Market (IPM) by acquiring the branded generics business of Piramal Healthcare with whopping US$3.72 billion. Abbott acquired Piramal Healthcare at around 9 times of its sales multiple against around 4 times of the same paid by Daiichi Sankyo.

Was the valuation right for the acquired companies?

Abbott had valued Piramal’s formulations business at about eight times sales, which is almost twice that of what Japan’s Daiichi Sankyo paid for its US$4.6 billion purchase of a controlling stake in India’s Ranbaxy Laboratories in June 2008.

According to Michael Warmuth, senior vice-president, established products of Abbott, the acquired business will report to him and will be run as a standalone business unit after conclusion of the merger process. Warmuth expects that the sales turnover of Abbott in India, after this acquisition, will grow from its current around US$ 480 million to US$2.5 billion in the next decade.

On the valuation, Warmuth of Abbott has reportedly commented “If you want the best companies you will pay a premium; however, we feel it was the right price.” This is not surprising at all, as we all remember Daiichi Sankyo commented that the valuation was right even for Ranbaxy, even when they wrote off US$3.5 billion on its acquisition.

For Abbott, is it a step towards Global Generics Markets?

It is believed that the Piramal acquisition is intended towards achieving a quantum growth of Abbott’s business in the IPM. However, it is equally important to note the widely reported quite interesting statement of Michael Warmuth’s, when he said, “we have no plans immediately to export Piramal products [to third-country markets] but we will evaluate that. You won’t be at all surprised that if we evaluate that.”

The Key driver for acquisition of large Indian companies:

Such strategies highlight the intent of the global players to quickly grab sizeable share of the highly fragmented IPM – the second fastest growing and one of the most important emerging markets of the world.

If there is one most important key driver for such consolidation process in India, I reckon it will undoubtedly be the strategic intent of the global pharmaceutical companies to dig their feet deep into the fast growing Indian branded generic market, contributing over 98% of the IPM. The same process is being witnessed in other fast growing emerging pharmaceutical markets, as well, the growth of which is basically driven by the branded generic business.

Important characteristics to target the branded generic companies in India:

To a global acquirer the following seem to be important requirements while shortlisting its target companies:

• Current sales and profit volume of the domestic branded generic business
• Level of market penetration and the rate of growth of this business
• Strength, spread and depth of the product portfolio
• Quality of the sales and marketing teams
• Valuation of the business

What is happening in other emerging markets? Some examples:

The most recent example of such consolidation process in other emerging markets happened on June 10, 2010, when GlaxoSmithKline (GSK) announced that it has acquired ‘Phoenix’, a leading Argentine pharmaceutical company focused on the development, manufacturing, marketing and sale of branded generic products, for a cash consideration of around US $253 million. With this acquisition, GSK gains full ownership of ‘Phoenix’ to accelerate its business growth in Argentina and the Latin American region.

Similarly another global pharma major, Sanofi-aventis is now seriously trying to position itself as a major player in the generics business, as well, with the acquisition of Zentiva, an important player in the European generics market. Zentiva, is also a leading generic player in the Czech, Turkish, Romanian, Polish, Slovak and Russian markets, besides the Central and Eastern European region. In addition to Zentiva, in the same year 2009, Sanofi-aventis also acquired other two important generic players, Medley in Brazil and Kendrick in Mexico.

With this Sanofi-aventis announced, “Building a larger business in generic medicines is an important part of our growth strategy. Focusing on the needs of patients, Sanofi-aventis has conducted a regional approach in order to enlarge its business volumes and market share, offering more affordable high-quality products to more patients”.

Faster speed of such consolidation process could slow down the speed of evolution of the ‘generics pharmaceutical industry’ in India:

As the valuation of the large Indian companies will start attracting more and more global pharmaceutical majors, the revolutionary speed of evolution of the ‘generics pharmaceutical industry’ in India could slow down. The global companies will then acquire a cutting edge on both sides of the pharmaceutical business, discovering and developing innovative patented medicines while maintaining a dominant presence in the fast growing emerging branded generics market of the world.

Recent examples of Indian companies acquired by global companies:

1. Ranbaxy – Daiichi Sankyo
2. Dabur Pharma – Fresenius
3. Matrix – Myalan
4. Sanofi Pasteur – Shanta Biotech
5. Orchid – Hospira
6. Abbott – Piramal Healthcare

Indian Pharmaceutical companies are also in a shopping spree:

It has been reported that by 2009, around 32 across the border acquisitions for around US $2 billion have been completed by the Indian pharmaceutical and biotech players. Recently post Abbott deal, Piramals have expressed their intent to strengthen the CRAMS business to make good the drop in turnover for their domestic branded generics business, through global M&A initiatives.

