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Replication of ‘Old Paradigm’ of the developed pharmaceutical markets is unlikely to yield results in the evolving new paradigm of India

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“Health leaps out of science and draws nourishment from the society around it”

- Gunnar Myrdal (Swedish Nobel Laureate Economist)

The success concoction of the global pharmaceutical industry for India, by and large, still remains to be sustained attempts in various forms of replication of the ‘Old Paradigm’ of the developed world, even when a ‘Public Health Interest’ oriented new paradigm has started evolving in the country, faster than ever before.

Very interestingly, efforts to arrest this paradigm change still continue, even when healthcare related government policies are getting more and more ‘Public Health Interest’ oriented under increasingly assertive public opinion, together with healthcare cost containment initiatives of various governments also in the OECD (Organization for Economic Co-operation and Development) countries.

Commercial and public relations strategies for replication or recreation of more or less similar business excellence environment of the developed pharmaceutical markets of the world now in India, though some may say is possible and would work, but in my view is highly improbable, at least in the foreseeable future. To be equally successful in India, creation of India centric robust and differentiated business models, broadly aligning with the new evolving paradigm of the country, could probably make more commercial sense for all concerned.

“See things as they are, not way you want them to be”:

“Maintain and sharpen your intellectual honesty so that you’re always realistic. See things as they are, not way you want them to be”, wrote the Management Guru – Mr. Ram Charan in his book titled, ‘Execution: The Discipline of Getting Things Done’ co-authored by Larry Bossidy. In the same book the authors deliberated on ‘The 10 Greatest CEOs Ever’.

One of these 10 greatest CEOs ever, George Merck of the global pharmaceutical giant Merck & Co articulated his vision for the Company way back in 1952 as follows:

“Medicine is for people, not for the profits.”

George Merck believed, the purpose of a corporation is to do something useful, and to do it well, which also ensures decent profits.

I have personally witnessed the Merck (MSD) employees to start their business presentations quoting the above famous vision, even today. George Merck’s vision, I reckon, is more relevant today than any time in the past.

In the same context, another very senior official of a global pharmaceutical major was quoted in the Harvard Business Review in its April 28, 2010 edition saying:

“As western pharmaceutical companies consider how to be successful in emerging markets, they must address two key questions:

  • How will we bring high-quality health care to patients wherever in the world they may live?
  • How do we effectively manage the transformation of the traditional pharmaceutical business model to one that meets the diverse range of needs of the emerging markets?”

He further said, “Our approach to providing patients with access to our medicines is evolving. We have extended a flexible-pricing strategy for middle-income countries to improve the affordability of our medicines and increase access for patients with lower income levels, while remaining profitable.”

Though some companies have been able to carefully pick up this important signal and strategize accordingly, many others still prefer to follow ‘their own ways’.

Increasing healthcare consumption of India attracting global players:

Along with the economic progress of India, healthcare consumption of the population of the country is also increasing at a reasonably faster pace. According to McKinsey India Report, 2007, the share of average household healthcare consumption has increased from 4 per cent in 1995 to 7 per cent in 2005 and is expected to increase to 13 per cent in 2025 with a CAGR of 9 per cent, as follows:

Share of Average Household Consumption (AHC) (%)

Household Consumption 1995 2005 E 2015 F 2025 F

CAGR %

1.

 Healthcare

4

7

9

13

9

2.

 Education & Recreation

3

5

6

9

9

3.

 Communication

1

2

3

6

12

4.

 Transportation

11

17

19

20

7

5.

 Personal Products and Services

4

8

9

11

8

6.

 Household Products

2

3

3

3

5

7.

 Housing & Utilities

14

12

12

10

5

8.

 Apparel

5

6

5

5

5

9.

 Food, Beverages & Tobacco

56

42

34

25

3

(Source; McKinsey India Report 2007)

From this study, it appears that among all common household consumption, the CAGR of ‘healthcare’ at 9 percent will be the second highest along with ‘education’ and ‘communication’ topping the growth chart at 12 percent.

As per this McKinsey study, in 2025, in terms of AHC for ‘healthcare’ (13 percent) is expected to rank third after ‘Food & Beverages’ (25 percent) and ‘transportation’ (20 percent).

Thus, AHC for ‘healthcare’ shows a significant growth potential in India, over a period of time. Hence, this important area needs to attract as much attention of the policymakers, as it is attracting the pharmaceutical players from all over the world, to help translate the potential into actual performance with requisite policy, fiscal support and incentives.

Such a scenario in the pharmaceutical space is difficult to ignore by any player with an eye for the future.

Sectoral break-up of the Healthcare Industry:

Even while looking at the sectoral break-up of the healthcare industry, the significant share of the pharmaceutical industry should be quite enticing to many global companies.

According to IDFC Securities 2010, the sectoral break-up of the US$ 40 billion healthcare industry is as follows:

Industry

%
Hospitals

50
Pharma

25
Diagnostics

10
Insurance & Medical Equipment

15

(Source: IDFC Securities Hospital Sector, November 2010)

A promising market:

Pharmaceutical market of India holds an immense future promise already being globally recognized as one of the fastest growing healthcare markets of the world. All components in the healthcare space of the country including hospital and allied services are registering sustainable decent growth, riding mainly on private investments and now fueled by various government projects, such as:

  1. National Rural Health Mission (NRHM)
  2. National Urban Health Mission (NUHM)
  3. Rashtriya Swasthya Bima Yojana (RSBY)
  4. Universal Health Coverage (UHC)
  5. Free Medicine from the Government hospitals
  6. Centralized procurement by both the Central and the State Governments

Supported by newer, both public and private initiatives, like:

  • Increase in public spending on healthcare from 1.0 per cent to 2.5 per cent of GDP in the 12th Five Year Plan period
  • Increasing participation of the private players in smaller towns and hinterland of the country
  • Wider coverage of health insurance
  • Micro-financing
  • Greater spread of telemedicine
  • More number of mobile diagnosis and surgical centers

Need to strike a right balance:

The pharmaceutical companies need to strike a right balance between ‘Public Health Interest’ and their expectations for a high margin ‘free market-like’ business policies in India.

