Piecing the perfect business model

The pharmaceutical sector is the 'in' sector at the moment. However, this evolution did not happen overnight. There has been a marked change in business strategies, which have been driven by competitive pressures. Nandini Patwardhan analyses the emerging post-WTO business models to discover the road ahead.

The pharmaceutical industry in India has witnessed an upheaval in the recent times. Post-TRIPS companies are adopting various strategies to succeed in a hyper competitive environment. They are piecing together different business models, experiments that would take over two years to gestate and perhaps change the face of Indian pharma altogether.

In transition

The business models adopted by various pharmacos have undergone a metamorphosis from inward looking to outward looking. According to K Raghavendra Rao, Managing Director of Orchid Chemicals and Pharmaceuticals, “Before the WTO happened, business models were locally focussed and the thrust was on getting the new drug in the Indian markets as soon as possible by developing process chemistry for a known molecule”.

Muralidharan Nair, Associate Vice-President, Risk and Business Solutions at Ernst & Young states, “If you consider pre-90s and post-90s, you will realise the huge difference in the pharmaceutical scenario in our country.” For instance, pre-90s the Indian pharmaceutical industry was dominated by high turnover multinationals. “Also, there was not much competition and companies could garner net profits in double digits on an average,” he adds.

The 90s witnessed Indian pharma evolve into a global phenomenon.Post-libe-ralisation saw the emergence of strong domestic players armed with manufacturing prowess, reverse-engineered patented molecules and a battery of lawyers. The TRIPS agreement has shaken this very framework.

Adds Rao, “Post-WTO we have to look more internationally, as better value can be added by making molecules which are going off-patent and selling them on a global scale. Alternatively, companies need to create new molecules rather than copy molecules that were introduced recently by multinational companies.”

Indian pharma is migrating from an inward looking revenue model to one that would be relevant in the post-WTO scenario. These models would be pieced together by combining the two or more of the following strategies.

M&As: M&As are not new to the pharma industry, you have enough examples of global players reaping benefits from this strategy. The difference now being, Indian pharmacos are joining the M&A game with companies like Sun Pharmaceuticals, Nicholas Piramal and Matrix Laboratories, acquiring international players to compete globally.

R&D: R&D is the very foundation of the pharma industry that any serious player cannot ignore. However, drug discovery is a high risk area and companies need to de-risk their R&D activity. De-risking allows a company to divest risks associated with drug development by bringing in a financial investor or by out-licensing research.

Dr Reddy's Laboratories is known for implementing this model successfully. Having realized the risks of its R&D efforts, Dr Reddy's laboratories has got into an agreement with ICICI Ventures for developing and selling products through the ANDA route. The deal is structured such that up-front payments will be received by Dr Reddy's for the development, registration and legal costs related to ANDAs filed in the US in 2004-05 and 2005-06. When these products start generating revenue, ICICI Ventures will get a royalty on sales for five years.

Alternatively, companies also need to look at new therapeutic areas and extend/renew old products.

In-licensing: MNCs waiting to launch products in India are getting into in-licensing agreements with domestic players who have a strong distribution network in place. For instance GSK has in-licensed Paritec (rabeprazole sodium) from Eisai Pharmaceuticals India to co-promote it in India. The drug will be imported in bulk to India and the finished formulation will be prepared by GSK at their Indian facilities. The two companies will jointly promote the drug in India.

Patent challenging: Many companies are also adopting the role of a patent challenger, wherein, it may challenge the patent of a product with a view to get into generic manufacturing of blockbuster drugs. “This is a high-risk model and as of now, it is difficult to ascertain how well it works. But like they say higher the risk, higher the rewards,” states Nair of Ernst & Young.

A new line of business

The advent of TRIPs compliance has brought with it new found opportunities in the pharma services segments such as KPOs, CROs and Business Intelligence firms. “The biggest driver to the KPO model would be the collective pool of people who have some initial high qualification, and are then trained to acquire a particular domain expertise,” explains Vikas Vats, Marketing Director, MarketRx.

Companies involved in these have worked around some interesting models. “MarketRx has adopted a global product-enabled services model. That means we are able to capture our expertise and knowledge into processes and tools that solve pharmaceutical and biotech commercialisation and promotion management problems globally and with significantly better results than pure-play services companies,” he adds.

