Locked 'in'/Behind the scenes
Intellectual property (IP) protection is becoming an important component of global trade. As countries are looking to enter the global market place they are recognising the need to revamp their IP laws to attract multinational companies to participate in their economies. This has certainly been true in India where in 2005 intellectual property laws were implemented protecting product patents; prior to that India only recognised process patents. Before the introduction of this new legislation, Indian pharmaceutical companies were free to legally reverse engineer products obtained from branded manufacturers and sell them within India and other markets with lax patents laws. This new development means that Indian companies will no longer be able to depend on revenues generated from selling copied versions of these branded drugs. "As India's patent regime is applicable to patents after 2005, it is possible for registration of an international product (still under patent, patented before 1995) with studies of bio-equivalence in India. In the EU and US, registration is possible only for products off patent", explains Surjit Aurora, Vice President Marketing, WinMedicare.
The changing dynamics of the regulated markets like the US and EU have presented a number of opportunities for Indian pharma industry to capitalise on. Some of the major concerns facing the global pharma industry are higher healthcare costs, competition from generics, patent expiries of blockbuster drugs, drying R&D pipelines and increasing R&D costs. These translate into a significant growth opportunity for Indian pharma industry, in the form of exports of generics to regulated markets and contract manufacturing/ research for global pharma companies. The Indian pharma industry is therefore exposed to a host of new opportunities and risks.
What are Indian companies looking for?
There are various reasons for Indian companies stepping in the regulated markets. Firstly, CARE research believes that the growth of the Indian pharma companies in the domestic market will get restricted with MNCs introducing newer patented drugs in the country. Under this scenario, growth for formulation companies is likely to come from the generics opportunity in regulated markets and geographic expansion in semi/non regulated markets. The generics market is currently valued at $60 billion with unbranded generics constituting two-thirds of that at approximately $38 billion. The US and Canada make up more than half ( approximately 54 percent) of the revenue for the generics market exceeding the sales of continents of Latin America and the EU. The value of drugs going off-patent in regulated markets is estimated at $ 70-80 billion during the next five years and this represents a huge opportunity for Indian pharma companies to establish their presence in these markets.
"Indian players operate mostly in the generic generics and branded generics segment. The generic generics segment is the one that is legally defined in the regulated markets," informs Utkarsh Palnitkar, Partner-Transaction Advisory Services, Leader-Business Advisory Services, Ernst & Young. This essentially means that the product must be sold on the basis of its molecule and not as a brand.
From a patent challenger to a preferred authorised generic
Many Indian companies have been able to gain generic market share by aggressively challenging patents, and this is a good strategy in the short term. But moving forward, this strategy is risky and ultimately an unsustainable business model. To be profitable in the generic space in the long term, experts believe that working with branded manufacturers to become an authorised generic is a more sustainable strategy. When Indian companies can take advantage of the opportunities of the regulated markets in the areas of cardiovascular, anti-diabetics, OTC, health and nutritional supplements, anti infectives etc, pricing pressure in the regulated markets, high litigation expenses and counter strategies followed by innovator companies are factors that could dampen the growth of Indian companies pursuing the generic opportunity.
The Indian 'key'
India pharma companies are rapidly ramping up their presence in the global pharma space through the inorganic route, and are increasing their horizons beyond domestic boundaries. They are adopting inorganic growth strategies rather than setting up their own manufacturing facilities and distribution networks to hasten their presence in newer markets and consolidate their market share. "Furthermore, with distribution concentrated in few large players in each geography, entry strategies are limited to distribution alliances or outright acquisitions," adds Palnitkar. Alliances have been followed by establishment of subsidiaries as is seen in the case of Dr Reddy's acquisition of Betapharm and Ranbaxy's acquisition of Terapia. The prime strategy behind cross border acquisitions is entering new markets, besides strengthening the value chain, improving the competitive position, expanding the product portfolio, building expertise in new therapeutic areas, and acquiring assets. The Indian players are focusing on other markets and just not relying on one or two prime markets. For instance, the primary objective of Ranbaxy's acquisition of Be Tabs, a leading generics player in South Africa, was to enter the high growth South African market. Dr Reddy's acquired Betapharm, to catapult itself into a significant position in Germany. There has also been a recent trend of pharma companies acquiring front-end pharma marketing companies to strengthen their distribution network.
Indian companies have primarily succeeded in acquiring many companies in Europe, whereas significant acquisitions in the US still remain a distant dream, primarily due to very high valuations. "Possibly the cost of acquisition is lower in EU. These companies also operate in the US and have ANDA filings for products going off patent. Cost of entry is lower in EU than in the US," adds Aurora.
Also the attractiveness of the US market has suffered some setback in recent periods, especially for the large generics targeting exclusivity. There is concern, that authorised generics, will take away the shine off 'first-to-file' strategies of generic players, who anticipated windfall gains through the 180-day marketing exclusivity period. Conceding this point, Aurora says, "There is significant price erosion when innovator companies launch authorised generics. This may affect your prices by as much as 50 percent." But players feel that this is not a new thing. Price erosion and products going off-patent does not creep in overnight. It has happened in the past and companies have factored the same in their projections. Other reasons include legal challenges by patent holders delaying and increasing the cost of launch; amongst others have severely impacted the exclusivity-related profits that generic players seek. The Indian pharma companies like Ranbaxy, Dr Reddy's, Wockhardt, Cipla, Nicholas Piramal and Lupin have been doing extremely well in developed markets. Over the years, they have changed their strategies and invested large funds in R&D, set up large numbers of FDA-approved plants and consolidated marketing activity. The companies have their strategies to leverage opportunities and appropriate values existing in formulations, bulk drugs, generics, Novel Drug Delivery Systems, New Chemical Entities, Biotechnology etc. "The industry has thrived so far on reverse engineering skills exploiting the lack of process patent in the country. This has resulted in the Indian pharma players offering their products at some of the lowest prices in the world," remarks Palnitkar. The quality of the products is reflected in the fact that India has the highest number of manufacturing plants approved by US FDA, which is next only to that in the US. The setbacks relate to regulatory requirements and price controls, especially in Europe and increasingly in US. Pharma being a highly regulated field with complex pathways, different geographies have different regulatory guidelines. "Another example is Japan, which has closed its doors to pharma dosage imports. In addition, post Vioxx withdrawal, USFDA has tightened safety and efficacy requirements for generics leading to costly overruns, informs Palnitkar.
"There is no quick cure. Indian companies have to go through the route mandated to reach the end consumers," feels Palnitkar. It has been found that companies avoid price-controlled markets, and are less likely to introduce products in additional markets after entering a price-controlled country. In the case of EU, launches are further delayed following legalisation of parallel imports. The silver lining is that all regulated markets are looking at increasing generics usage in the healthcare system as a means to counter massive healthcare budget deficits. Indian companies are very optimistic over their plans for regulated markets such as the US and EU. They are following the route of mergers and acquisitions to make inroads in the foreign markets. They need to consolidate further in different parts of the world to become trans-national players. Indian companies will have to rise above the statement of Micheal Porter (1990), that most multinational firms are just national firms with international operations. They shall certainly be at an advantage, as their strong national identities will give them a competitive advantage in global markets.