Pharmaceuticals come under the ‘Essential Commodities Act’ in India, where government administered pricing for all drugs featuring in the ‘National List of Essential Medicines 2011’ is expected and cannot be wished away, at least, for now.

Despite all these concerns, India still remains a promising market for the pharmaceutical players, both global and local. McKinsey & Company in its report titled, “India Pharma 2020: Propelling access and acceptance realizing true potential” estimated that the Indian Pharmaceutical Market (IPM) will grow to US$ 55 billion by 2020 and the market has the potential to record a turnover of US$ 70 billion with a CAGR of 17 per cent during the same period.

Domestic Pharmaceutical Industry has come a long way:

Domestic pharmaceutical companies have positioned themselves as formidable forces to reckon with, not just locally but in the global generics market too.

Currently India:

  • Ranks 3rd in the world in terms of pharmaceutical sales volume.
  • Caters to around a quarter of the global requirements for generic drugs.
  • Meets around 70 per cent of the domestic demand for Active Pharmaceutical Ingredients (API).
  • Has the largest number of US FDA approved plant outside USA
  • Files highest number of ANDAs and DMFs
  • One of most preferred global destinations for contract research and manufacturing services (CRAMS)

Patients are still being exploited:

Unfortunate and deplorable incidences of exploitation of patients, mainly by the private players, are critical impediments to foster growth in quality healthcare consumption within the country.

In this context, ‘The Lancet’, January 11, 2011 highlighted as follows:

“Reported problems (which patients face while getting treated at a private doctor’s clinic) include unnecessary tests and procedures, rewards for referrals, lack of quality standards and irrational use of injection and drugs. Since no national regulations exist for provider standards and treatment protocols for healthcare, over diagnosis, over treatment and maltreatment are common.” 

Prevailing situation like this calls for urgent national regulations for provider-standards and treatment-protocols, at least for the common diseases in India and more importantly their stricter implementation across the country by both the global and local players.

Pharmaceutical key business processes in India are almost a ‘free-for-all’ type:

Despite many challenges and damning reports of the Indian Parliamentary Standing Committees, overall key business processes in India are something like ‘free-for-all’ types, mainly because of the following reasons:

  • No pan-India voluntary or mandatory code exists for ethical Sales and Marketing practices
  • Many regulatory controls and standards are reportedly below par
  • Regulatory control on clinical trials done in India is reportedly sub-standard. In many cases even  adequate compensation towards trial related deaths is reportedly not paid to the victims families by the companies, mostly fixing responsibilities to the ‘Ethics Committees’.

Key factors to take note of in the changing paradigm:

While looking at the big picture, the global pharmaceutical players, I reckon, should take note of the following factors while formulating their India- specific game plan to be successful in the country without moaning much:

  • At least in the short to medium term, it will be unrealistic to expect that India will be a high margin / high volume market for the pharmaceutical sector in general, unlike many other markets, across the world.
  • India will continue to remain within the ‘modest-margin’ range with marketing excellence driven volume turnover.
  • The government focus on ‘reasonably affordable drug prices’ may get extended to patented products, medical devices / equipment and other related areas, as well.
  • Although innovation will continue to be encouraged in the country, the amended Patents Act of India is ‘Public Health Interest’ oriented and different from many other countries. This situation though very challenging for many innovator companies, is unlikely to change in the foreseeable future, even under pressure of various “Free Trade Agreements (FTA)”.

Government no longer accepts that medicine prices are cheapest in India:

Pharmaceutical companies in India will be constrained to live with the continuing focus of the government and also of the civil society on ‘reasonably affordable medicines’ irrespective of the fact whether they are generic or patented.

The Department of Pharmaceuticals has reportedly started comparing the Indian drug prices with international equivalents in terms of the ‘purchasing power parity’ and ‘per capita income’ and not just their prevailing prices in various developed markets converted to rupees.With such comparisons the government has already started voicing that prices of medicines in India are not the cheapest but on the contrary one of the costliest in the world.

The above argument though interesting, worth taking note of, by all concerned to successfully chart-out their respective game plans for India.

A recent media report highlighted that an inter-ministerial group constituted for regulating prices of patented medicines in India has recommended using a per capita income-linked reference pricing mechanism for such products.

The above news item also mentions that Tarceva, a Roche lung cancer drug, costs Rs 1.21 lakh in Australia and France while it costs Rs 35,450 in India. But when adjusted for per capita income, which is significantly more in these countries compared with India, the price falls to Rs 10,309 and Rs 11,643, respectively, for both countries as indicated below:

Country India France Australia
Per capita gross national income (PCGNI) (US$) 3260 33940 38510
Ratio of PCGNI of other countries to India 1 10.4 11.8
Eriotnib (Tarceva) 100 mg price in India (Rs.) 35450 121085 121650
Eriotinib (Tarceva) 100 mg Price in terms of weighted PCGNI (Rs) 35450 11643 10309
Sunatinib (Stutent) capsule 50 mg (Rs)       46925 363216 310384
Sunatinib (Stutent) 50 mg price in terms of weighted PCGNI (Rs)              46925 34925 26303

(Source: The Economic Times, August 16, 2012)

Government encouraging R&D Focus on the diseases of the poor:

Many in India, including ‘Council of Scientific & Industrial Research (CSIR)’ feel that the pharmaceutical R&D activities should also focus on the diseases of the poor, which constitute the majority of the global population.