Some of the major overseas acquisitions by the Indian Pharmaceutical and Biotech companies:

1. Biocon – Axicorp (Germany)
2. DRL – Trigenesis Therapeutics (USA)
3. Wockhardt – Esparma (Germany), C.P. Pharmaceuticals (UK), Negma (France), Morton Grove (USA)
4. Zydus Cadilla – Alpharma (France)
5. Ranbaxy – RPG Aventis (France)
6. Nicholas Piramal – Biosyntech (Canada) , Minrad Pharmaceuticals (USA)

What is happening in other industries?

In spite of the global financial meltdown in 2009, the future of M&A deals in India looks promising across the industry. Some of the major offshore acquisitions by the Indian companies are as follows:

 

Mega acquisition of foreign companies by Indian companies:

• Tata Steel acquired 100% stake in Corus Group on January 30, 2007 with US$12.2 billion.
• India Aluminum and Hindalco Industries purchased Canada-based Novelis Inc in February 2007 for
US $6-billion.
• The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009 for US $2.8 billion.
• Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008. The deal
amounted to $2.3 billion.
• Acquisition Asarco LLC by Sterlite Industries Ltd’s for $1.8 billion in 2009
• In May 2007, Suzlon Energy acquired Germany’s- wind turbine producer Repower for US$1.7 billion.

Mega acquisition of Indian companies by foreign companies:

• Vodafone acquired administering interest of 67% owned by Hutch-Essar, on February 11, 2007 for US
$11.1 billion.
• The Japan based telecom firm NTT DoCoMo acquired 26% stake in Tata Teleservices for USD 2.7
billion, in November 2008.

An alarm bell in the Indian Market for a different reason:

It has been reported that being alarmed by these developments, Indian Pharmaceutical Alliance (IPA) has written a letter to the Department of Pharmaceuticals, highlighting, “Lack of available funding is the main reason for the recent spurt in the sale of stakes in domestic companies”.

The letter urged the Government to adequately fund the research and development initiatives of the Indian Pharmaceutical Companies to ensure a safeguard against further acquisition of large Indian generic players by the global pharmaceutical majors. To a great extent, I believe, this is true, as the domestic Indian companies do not have adequate capital to fund the capital intensive R&D initiatives.

Will such consolidation process now gain momentum in India?

In my view, it will take some more time for acquisitions of large domestic Indian pharmaceutical companies by the Global Pharma majors to gain momentum in the country. In the near future, we shall rather witness more strategic collaborations between Indian and Global pharmaceutical companies, especially in the generic space.

The number of high profile M&As of Indian pharma companies will significantly increase, as I mentioned earlier, when the valuation of the domestic companies appears quite attractive to the global pharma majors. This could happen, as the local players face more cut-throat competition both in Indian and international markets, squeezing their profit margin.

It will not be a cake walk…not just yet:

Be that as it may, establishing dominance in the highly fragmented and fiercely competitive IPM will not be a ‘cakewalk’ for any company, not even for the global pharmaceutical majors. Many Indian branded generic players are good marketers too. Companies like, Cipla, Sun Pharma, Alkem, Mankind, Dr.Reddy’s Laboratotries (DRL) have proven it over a period of so many years.

We witnessed that acquisition of Ranbaxy by Daiichi Sankyo did not change anything in the competition front. Currently the market share of Abbott, including Solvay and Piramal Healthcare, comes to just 6.4% followed by Cipla at 5.5% (Source: AIOCD). This situation is in no way signifies domination by Abbott in the IPM, even post M&A.

Thus the pharmaceutical market of India will continue to remain fragmented with cut-throat competition from the existing and also the newer tough minded, innovative and determined domestic branded generic players having both cost arbitrage and the spirit of competitiveness.

Simultaneously, some of the domestic pharmaceutical companies are in the process of creating a sizeable Contract Research and Manufacturing Services (CRAMS) sector to service the global pharmaceutical market.

Conclusion:

In my view, it does not make long term business sense to pay such unusually high prices for the generics business of any company. We have with us examples from India of some these acquisitions not working as the regulatory requirements for the low cost generics drugs were changed in those countries.

Most glaring example is the acquisition of the German generic company Betapharm by DRL for US$ 570 million in 2006. It was reported that like Piramals, a significant part of the valuation of Betapharm was for its trained sales team. However, being caught in a regulatory quagmire, the ultimate outcome of this deal turned sour for DRL.

Could similar situation arise in India? Who knows? What happens to such expensive acquisitions, if for example, prescriptions by generic names are made mandatory by the Government within the country?

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.

Abbott – Piramal deal: the way future is expected to shape up

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In my view, these are still very early days for such acquisitions of large domestic Indian pharmaceutical companies by the Global Pharma majors to gain momentum in the country. However, there is no doubt that in the near future, we shall rather witness more strategic collaborations between Indian and Global pharmaceutical companies, especially in the generic space.