Ahmedabad based Veeda CR is one of CROs in the country that has been in news for its overseas acquisition. “Our business model caters to bioequivalence studies and Phase II, Phase III studies for Indian CRO's. It also accommodates Phase II and Phase III studies for MNC's,” states Kiran Marthak, Medical Director of the CRO.

“The Veeda CR business model is a typical Anglo-Indian scenario conducting bioequivalence studies (BA/BE studies) for generic products for regulated countries not only for Indian pharmaceutical companies but also for multinational companies,” he adds.

Another set of companies, business intelligence firms, providing niche services have hit the pharma scene. These are newer versions of the syndicated information companies like The Data Monitor who were into collection of market data and competitive analysis.

Living the change

"One of the different business models adopted by the Indian pharma today clearly tailors towards innovation" -Glenn Saldanha Managing Director and CEO Glenmark Pharmaceuticals

Glenn Saldanha, Managing Director and CEO of Mumbai-based Glenmark Pharma-ceuticals comments, “One of the different business models adopted by the Indian pharma today clearly tailors towards innovation. So, you have a set of pharma companies who have taken innovation as a challenge. Their business models involve discovering New Chemical Entities (NCEs) or moving products to different markets and partnering with companies.”

“There is another set of companies who have adopted the generics model. Within that there's a certain mix of generics and NCEs. There are some larger companies who are doing both. The third is obviously contract manu-facturing, contract research and the fourth is API kind of a business model,” he adds.

Today, Glenmark is a global, fully integrated, research-based pharma-ceutical company that has generic formulations and API business interests in over 70 countries across the world including the highly regulated markets of USA and Europe. “We currently are more in the branded generic space with a clear eye on innovation and keenness to evolve as an organisation into an innovative company over the next decade,” explains Saldanha. In addition, Glenmark also has two out-licensing partners and will continue to look for more for their research. “That is clearly a big driver for the organisation,” says Saldanha. As far as M&As are concerned the company has rights on their NCEs for some of the ROW markets, markets in Asia, Africa, CIS and Latin America, outside of US, Europe, Japan. “So the whole thinking is to actually acquire companies in these geographies and build out front-ends. So that when our NCEs come to market, we have a ready marketing and distribution network,” he reveals.

Orchid Chemicals and Pharmaceuticals, is in the news for its alliances with companies like Apotex, Par Pharma, Altharna, Stada, Ivax and Mayne Pharma and for raising around $40 million in Global Depository Receipts and $42.5 million in Foreign Currency Convertible Bonds. “Our overall business strategy is to play on our strengths and leverage on our partners' strengths,” Rao discloses.

The company has adopted a two pronged business model focussing on manufacturing and research. “The company manufactures antibiotics like cephalosporin. Moving forward we plan to provide an entire range of products in this segment and take those in the final dosage form supported by our own bulk within the integrated manufacturing structure to the regulated markets as soon as the goes off patent,” says Rao. On the research front, Orchid has collaborated with US-based Bexel Pharmaceutical to come up with molecules in diabetes, obesity, inflammation, infection and oncology, do all clinical tests in house and trials abroad, have a proof of concept and then license the product to an MNC to distribute it. And what next? The company is reaping rewards from its first thrust area which is manufacturing as the profits for the last two quarters have tripled over the last year.

Way ahead

“There will be more M&As in the country. In the CRO space, there will be more focus in the area of the clinical development to offer specialised studies,” says Marthak.

Explains Nair, “The decisive factor for zeroing in on any business model is clearly the risk-return equation. Other factors include the overall nature and size of the player himself, market size, growth opportunities, consumption patterns, technology focus and the opportunity overlapping with the company strategy.” For instance, many companies are actively focussing on the Indian vaccines market.

As a result there are many products available for the same category of vaccine. There are more than 10 vaccines offered by various companies for Hepatitis B, resulting in the lowest-priced players cornering the market share; but in the long run, this may not be a sustainable option as vaccine manufacturing is expensive and time consuming.

It is too early to comment on the business models that will be predominant in the product patent regime. One thing that will happen for sure is that small time businessmen, who looked at pharma as a profitable short-term investment, will have to leave the industry and only the serious players will survive.

But to sustain in the competitive industry, they may have to choose from the permutation and combination of various revenue streams and develop a model for themselves that enables them to scale new heights of success.

editorial@expresspharmaonline.com