However, global pharmaceutical companies argue that greater focus on the development of new drugs for the diseases of the poor should not be considered as the best way to address and eradicate such diseases in the developing countries. On the contrary, strengthening basic healthcare infrastructure along with education and the means of transportation from one place to the other could improve general health of the population of the developing world quite dramatically.

The counterpoint to the above argument articulates that health infrastructure projects are certainly very essential elements of achieving longer-term health objectives of these countries, but in the near term, millions of unnecessary deaths in the developing countries can be effectively prevented by offering more innovative drugs at affordable prices to this section of the society.

Recognition of India’s healthcare priorities is important:

Despite chaos in many areas, as mentioned above, a paradigm change in the way pharmaceutical business to be conducted in India, is slowly but surely taking place, where replication of any western business model could be counterproductive. The strategy has to be India specific, accepting the priorities of the countries, even with all its ‘warts and moles’

Participative strategies should yield better results:

To achieve excellence in the pharmaceutical market of India, there is a dire need for all stakeholders to join hands with the Government, without further delay, to contribute with their global knowledge, experience and expertise to help resolving the critical issues of the healthcare sector of the nation, like:

  • Creation and modernization of healthcare infrastructure leveraging IT
  • Universal Health Coverage
  • Win-Win regulatory policies
  • Creation of employable skilled manpower
  • Innovation friendly ecosystem
  • Reasonably affordable healthcare services and medicines for the common man through a robust government procurement and delivery system

Right attitude of all stakeholders to find a win-win solution for all such issues, instead of adhering to the age-old blame game in perpetuity, as it were, without conceding each others’ ground even by an inch, is of utmost importance at this hour. 

It is high time for the Government of India, I reckon, to reap a rich harvest from the emerging lucrative opportunities, coming both from within and the outside world in the healthcare space of the country. Effective utilization of this opportunity, in turn, will help India to align itself with the key global healthcare need of providing reasonably affordable healthcare to all.

Conclusion:

Thus in my view, just replication of the ‘Old Paradigm’ of the developed pharmaceutical markets is unlikely to yield results in the new evolving paradigm of India.

In this rapidly changing scenario, the name of the game for all players of the industry, both global and local, I believe, is recognition of the changing market dynamics of India, active engagement in the paradigm changing process of one of the most important emerging pharmaceutical markets of the world and finally adaptation to the countries changing aspirations and priorities to create a win-win situation for all.

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.

Reaping rich harvest with less moaning and bagful of creative ideas from emerging Rural Markets of India

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About 72 percent of the population and 135 million households of India live in the rural areas of the country. Many of them are poor.

Definition of ‘Rural’:

Agencies of the Government of India like, National Council of Applied Economic (NCAER) and Insurance Regulatory and Development Agency (IRDA) have defined the terminology ‘rural’ as “villages with a population of less than 5000 with 75 percent population engaged in agriculture…”

Rural India is no longer an agrarian economy:

A recent study by ‘Credit Suisse’ indicates that rural India is no longer a pure agrarian economy, depending mostly on the quality of rain falls during monsoon season. This has been corroborated by the fact that the contribution of agriculture to the total GDP of rural India has come down from 50 percent, as registered during the turn of this century, to its current level of about 25 percent.

This transition of rural India from agriculture to industry and services, is now taking place at a much faster pace than ever before, as the rural economy is getting increasingly attuned to the national economic cycle, creating more and more non-agrarian jobs in those areas. Most of the incremental job creation is taking place in manufacturing, construction, retail and wholesale trade and also in the community services.

Currently, 55% of India’s GDP from manufacturing comes from rural India as the ‘Credit Suisse’ report highlights. As a result, since April 2000, per capita GDP in rural India has grown at a much faster pace than in urban India.

This welcoming change, in turn, is expected to play a key role in significantly improving the consumption of reasonably affordable healthcare, besides many other products and services, in the rural India.

Rural share of GDP growing faster:

Since last several years with various rural reform initiatives of the Government, the hinterlands of India have started growing faster than ever before.

A National Council of Applied Economic (NCAER) Research survey, indicating rural share of India’s GDP improved from 40 percent in 1980 to 54 percent in 2010, vindicates this point. At the same time, aggregate rural consumption (US$ Bn) increased from 94 in 1985 to 203 in 2005 and is expected to reach 350 in 2015. (Source: National Statistical Offices, UN, Euro Monitor International, Office of the Registrar General & Census Commissioner, India).

A new growth opportunity:

According to McKinsey Report, rural India currently accounts for 21 percent of the Indian Pharmaceutical Market (IPM). It is interesting to note from the NCAER report that both urban and rural India spend 5% of their total income on health.

Rural growth drivers:

McKinsey estimates that by 2015, upcoming smaller towns and the rural markets will contribute as much to the growth of IPM as the metros and top tier towns.