Squeezing margin due to cut-throat domestic and international competition may affect future valuation of the domestic companies:

I reckon, the number of such high profile mergers and acquisitions will significantly increase, as and when the valuation of domestic Indian companies appears quite attractive to the global pharma majors. This could happen, as the domestic players face more cut-throat competition both in Indian and international markets, squeezing their profit margin.
Abbott possibly has a well-structured game plan for seemingly high valuation of the deal:
Having said that let me point out, during Ranbaxy-Daiichi Sankyo deal, analysts felt that the valuation of the deal was quite high. US $ 3.7 billion Abbott – Piramal deal has far exceeded even that valuation. Does this deal not make any business sense? I do not think so. Abbott is a financially savvy seasoned player in the M&A space. It is very unlikely that they will enter into any deal, which will not have any strategic and financial business sense.

Big ticket Indian Pharma deals:

So far India has seen four such major deals starting from Ranbaxy – Daiichi Sankyo, Dabur Pharma – Fresenius, Matrix – Myalan and Orchid – Hospira, besides some global collaborative arrangements, such as, Pfizer with Aurobindo/Claris/Strides GSK with DRL, AsraZeneca with Torrent and again Abbott with Zydus Cadila.

Key drivers for these deals:

Such acquisitions and collaborations will be driven by following eight key factors:

1. R&D pipelines of the global innovative companies are drying up
2. Many blockbuster drugs will go off-patent in the near future
3. Cost containment pressure in the western world exerting pressure on the bottom lines
of the global pharma majors
4. Increasing demand of generics in high growth emerging and developing markets
5. The new Healthcare Reform in the US will promote increased usage of generic drugs.
6. The fact that India already produces 20% of the global requirement for generic drugs
increases the attractiveness.
7. The fact of domestic Indian companies account for 35% of ANDAs highlights the future
potential of the respective companies.
8. Highest number of US-FDA approved plants, next to the US, is located in India.

A strategic move by Abbott:

As announced by Abbott from its headquarter in Chicago that Abbott in India will increase its sales four times to around Rs. 11,000 Crores by 2020 with the acquisition of 350 brands of ‘Piramal Healthcare’ business.

Facing the stark reality of a ‘patent Cliff’, cost containment pressures especially in the US and EU, low single digit growth rate of the developed markets and high growth of branded generic dominated emerging markets, Abbott has taken a new global initiative aimed at the emerging markets with the creation of its global ‘Established Products’ Business’. This initiative started with worth US $ 6.2 billion acquisition of branded generic business of Solvay Pharma, which has a sizeable presence in the EU markets.
Recently announced licensing agreement of Abbott with Zydus Cadila to market 24 products initially in 15 emerging markets of the world is another step towards this direction.

Advantage Abbott India:

The asset based acquisition of ‘Piramal Healthcare’ by Abbott will help its Indian arm to increase its domestic market penetration, significantly, both for branded generic and patented products in urban, semi-urban and rural markets spearheaded by around 7000 strong sales force. This strategy perhaps will also help Abbott in India distancing itself from the number 2, in the Indian Pharma league table, probably with a handsome margin.

Global players want a risk-cover with the generic business and minimize tough competition:

Like Abbott, it is quite likely that other major global players are also planning to reduce their business risks by expanding the business from mainly high risk and expensive R&D intensive patented products to a more predictable and rapidly expanding branded generic business.

Will such move have any significant effect on competition?

Such M&A initiatives may seemingly minimize the cut throat competition from large generic players from India. However, I do not envisage any significant impact on over all competition between the generic players for such moves, as their will be mounting competition from more number of new entrants and emerging players, entry barrier in Indian generic pharmaceutical market being quite low.

Conclusion:

In the globalized economy where the ‘world is flat’ such types of business consolidation initiatives are inevitable. The domestic Indian companies across the industry are also in the prowl for suitable global targets, which are at times of world class ‘Crown Jewels’ like Arcelor, Chorus or Jaguar/Land Rover. Pharmaceutical industry is, therefore, no exception.

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.

How have the ‘Drug Policies’ of India fared against the set objectives?

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Indian Pharmaceutical Industry has by now established itself as one of the most important knowledge based industry of the nation with significant sets of differential advantages. It has earned global recognition as a low cost producer and global supplier of generic drugs. The domestic industry today meets almost the entire demand for pharmaceutical products of the country. This happened, as many would consider, primarily due to the pragmatic decision of the government to abolish the product patent during the growth stage of the Indian pharmaceutical industry, in the early 70’s.
In global perspective India is still a small market in terms of value turnover:

Having achieved all these, one should keep in mind that despite being the second largest country in terms of population, domestic Indian pharmaceutical market recorded a turnover of just U.S$ 7.8 billion in 2008, which is significantly lower than any smaller country of the developed world.