The following factors are expected to drive the growth of the pharmaceutical industry in the rural India:

  • Large patient base
  • Increasing overall income (over 1 percent of the total population coming above the poverty line every year)
  • Increasing number of middle class in rural areas
  • Disease pattern gradually shifting to chronic ailments
  • Improving healthcare infrastructure with increasing Government spend on the National Rural Health Mission (NRHM)
  • Rashtriya Swasthya Bima Yojana (RSBY), which is the National Health Insurance Scheme for Below Poverty Line (BPL) families, will provide health cover to increasing number of BPL households
  • New initiatives of the Department of Pharmaceuticals (DoP) like, “Janaushadhi”  scheme will provide low cost quality medicines to boost the uptake

Rural market size:

The rural markets contribute about 21 percent of U.S$ 12.5 billion pharmaceutical market in India (AIOCD-AWACS, February, 2012). As reported in ‘India Pharma 2015’ of McKinsey, by 2015 rural pharma market size is expected to reach U.S$ 4.8 billion from U.S$1.2 billion in 2005.

Currently, rural markets are dominated by ailments related to various types of infections. As stated above, this disease pattern is expected to change by the next decade to non-infectious chronic illnesses, like diabetes, cardiac, cancer, hypertension etc.

Increasing Pharmaceutical growth trend in the rural markets:

In 2011 the rural markets of India registered a growth of around 23 percent over the previous year. This decent pace of growth is expected to continue in the next decades.

MAT Dec 2011 (INR M)

MAT Dec 2011 (Saliency)

Growth %
Indian Pharma Market

538,028

100.00

14.92
CLASS I TOWNS

168,339

31.29

12.12
METROS

164,625

30.60

16.33
CLASS II TO VI

102,536

19.06

9.93
RURAL

102,528

19.06

23.19

(Source: IMS Town Class Data – Dec MAT 2011)

Moreover, McKinsey Report forecasts that rural markets will contribute around 27 percent of the total consumption of India by 2020 and by 2015, rural India will account for over 24 percent of the domestic pharmaceutical market from its current level of 21 percent.

Charting the uncharted frontier:

It has been reported that growth rate of the rural markets of many companies have more than doubled due to their rural marketing focus. Possibly as a testimony to this new business opportunity, one can now see:

1. Novartis with its “Arygoya Parivar” initiative is rolling out a tailor-made program for rural areas of seven states of India, to start with. They have developed special packs of essential medicines with special prices to reach out to the rural population. To create disease awareness within the target population and also for disease prevention and treatment, Novartis has deployed health educators for this project.

2. Sanofi has initiated a dedicated rural marketing initiative called ‘Prayas’.  The initiative is aimed at ‘bridging the diagnosis‐treatment gap through a structured continuing education program for rural doctors across India’.

The Company says, “through ‘Prayas’, specialists from semi‐urban areas will share latest medical knowledge and clinical experience with general practitioners based in smaller towns and villages in the interiors of India”. Their second strategy, reportedly, is for improving healthcare access by making quality medicines available at affordable prices for the rural patients.

3. Novo Nordisk is currently engaged in screening patients for diabetes in the rural areas of Goa with mobile clinics. This initiative is expected to create widespread awareness about diabetes and early detection of the disease, so as to prevent early onset of the disease related complications.

4. Eli Lilly developed a program along with the Self-Employed Women’s Association in Ahmedabad to educate and encourage rural patients suffering from tuberculosis to go for treatment.

5. Elder pharmaceuticals created a dedicated 750 strong rural marketing sales force called Elvista.

6. Cadila Pharma has set up a dedicated rural marketing arm called ‘Explora’.

7. Alembic Chemicals created a rural business unit called ‘Maxis’.

These are just a few illustrations and not an exhaustive list. However, the issue is whether the rural marketing initiative will continue to remain an experimental one to the pharmaceutical companies in India or will get translated into a decent long term strategic business move.

“The Fortune at the Bottom of the Pyramid”:

The iconic management guru C K Prahalad in his well-known book titled, “The Fortune at the Bottom of the Pyramid” wrote:

“If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative consumers, a whole new world of opportunity will open up.” I am not sure whether the above profound observation is encouraging the pharmaceutical companies to explore the rural India with the wings of courage, where majority of the Indian populations live and most of them are poor.

A ‘Pot of Gold’ in the rural markets?

Currently around 20 million middle class households live in over 6,00,000 villages of India. This is almost the same as the number of middle class households residing in urban India and holds the key to significant increase of healthcare spending in rural India.

Rural market-entry strategy:

Instead of transplanting the urban marketing strategy into rural India, some companies, as mentioned above, have taken the community-welfare route to make the rural population aware of particular disease segments like, tuberculosis, diabetes, cardiovascular, waterborne diseases etc. together with the treatments available for such ailments.

These value added marketing strategies offer benefits to both the patients and the company concerned. The local medical practitioners, in turn, are also benefited as they get increasing number of patients in their clinics through such disease awareness community program by the pharmaceutical companies.

Key challenges:

There are some key challenges for effective rural penetration by the Indian pharmaceutical industry, as follows:

• Inadequate basic healthcare infrastructure. Only 20 percent of total healthcare infrastructure of the country is in rural areas where over 72 percent population of the country lives. • Density of doctors per 10,000 populations in India is just 6. A large number of villages in India do not have any doctor. As per AC Nielson study, an average rural Indian has to travel about 6 km to visit a doctor. A Medical Representative will require traveling about 250 to 300 km every day just to meet about 10 doctors and 4 dealers. • Many villages are not well connected by proper all season roads. • Lack of appropriate supply chain network and logistics support.

Conclusion:

With increasing infrastructural support and tailor made innovative marketing strategies for rural India, simultaneously delivering both preventive and curative therapies under one umbrella, it may not be difficult for the Indian pharmaceutical companies to discover ‘The Fortune at the Bottom of the Pyramid’ – a win-win situation indeed for both the ‘haves’ and a vast majority of ‘have-nots’ living in an amazing country called India.