This is primarily because India is a low priced generic pharmaceuticals market. McKinsey forecasts that by 2015 the industry will record a turnover of U.S$ 20 billion. The key drivers of growth are forecasted to be the following:

1. Overall rising income level, particularly of the middle class.

2. Increase in life-style related diseases.

3. Change in demographic pattern with increase in life expectancy.

4. Greater penetration in the rural markets.

5. Increasing penetration of health insurance.

6. Increase in government expenditure towards healthcare.

A quick snapshot of ‘Drug Policy’ changes:

With the initiation of globalization process in 1991, many significant steps have been taken by the government for the pharmaceutical industry of India.

Along with reduction in the span of price control of drugs, reservation of some drugs for the public sector was withdrawn and private sector was allowed to manufacture all types of drugs. Although industrial licensing for pharmaceuticals was abolished, for bulk drugs the system is still in force. Foreign investments through automatic route was first raised to 74 percent and then to 100 percent.

The product patent regime with the introduction of the Patents Act 2005 ushered in a paradigm shift in the pharmaceutical landscape of India. Almost simultaneously, on in-house research and development, the facility of weighted deduction of 150 percent (though inadequate) to cover expenditure towards R&D, patent filing, regulatory approvals and clinical trials was a welcome step. These steps, howsoever good, were considered to be not good enough by a large section within the pharmaceutical industry of India.

The need for some more key changes:

The reform initiatives as enunciated in the successive drug policies were considered by the pharmaceutical industry as far from satisfactory. In the era of globalization, where market forces play a dominant role to control prices including of essential commodities like, food grains, the rigors of stringent price control on pharmaceuticals need to have a relook urgently. This was re-inforced even in the ‘National Economic Survey Report of 2009′.

Moreover, considering the new product patent regime is well in place since January 2005, to foster and encourage innovation within the country, there is an immediate need to take robust fiscal measures and offer attractive financial incentives for indigenous pharmaceutical R&D initiatives.

Simultaneous reform measures are warranted in the health insurance sector:

It is worth mentioning, effective penetration of health insurance being one of the key growth drivers of the Indian pharmaceutical industry, adequate and immediate reform measures in this area is necessary to respond to the need of a robust healthcare financing model for all strata of the society. This should work in tandem with the new drug policy measures.

The health insurance sector is growing, but not to the extent that it should. Health insurance premiums had grown to around U.S$ 800 million as on 2007 and are expected to reach around U.S$ 4.5 billion by 2013. Entry of more private health insurance players along with a reformed health insurance regulatory policy, is expected to expedite the growth rate of this important sector further.

Achievements against each key objective areas of the drug policy, thus far:

In the Drug Policy 1986 the basic objectives of policies relating to drugs were clearly enunciated. But the question is: have the objectives of the successive drug policies yielded the desirable outcome? Let us have a reality check as follows:

1. Objective: To ensure abundant availability of medicines at reasonable price and quality for mass consumption.

Reality: 65 percent of the population of the country still do not have access to modern medicines

2. Objective: To strengthen the domestic capability for cost effective, quality production and exports of pharmaceuticals by reducing trade barriers in the pharmaceutical sector.

Reality: The country has been able to make good progress in this area.

3. Objective: To strengthen the system of quality control over drug and pharmaceutical production and distribution.

Reality: The quality of all medicines produced in the country against valid manufacturing license still raises a big concern. Even the government of India while purchasing medicines for its own ‘Jan Ausadhi’ outlets, restricts purchases of medicines only upto a certain category of pharmaceutical manufacturers, for product quality reasons.

4. Objective: To encourage R&D in the pharmaceutical industry in a manner compatible with the country’s need and with particular focus on diseases endemic or relevant to India by creating conducive environment.

Reality: Nothing worth mentioning has been done in this area.

5. Objective: To create an incentive framework for the pharmaceutical industry, which promotes new investment into the industry and encourage introduction of new technology and new drugs?

Reality: Again nothing significant has been done by the government in this area.

Conclusion:

The role and objectives of the drug policy should help accelerating the all-round inclusive growth of the Indian pharmaceutical industry and make it a force to reckon with in the global pharmaceutical industry. The drug policy is surely not formulated only to implement rigorous price control of drugs. The policy formulates other key objectives to contribute significantly towards achieving the healthcare objectives of the nation, working closely with other related ministries of the government.

Unfortunately, it has not been able to keep pace with the globalization process of the country as compared to the other industries, also dealing with the essential commodities. The amended Indian Patents Act came into force in India in 2005. The drug policy of India, for various reasons, has not been able to articulate, as yet, specific measures to encourage innovation, giving a new thrust to the pharmaceutical R&D space of the nation.

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.

The Indian and Global Pharmaceutical Industry – A brief perspective to meet the challenge of change

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A. INDIAN PHARMACEUTICAL INDUSTRY PERSPECTIVE:
January 1, 2005 ushered in a paradigm shift in the Indian Pharmaceutical Industry with the new product patent regime. Future of the industry, thereafter, will never be the same again as what we have been witnessing since 1970.

Gradually India, which was synonymous to cheaper copycat generic versions of products patented in most of the developed and emerging pharmaceutical markets of the world, is expected to transit through a relatively ‘lull period’ for a shorter duration, before it starts helping to establish India as a force to reckon with, in the pharmaceutical research and development (R&D) space of the world. We have seen some glimpses of the era to come by through initial basic research initiatives of companies like, Ranbaxy, Dr. Reddy’s Laboratories (DRL), Piramal Life Science and Glenmark. All such companies are gradually transforming their R&D focus from reverse-engineering to developing new chemical/molecular entity (NCE/NME) or novel drug delivery systems (NDDS).

Opportunities during the paradigm shift:

The low cost base, large English speaking technical talent pool and development of world class R&D facilities of the country will play the role of catalysts in this fast changing process and throw open many new vistas of opportunities for the industry to cash on.

At the same time, generic companies will play even more important global role than ever before. Many of them will no longer remain a local branded generic or generic player, they will open their wings to fly down to the important global destinations. Some others will collaborate with multi-national pharmaceutical companies (MNCs) in their contract research and manufacturing services (CRAMS) initiatives. For others, the domestic pharmaceutical market will still remain big and lucrative enough to grow their business.

However, those companies, which will not be able to effectively combat the ‘challenge of rapid changes’ will either perish or be gobbled-up by the big fishes in the consolidation process of the local and global pharmaceutical industry.

Some perspectives:

Though the domestic Indian pharmaceutical industry caters to around 70% of the requirements of pharmaceuticals of the nation, is highly fragmented. The industry manufactures 8% of the global production being the fourth largest producer of pharmaceuticals in terms of volume and employs over half a million people, mostly by around 300 large to medium sized companies in their local and global operations. Although around 6000 companies are engaged in manufacturing, many of them are third party manufacturers. Small manufacturers, who do not conform to ‘Schedule M’ requirements of the Drugs & Cosmetics Act will face or have already started facing trying times.

In terms of value, at present, India with around U.S 7.8 billion turnover, shares just around 2% of the global market with 14th in ranking. McKinsey forecasts that by 2015 India will record a turnover of U.S$ 20 billion and will improve its rank in the global pharma league table to 10th.

Key markets of the domestic Indian companies:

Although India still remains one of the major markets of the domestic Indian pharmaceutical companies, many of them have already established their business in the US, Europe, Latin America, Russian Federation, Africa, Middle East, South East Asia and even in Japan and Australia.

Contribution of India business of different Indian pharmaceutical companies to their global business varies based on their respective business strategies, from 63% of Zydus Cadila to around 16% of DRL, in 2007-08.

US market followed by Europe, is the main revenue earner for most of the large Indian companies. For example Ranbaxy generated around 27% and 20% of their global turnover from the US and Europe, respectively in 2008.

However, for some other companies like Wockhardt, Europe is a more important market than USA. Wockhardt generated around 54% of their global turnover from Europe, in 2007.

Global market entry strategy:

Different Indian companies adopted different market entry and expansion strategies in their globalization process. However, these have been mostly driven mergers and acquisitions.

Is the Indian pharmaceutical industry facing a dire need for an image makeover?

Despite significant contribution of the Indian pharmaceutical industry to provide relatively cheaper generic medicines to address a wide array of ailments of a vast majority of the population, the image of the industry to its stakeholders or even to public at large, is far from satisfactory.

There are some key perceptual reasons for the same. Some of these are as follows:

1. Pharmaceutical industry is making exorbitant profits at the cost of the basic healthcare needs of the common man.

This perception gets further strengthened when, for example, the National Pharmaceutical Pricing Authority (NPPA) demands crores of rupees from many pharmaceutical companies for overcharging to the patients and notices are served even attaching their properties to recover these dues.

2. The quality of all medicines is not reliable.

This gets vindicated when, for example, the government for its ‘Jan Aushadhi’ program refuses to buy from certain groups of licensed pharmaceutical manufacturers, predominantly on product quality parameters.

3. Some questions, do the pharmaceutical manufacturers in India manufacture medicines following the highest quality norms?