The name of the game is less moaning and a bagful of implementable creative ideas.

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.

Explore the Emerging Markets with the ‘Wings of Courage’.

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Overall growth rate of the global pharmaceutical industry is currently hovering around 5%. Similar situation has been prevailing since last several years. There is no indication of acceleration of growth rate from any of the top 3 regions of the world namely the USA, EU and Japan, at least in the near future.

According to IMS, the global pharmaceutical market is expected to grow around 5%-7% in 2011 to US$ 880 billion, as compared to around 4%-5% of 2010.

The reasons of the slowdown, I have discussed several times in the past through this column and do not intend to dwell on that, at least, in this Article.

The Emerging Markets of the World:

Unlike developed markets, emerging pharmaceuticals market of the world, like, India, China, Brazil, Russia, Mexico, Turkey and Korea, are showing a robust growth rate, quite commensurate to the ascending GDP growth trend of these countries.

According to IMS, the projected CAGR trend of the developed and Emerging Markets for the period of 2007–11, are as follows:

Mature Markets

CAGR 2007-11

Emerging Markets

 CAGR 2007-11
USA 4-7% China 13-16%
Canada 6-9% Korea 8-11%
Japan 2-5% Brazil 9-12%
Germany 3-6% Russia 17-20%
France 2-5% Mexico 6-9%
Italy 3-6% India 11-14%
UK 4-7% Turkey 9-12%
Spain 5-8%

(Source IMS)

Branded Generics/Generics are now key growth drivers in the Emerging Markets:

It is worth noting, unlike the developed markets of the world, where high priced branded patented drugs drive the value growth of the industry, in the emerging markets, where investment towards R&D is relatively less, branded generic and the generic products are the key growth drivers.

Such an evolving situation has prompted large global majors like Pfizer, GSK, Sanofi-aventis, Daiichi Sankyo and Abbott Laboratories, to name a few, either to acquire large generic or Biosimilar drug companies or ink various interesting and win-win collaborative deals, in these markets, to maintain their respective business growth with the branded generic and generic products in the fast growing emerging markets of the world.

Will Emerging Markets be lucrative enough only with Generic and Branded Generic products, in the long run?

Some experts do feel that, in the long run, the emerging pharmaceutical markets, like India, may not prove to be as lucrative to the global pharmaceutical majors.

The key reason being, around 80% ‘out of pocket’ expenditure for medicines in India, could be the key impediment to expanded access to higher priced innovative medicines, in general. Such a situation could seriously limit the success of branded patented drugs in India following their global strategy, compared to the developed markets of the world. The issue of affordability of such medicines will continue to be a key factor for their improved access in India, if the ground reality remains unchanged. Top line business growth only with Generics and Branded Generics in the emerging markets may not be sustainable enough, in the long run, for the innovator companies to adequately fund their R&D initiatives to meet the unmet needs of the patients.

The other school of thought:

The other school of thought, however, argues that ‘out-of pocket” characteristic of  India is indeed more sustainable in terms of cost containment pressure, than those  markets where the government or health insurance companies cover a large part of the medical expenses for the population.

Every year around 1% of population comes above the poverty line in India together with a growing ‘middle income’ segment with increasing purchasing power. This cycle, in turn, will keep fueling the growth of healthcare space, contributing significantly to the progress of the pharmaceutical industry of the country.

‘One size fits all’ global strategy unlikely to succeed in the ‘Emerging Markets’:

In my view ‘One size fits all’ type of strategy, especially in the area of pricing, is unlikely to succeed in the emerging markets of the world. Pharmaceutical Companies will need to have  different types of ‘tailor made’ strategic approaches for markets like Brazil, Russia, India, China, South Africa, Mexico, Korea and Turkey.

Pricing Strategy will be a key determinant to success:

For better access to medicines, ‘differential pricing strategy’ has been the stated policy of large global companies like, GSK and MSD. If this trend continues, a win-win situation could be created, when unmet needs of a large number of patient groups could be met with innovative medicines, paving the way for the innovator companies to register a healthy, both top and bottom line, business growth in these markets to effectively fund their R&D projects, besides others.

The most successful brand launch in India, so far:

The credit for the most successful new patented product launch (launched in 2008) in the recent times, I reckon, should go to Januvia (Sitagliptin), an oral anti-diabetic molecule from the global major MSD. The reported global sales of Januvia in 2008 was US $1.4 billion and the sales reported in India was around Rs. 77 Crore (around US $17 million) in just over two years with around 2.4% market share in the large and fragmented Oral Ant-Diabetic segment (IMS, MAT March 2010). This could happen, in my view, not only due to a brilliant business strategy executed with military precision but also because of a differential pricing strategy adopted by the company for this particular product in India.

In recent times, it has not been difficult to record a turnover of around US $ 20 – 25 million by a large pharmaceutical brand either in India or China.

Conclusion:

If this does not happen, due to one reason or the other, it would arguably be quite challenging for the global innovators to be able to keep engaged in the high-cost and high-risk R&D initiatives, by driving their business growth mainly with generic and branded generic medicines in the fast growing emerging markets of the world.

Thus the name of the game for the global innovator companies will be to Explore the Emerging Markets with the ‘Wings of Courage’.

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.

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.

Emerging markets and a robust oncology portfolio expected to be the future growth engine of the global pharmaceutical industry… but not without associated pricing pressures.