To answer to this question some people argue; if so, why will Indian manufacturers need stringent manufacturing quality certification of the drug regulators of the developed markets to export medicines in the those countries? Why the manufacturing quality certification given to these exporters by the Indian drug regulator is not accepted in those countries?

Moreover, when medicines are imported into India, we accept the quality norms of the drug regulators of the developed countries.

4. Some sections of the media highlight the alleged malpractices by the Indian pharmaceutical companies to promote their mediciness to the medical profession. Such alleged high expenditure towards product promotion is considered by many as avoidable wasteful expenses, the benefit of which can easily be passed on to the patients.

Indian pharmaceutical industry is yet to develop a uniform code of marketing practices, which will be applicable to all the pharmaceutical companies across the board and implement the same effectively, to address such allegations.

Multinational Companies – friends or foes?

To partly salvage the situation, at the same time, one notices open attempts are being made to project the multinational drug companies as demons, the exploiters with a suspicious agenda of thwarting the growth of the domestic companies. In such a scenario, it is indeed perplexing, when one sees the names of the Indian companies at the top of the NPPA lists who allegedly overcharged maximum amount of money to the common man.

What the industry should do jointly:

Under such sad circumstances, the entire industry should come together, take a hard look on itself first and extend its helping hands in public private partnership (PPP) initiatives for the benefit of the civil society.

Such PPP may not necessarily be charitable. It could focus on developing a robust healthcare financing model with industry expertise, for implementation with the government involvement for all strata of society. Or, for example, the industry should come out with a plan, which the US Pharmaceutical trade association – PhRMA has recently proposed to the Obama administration voluntarily on their ‘Medicare’ program, for the senior citizens of America.

For image makeover the name of the game is actual ‘demonstration’ of the good intent and NOT ‘pontification’ of what others should do, highlighting the identified loopholes in the government machineries.

B. GLOBAL PHARMACEUTICAL INDUSTRY PERSPECTIVE:

In the midst of the global financial meltdown, beginning 2009, no one is still able to fathom what impact, if at all, will it leave on to the global pharmaceutical industry.

In the most populous country of the world – China, in April 2009, the government unfolded the blueprints of new healthcare reform measures, covering the entire nation.

Similarly, in the oldest democracy and the richest country of the world – United States of America, President Barak Obama administration expressed their resolve to address important healthcare related issues, as an integral part of the economic reform of the country.

In other developed markets of the world like Europe and Japan intense cost containment pressure is in turn creating significant pricing pressure on pharmaceuticals, triggering the demand of greater use of cheaper generic formulations.

Financial meltdown though eroded the market capitalization of most of the companies; the growth of the global pharmaceutical industry remained unabated till 2008, albeit at a slower pace though. Many markets of the world witnessed a faster generic switch, fuelling higher volume growth of the generic segment of the industry.

Some perspectives:

In 2008 the global pharmaceutical market size was of U.S$ 780 billion, which is expected to grow to U.S$ 937 billion in 2012 registering a 5 year CAGR of around 5.5%. Sales worth U.S$ 253 billion came from just 100 blockbuster drugs, contributing around one third of the global pharmaceutical market.

USA with a retail revenue turnover of U.S$ 206 is the largest market of the world, though currently showing a sharp decline in its growth rate. The growth rate of the US is expected to drop further along with the patent expiry of other blockbuster drugs.

Just three countries of Europe, U.K, France and Germany contributed to 50% of pharmaceutical sales of entire Europe.

Doctors’ are no longer the sole decision maker to prescribe a medicinal product:

Just like in the US, one witnesses a change in the role of the medical professionals as a key decision maker to prescribe medicines for the patients in Europe, as well. More and more, payors like health insurance companies, NHS are assuming that role.

A shift from small molecule pharmaceuticals to large molecule biotech products:

As small molecule pharmaceuticals are coming under intense pricing pressure, the focus of new drug launches is shifting towards more expensive large molecule biotech drugs with much higher margins of profit increasing the treatment cost further.

The brighter side:

Growing middle class population with higher disposable income together with increase spending of the government towards healthcare, in most of these countries, are making the pharmaceutical industry grow at a much faster pace in the emerging markets like, Brazil, Venezuela, Russia, China, India, Turkey, Mexico and Korea. However, the revenue and profit earned by the global companies from the developed markets are still far more than the emerging markets of the world.

Access to healthcare still remains a global issue:

Despite so much of progress of the global pharmaceutical industry, access to healthcare still remains an issue, besides others, even in some of the developed markets of the world. The waiting period of a patient just to get an appointment of the doctor is increasing fast. Even in the US about 47 million of US citizens still are not covered by insurance, besides many more of them who remain underinsured.

Global pharmaceutical industry is still considered a part of the problem:

Despite meeting the unmet needs of the patients through intensive research and development initiatives and various global access programs for the needy and the downtrodden, the civil society all over the world, including in the developed countries, still believes that the pharmaceutical industry is a part of the global healthcare problems, though relatively more in the developing and the least developed economies of the world. These perceptions are mainly due to high costs of patented drugs, high research expenditure for low value added drugs and seemingly unethical marketing practices of the industry across the board with varying degree.

Conclusion:

The pharmaceutical industry, the ultimate savior in the battle against disease, is now passing through a critical phase both locally and globally and both in terms of its image and capacity to deliver newer medicines ensuring their affordable access, the reason of which may vary from country to country.

Be that as it may, the industry has been making significant contribution to the humanity to meet the ever increasing unmet needs of the patients. However, expectations of the stakeholders are also growing and justifiably so. There is no time for the industry, in general, to ponder much now or rest on the past laurels. It is about time to walk the never ending extra mile, for the global patients’ sake.

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.

Changing Business Model of Global Pharmaceutical Companies – a snapshot.

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Mounting pressure on P&L account, as the products go off patent:
Patented new products are prime growth drivers of research based pharmaceutical companies all over the world. Since last few years, because of various reasons, the number of launch of such products has been significantly reduced. To add fuel to the fire, 2010-12 will witness patent expiries of many more blockbuster drugs, depleting their growth potential even further.

The blockbuster model of growth engine of innovator companies effectively relies on a limited number of ‘winning horses’ to achieve their business goal and meeting the Wall Street expectations. In 2007, depleting pipeline of the blockbuster drugs hit a new low in the developed markets of the world. It is estimated that around U.S. $ 140 billion of annual turnover from blockbuster drugs will get almost shaved off due to patent expiry by the year 2016. IMS reports that in 2010, sales revenue of more than U.S. $ 30 billion will be adversely impacted due to patent expiry. Another set of blockbuster drugs with similar value turnover will go off patent just the year after i.e. in 2011. It will not be out of context to mention, that last year around U.S. $ 27 billion worth of patented drugs had gone off-patent.

The decline in R&D productivity has not been due to lack of investments. It has been reported that between 1993-2004, R&D expenditure by the global pharmaceutical industry rose from U.S.$ 16 billion to around U.S.$ 40 billion. However, during the same period the number of applications for New Chemical Entities (NCEs) filed annually to the U.S. FDA grew by just 7%.

The global expenditure on R&D was reported to have reached U.S. $ 55.2 billion in 2006. 75% of this expenditure was incurred by the U.S alone. It is interesting to note that only 22 NMEs received marketing approval by the US FDA during this period against 53 in 1996, when R&D expenditure was almost less than half of what was incurred in 2006.

Be that as it may, the pressure on P&L (Profit and Loss) accounts of these companies indeed keeps mounting.

The silver linings:

However, there seem to be following two silver linings in the present global R&D scenario, as reported by IMS:

1. Number of Phase I and Phase II drugs in the pipeline is increasing.

2. Applications for clinical trials in the U.S. rose by 11.6% to a record high of 662, last year.

Significant growth of generic pharmaceuticals is expected in near future, far surpassing the patented products growth:

Patent expiry of so many blockbuster drugs during this period will fuel the growth of generic pharmaceutical business, especially in the large developed markets of the world. The market exclusivity for 180 days being given to the first applicant with a paragraph 4 certification in the U.S. is, indeed, a very strong incentive, especially for the generic companies of India.

Pressure on Marketing expenditure:

The marketing expenditure for pharmaceutical of the global pharmaceutical companies as reported by Scrip is U.S. $ 57.5 billion. However, an international pharmaceutical industry association reported that research based pharmaceutical companies in the U.S. spent $ 29.4 billion on R&D and $ 27.7 billion on promotional activities.

New Product Differentiation could be a challenge:

Products in R&D pipeline could face problems of ‘differentiation’ in terms of value offering to the patients, once they are launched. This issue is expected to surface particularly with products related to oncology disease area. IMS Health reports that about 55 oncology projects are now in Phase III and 8 in the pre-registration stage. Thus about 50 new oncology products are expected to hit the market by end 2010. Many experts anticipate that there may not be significant brand differentiation between the brands of the ‘same basket’, leading to cut-throat competition and further pressure on expenditure towards marketing of brands.

The changing business model of global pharmaceutical companies during this trying time:

In this trying time, the global pharmaceutical companies are resorting to an interesting strategy, combing both traditional and the new business strategies. In this article, I shall touch upon following six strategies:

1. Mergers and Acquisitions (M&A):

Mega M&A strategies are still being actively followed by some large Pharmaceutical companies mainly to enrich R&D pipeline and achieve both revenue and cost synergies.