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When the growth rate of the developed markets of the global pharmaceutical industry started slowing down along with the declining R&D productivity, the emerging markets were identified as the new ‘El-Dorado’ by the global players. At the same time, new launch of anti-cancer drugs, more in number, started giving additional thrust to the growth engine of the industry, at least in the developed markets and for the ‘creamy layers’ of the emerging markets of the world. As cancer is being considered as one of the terminal illnesses, the cancer patients from all over the world, would like to have their anti-cancer medications, at any cost, even if it means just marginal prolongation of life with a huge debt burden.According to a recent study done by the Cancer Research, UK, despite significant decline in the overall global pharmaceutical R&D productivity over a period of time, in a relative yardstick, newer anti-cancer drugs have started coming up to the global market with a much greater frequency than ever before. ‘Pharmacy Europe’reports that 18 percent, against a previous estimate of 5 percent of 974 anti-cancer drugs will see the light of the day in the global market place, passing through stringent regulatory requirements. This is happening mainly because of sharper understanding of the basic biology of the disease by the research scientists.Another study reports that between 1995 and 2007 such knowledge has helped the scientists to molecularly target ‘kinase inhibitors’, which are much less toxic and offers much better side effect profile. Well known anti-cancer drug Herceptin of Roche is one of the many outcomes of molecularly targeted research.

Price of Anti-cancer drugs:

Although in the battle against the much dreaded disease cancer, the newer drugs which are now coming to the market, are quite expensive. Even in the developed markets the healthcare providers are feeling the heat of the cost pressure of such medications, which would in turn impact the treatment decisions. Probably because of this reason, to help the oncologists to appropriately discuss the treatment cost of anti-cancer drugs with the patients, the American Society of Clinical Oncology recently has formed a task force for the same.

The issue is now being fiercely debated even in the developed markets of the world:

In the developed markets of the world, for expensive cancer medications, the patients are required to bear the high cost of co-payment, which may run equivalent to thousands of U.S dollars. Many patients are finding it difficult to arrange for such high co-payments.

Thus, it has been reported that even the National Institute of Health and Clinical Excellence (NICE), UK considers some anti-cancer drugs not cost-effective enough for inclusion in the NHS formulary, sparking another set of raging debate.

‘The New England Journal of Medicine’ in one of its recent articles with detail analysis, expressed its concern over sharp increase in the price of anti-cancer medications, specifically.

Is the global pharmaceutical industry in a ‘gold rush’ to get into the oncology business?

Recently ‘The New York Times’ reported some interesting details. One such was on the global sales of anti-cancer drugs. The paper reports that in 1998 only 12 anti-cancer drugs featured within the top 200 drugs, ranked in terms of global value turnover of each. In that year Taxol was the only anti-cancer drug to achieve the blockbuster status with a value turnover of U.S$ 1 billion.

However, in 2008, within top 200 top selling drugs, 23 were for cancer with three in the top ten, clocking a global turnover of over U.S$ 1 billion each. 20 out of 126 drugs recording a sales turnover over U.S$ billion each, were for cancer, impressive commercial growth story of which is far from over now.

How to address this issue?

Experts are now deliberating upon to explore the possibility of creating a ‘comparative effectiveness center’ for anti-cancer drugs. This center will be entrusted with the responsibility to find out the most cost effective and best suited anti-cancer drugs that will be suitable for a particular patient, eliminating the possibility of wasteful expenses, if any, with the new drugs, just because of their newness and some additional features, which may not be relevant to a particular patient. If several drugs are found to be working equally well on a patient, most cost effective medication will be recommended to the particular individual.

Some new anti-cancer medications are of ‘me-too’ type:

‘The Journal of National Cancer Institute’ reports that some high price anti-cancer drugs are almost of ‘me too’ type, which can at best prolong the life of a patient by a few months or even weeks. To give an example the journal indicated, ‘Erbitux for instance, prolongs survival in lung cancer patients by 1.2 months… at a cost of U.S$ 80, 000 for an 18 – week course of treatment.’

However, the manufacturer of the drug later told ‘The Wall Street Journal’ (WSJ), ‘U.S.$ 80,000 is like a sticker price, but the street price is closer to U.S$ 10,000 per month” i.e around U.S$ 45,000 for 18 week course of treatment.

Conclusion:

Even in the developed countries, the heated debate on expensive new drugs, especially, in the oncology segment is brewing up and may assume a significant proportion in not too distant future. India being one of the promising emerging markets for the global pharmaceutical industry, willy nilly will get caught in this debate, possibly with a force multiplier effect, sooner than later.

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.

Managing expectations of the emerging markets of the world, proactively, will differentiate winners from the rest, in the Global Pharmaceutical Industry.

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Change or Perish:In Mid 2007, PricewaterhouseCoopers (PwC) recommended to the research-based global pharmaceutical companies that for sustainable business performance they should move a part of their expenditure from marketing to research. They also recommended that the drug prices should be related to incremental efficacy that the products would provide. That global pharmaceutical business model is “economically unsustainable and operationally incapable of acting quickly enough to produce the types of innovative treatments demanded by global markets” as a challenge of change, was forecasted in 2007 by PwC in their ‘Pharma 2020: The vision’, report.Fast evolving scenario:

The global pharmaceutical industry scenario is fast evolving. More drugs are going off patent than what the innovator companies can replace with the new products. The research is undoubtedly failing to deliver.

At the same time, the business growth in the developed markets of the world has been declining over a period of time. The growth in the top two pharmaceutical markets of the world viz, USA and Japan has gone negative. IMS predicted in their recent ‘CEO Conclave’ in Mumbai that negative trends in these markets will continue even beyond 2013.

In the same conclave IMS predicted that ‘Pharmerging’ markets and Venezuela will drive the growth of the global pharmaceutical industry in the next five year period. Within ‘Pharmerging’ markets, China is expected to record highest CAGR growth of over 25%, followed by India and Turkey around 12-14% each. With such a scorching pace of growth China is expected to become third largest pharmaceutical market in the world in 2013 with India holding its 2008 ranking of no. 13. Venezuela is expected to register highest CAGR growth of around 40% during this period placing itself as the eleventh largest pharmaceutical market of the world, comfortably overtaking India.

Emerging markets will drive global growth:

IMS health reported that last year the global pharmaceutical market recorded a turnover of US$712 billion, which is an increase of US$178 billion over last five years. However, the growth rate has come down to 6.4% compared to 11.8% in 2001. Emerging markets like India, China, Russia, Turkey and South Korea have recorded a growth of 13%, 25.7%, 20.2%, 17.2% and 10.7%, respectively against just 3.8% growth of the US market.

Making up sales revenue of world’s top 10 products:

World’s 10 top selling prescription drugs, as reported by IMS, which will be difficult to replace in terms of single-product value turnover after they go off patent, are as follows:

- Lipitor, US$13.5 billion (Pfizer)

- Plavix, US$7.3 billion (Sanofi-Aventis)

- Nexium, US$7.2 billion (AstraZeneca)

- Seretide/Advair, US$7.1 billion (GlaxoSmithKline)

- Enbrel, US$5.3 billion (Amgen and Wyeth)

- Zyprexa, US$5 billion (Eli Lilly)

- Risperdal, US$4.9 billion (Johnson & Johnson)

- Seroquel, US$4.6 billion (AstraZeneca)

- Singulair, US$4.5 billion (Merck)

- Aranesp, US$4.4 billion (Amgen)

Focus on the emerging markets and other measures are expected to more than offset the loss of revenue and profit for these products.

Key business issues in the emerging markets:

Governments of many of these emerging markets expect some local benefits out of the evolving growth opportunities of the global pharmaceutical companies from their respective countries. Various reports indicate that there will be mainly the following two key issues in these markets:

• Local manufacturing of products
• Pricing

Local manufacturing:

Out of these emerging markets, Indonesia has clearly spelt out its intention by specifying that the pharmaceutical companies marketing their products in Indonesia will need to establish local manufacturing facilities. The new rule is directed towards local job creation.

The Health Minister of Indonesia has said, “If they want to get licenses (to sell their products) they have to invest here also, not just take advantage of the Indonesian market.” The Minister further added, “they can’t just operate like a retailer here, with an office that’s three meters by three, and make billions of rupiah. That’s not fair.” It has been reported that India and China may also come out with similar requirements for their respective countries.

U.S. Chamber of Commerce has registered a strong protest in this matter with the President of Indonesia and has urged a reversal of this decision. However, the country appears to have taken a firm stand in this matter. This is evident when in response to the report that some global pharmaceutical companies have threatened withdrawal of their business from Indonesia because of this reason, the Health Minister retorted, “If they want to go away, go ahead.”

Pricing:

Anticipating such moves in the emerging markets, GlaxoSmithKline (GSK) has already started reducing the prices of its products in the emerging markets.

The visionary CEO of GSK, Andrew witty strongly believes that such price reduction will enable more patients in the emerging markets to afford GSK products. Consequently the increased sales volume will not only be able to offset the price loss but will also create a substantial goodwill for the company in these markets.

Quoting Andrew Witty the ‘Wall Street Journal’ (WSJ) reported that in Philippines, GSK has reduced the price of 28 products by 30% to 50%. In other emerging markets in Asia including India, Malaysia and Thailand the company has reduced the prices of Cervarix, its cervical cancer vaccine, substantially.

Price reductions made by GSK in Philippines in March have started paying rich dividends to the company with 15% to 40% increase in sales revenue.

Conclusion:

To achieve the growth objectives in the emerging markets of the world, global pharmaceutical companies will need to find out a win-win solution. Andrew Witty of GSK has set examples in this area with various path breaking initiatives. Pricing and local manufacturing of products, in that order, are expected to be the key issues in the business model for emerging markets of the global pharmaceutical companies. Witty has responded to such expectations proactively and in an exemplary way. His vision is widely expected to be emulated by many others, as we move on, in the interest of all stakeholders.

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.

Recent appetite of Global Pharmaceutical Majors for Generic Pharmaceutical Business: can it pose a threat to pure generic players?

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Last year Lehman Brothers estimated that by 2012 over 25% of the global pharmaceutical market will face competition from generics. Higher demand of generics is mainly due to the following reasons:1. Increased number of patented drugs is going off-patent.2. Cost containment and pricing pressure, especially from the Government, in the developed markets of the world.

3. Increasing number of patents is being challenged, especially in the U.S courts, on the ground of “obviousness”.

“Obviousness” is becoming a key reason of patent challenges in the U.S:

In first quarter of the last year we read about the U.S trial court making void the key patent of Yasmin, the contraceptive drug of Bayer for ‘obviousness’. This incident had compelled Bayer to revise its profit forecast downwards, for 2008.

‘Obviousness’ is increasingly becoming one of the key reasons for challenging Patents in many countries of the world, including India. Financial Times reported recently that keeping protection to all patents intact, could eventually pose to be a key challenge for the R&D based global pharmaceutical companies. Many analysts feel that the issue of “obviousness” could indeed be a threat to many U.S pharmaceutical patents, especially those, which will be considered by the court just as a ‘tweaked-up’ version of existing drugs.