However, some of these large global companies have started realizing that ‘powerhouses’ created through past mega mergers and acquisitions have now become too large to manage effectively for various reasons. Mismatch between two different organization cultures also throws a great challenge to obtain desired output, many a times. Moreover, the merged R&D set up could become too large to manage, impacting the R&D productivity quite adversely.

2. Extension of Product Life Cycle and Effective Product Life Cycle Management:

Many global pharmaceutical companies are now engaged in ‘product life cycle management’ of their existing products by extending the ‘product life cycle’, effectively. In that process they are trying to maximize the brand value of these products in the international markets. For example, AstraZeneca has developed once daily treatment for their anti-psychotic drug Seroquel XR. This extended-release formulation will help patients avoid 5 to 7-day titration required with the immediate-release version of the same drug.

Towards similar initiative, Pfizer has also recently set up a dedicated “Established Product Business Unit” within worldwide pharmaceutical operations, to hasten business growth in the international markets.

3. Prescription to OTC Switch:

Prescription to ‘Over the Counter’ (OTC) switch is another business strategy that many innovator companies are now imbibing much aggressively and at a much larger scale.

This strategy is helping many global pharmaceutical companies, especially in Europe and the U.S to expand the indication of the drugs and thereby widening the patients base.

Recent prescription to OTC switches will include products like, Losec (AstraZeneca), Xenical (Roche), Zocor (Merck), etc.

4. Emerging of Preventive Therapy, like Vaccines:

Many large global companies, like GSK, Sanofi Aventis and Merck are getting attracted to emerging opportunities in the fast developing vaccines market. This trend was triggered primarily by heightened awareness and greater focus on preventive medicines, almost all over the world. It is estimated that in 2011, the vaccines market will grow from U.S.$ 13 billion to U.S.$ 30 billion registering a growth of 18% each year during this period. PricewaterhouseCoopers (PwC) estimates vaccine market to be U.S. $ 42 billion by year 2015 based on data of 245 pure vaccines and 11 combination vaccines currently under clinical development. It is to be noted that 90 of these are therapeutic vaccines for cancer.

5. Entry into highly contentious market of Biosimilar drugs:

The Generic Pharmaceutical Association (GPhA) has estimated that it is possible to save US$ 10 billion – 108 billion over a period of 10 years with biosimilars in the top 12 categories of biological drugs. Some of these biological are already off patent and for others the patents will expire shortly.
Only a few biosimilar drugs have reached the global markets as on date. This is mainly because of regulatory restrictions for such drugs in most of the developed markets of the world. Even those biosimilar drugs, which have since been launched in Europe like, human growth hormone (HGH) Somatropin and Epoetin alfa for anemia, are yet to make a mark in the market place.

IMS Health reports that Omnitrope (somatropin) of Sandoz, the first biosimilar drug launched in the developed world, has registered less than 1% of the U.S. $ 831 million HGH market in Europe. Moreover, launch of 3 more biosimilar versions of epoetin alfa in 2007, made almost negligible impact in the market. Such a low acceptance of biosimilars in the western world, so far, could well be due to lingering safety concern of the medical profession with such types of drugs.

Currently, Japan and USA are working on formal guidelines for biosimilar drugs, whereas Health Canada has already issued draft regulatory guidelines for their approval in Canada.

6. Entry into Generic Markets:

Some large global pharmaceutical companies have already made a firm commitment to the generics market. Novartis paved the way for other innovator companies to follow this uncharted frontier as a global business strategy. Last year the generic business of Novartis (under Sandoz) recorded 19% of their overall net sales, with turnover from generics registering U.S$ 7.2 billion growing at 20%.

Keen business interest of Sanofi Aventis to acquire Zentiva, the generic pharmaceutical company of Czechoslovakia; it’s very recent acquisition of the generic pharmaceutical company Laboratorios Kendrick of Mexico and acquisition of Ranbaxy Laboratories of India by Daiichi Sankyo, will vindicate this point.

Pfizer has also maintained its generics presence with Greenstone in the U.S. and is using the company to launch generic versions of its own off patent products such as Diflucan (fluconazole) and Neurontin (gabapentin).

I guess that similar trend will continue, in future, as well.

Another ‘New Pharmaceutical Marketing Model’ is emerging:

Another ‘new pharmaceutical sales and marketing model’ is gradually emerging in the global markets. This model emphasizes partnership by bundling medicines with services. The key success factor, in this model, will depend on which company will offer better value with an integrated mix of medicines with services. PwC indicates that in this ‘new pharmaceutical marketing model’, besides required medicines, the expertise of a company to effectively deliver some key services like, patient monitoring and disease management could well be the key ingredients for success.

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.