As reported by ‘Chemical Weekly’, March 2008, total 338 patent challenges were recorded globally in 2008. India ranks only next to USA with a share of 21% pharmaceutical patent challenges.

Global generic pharmaceutical market is growing at a faster pace:

Prescription market in the U.S grew by just 1.3% last year to U.S$291 billion. Key factors believed to be responsible for slower growth in the U.S market are as follows:

1. Higher prescriptions for less expensive generic medicines.

2. Lower sales of higher priced new products.

3. Economic downturn has made more patients to move to generics and large number of consumers to lose their health insurance.

Similarly in the United Kingdom (U.K) generics industry supplies 64% of medicines dispensed by the National Health Scheme (NHS), though they contribute just around 30% of NHS expenditure towards medicines.

Recent reports indicate that the generic global pharmaceutical market is expected to record a turnover of U.S$ 520 billion by 2012. This market size is too lucrative to ignore by any big global pharmaceutical player.

Based on sales turnover of 2007, Teva tops the list of global generic players with a turnover of U.S$ 9.1 billion, followed by Sandoz with U.S$ 5.8 billion and Mylan/Merck with U.S$ 4.6 billion.

From India, Ranbaxy registered a turnover of U.S$ 1.7 billion, Dr.Reddy’s U.S$ 1.4 billion, Cipla U.S$ 1 billion and Sun Pharma/Taro U.S$ 900 million, during that year.

48% of the total 422.6 million prescriptions written in Canada in 2007 were for generic medicines, which registered an annual growth of 14%, reports IMS Canada. Compared to this performance, branded products in Canada recorded a growth of meager 0.2%, during this period. As a consequence, generic Canadian pharmaceutical companies like Novopharm (Teva) and Apotex recorded impressive growth of 46.8% and 18.5%, respectively, in that period.

Despite such outstanding performance of generic pharmaceuticals, overall growth of prescription drugs in Canada was at just 6.3%, the lowest in the last ten year period.

President Obama’s Healthcare Policy will encourage generics and biosimilar drugs:

It is widely believed that the new U.S administration under President Barak Obama will try to encourage speedy introduction of generics into the U.S market.

So far as ‘Biosimilar’ drugs are concerned, in 2009 Obama administration is expected to work out the road map to facilitate the introduction of ‘Biosimilar dugs’ in the U.S market. Due to inherent characteristics that biological are ‘grown and not just manufactured’, biosimilar drugs are not expected to be replica of the original products.

To find out a solution to the heated debate, an answer has to be found out regarding the extent of clinical trials that the ‘biosimilar’ manufacturers will require to undertake to satisfy the U.S FDA that these drugs are as safe as the original ones. It is believed by some that the answer to this question lies in the approach that gives regulatory authority the flexibility in ‘what it demands that asks for more evidence than is now required for generic drugs, but something less than the kind of full-blown trials required for products new to the market.’

Global pharmaceutical majors are developing appetite for generics business:

Keeping a close vigil on these developments, as it were, even Pfizer, the largest pharmaceutical player of the world, has started curving out a niche for itself in the global market of fast growing generics, following the footsteps of other large global players like Novartis, GlaxoSmithKline, Sanofi-Aventis and Daiichi Sankyo.

Is Pfizer planning to follow the business model of Abbott and Johnson & Johnson (J&J)?

As reported by the Wall Street Journal (WSJ), Mr. Kindler the CEO of Pfizer very recently commented, “We are breaking the company down into smaller units so we aren’t dependent on any single product… I am a great admirer of J&J and Abbott’s business model.”

It appears what Mr. Kindler perhaps meant by this statement is that smaller business units, like Over the Trade Counter (OTC), Vaccines, Nutrition and Animal Health can be more ‘manoeuvrable and innovative’ for faster business growth. Acquisition of Wyeth could actually help Pfizer to implement this business model.

Coming back to generic business, the recent collaborative arrangement of Pfizer with Aurobindo Pharma in India vindicates Pfizer’s recent appetite on generic global pharmaceutical business. The company is already in this business with some of its off patent products. But now like others, Pfizer seems to be strategizing to reap a rich harvest from fast-growing generic pharmaceutical business through most probably its “Established Products” business division.

Could such business model of Global Pharmaceutical majors pose a threat to pure generic players in the business?

The entry of the global pharmaceutical majors into generic pharmaceutical business, in my view, could pose a serious threat to current generic players in the business, including those who are operating from India in the ‘regulated markets’ of the world, for the the following reasons:

1. Generic pharmaceutical business is usually a high volume, relatively low margin and highly competitive business. To survive in this business of cut-throat competition will require both financial and innovative marketing expertise, as well as financial and marketing muscle, where large global players are expected to easily score over others.

2. Product price of generics of the same or similar molecules being within a price band, prescribers and payors’ preference are expected to be in favour of large global pharmaceuticals, because of corporate brand image.

3. In future, the pharmaceutical marketing model, in my view, is expected to shift from ‘marketing of only medicines’ to ‘marketing of a bundle of medicines and services’. In the changed scenario global pharmaceutical majors are expected to have a distinct strategic advantage.

4. Global Pharmaceutical majors may also use this business model as a ‘preventive strategy’ to restrict market entry of number of players for an off-patent molecule and thereby effectively contain the extent of price erosion, as the brands will go off-patent.

It will, therefore, be quite interesting to watch, what happens in the global generic pharmaceutical business in the next five to ten years. I expect a significant consolidation taking place in this market, both global and local.

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.