Business Accent

It takes two to tango

Indian lifescience companies take the partnership plunge, writes Vishnu Shankar, Industry Analyst, Chemicals, Material and Foods Practice, Frost & Sullivan—South Asia and Middle East.

About three to four years ago, the two key buzzwords in the Indian pharma industry were outsourcing and generic drugs. Indian companies were actively seeking potential customers who would get into outsourcing contracts with them for the supply of intermediates (mid-level to advanced ones), APIs or generic formulations. These contracts lasted from few weeks to a few months after which the ball had to be set rolling all over again, both from a supplier's (Indian company) and a buyer's (international company) side. Nevertheless, generics still hold huge potential and can contribute to a major chunk of the business of so many mid-sized to large pharma companies in India. With over $65 billion worth of drugs going off-patent by 2010, scientists are already in the rat race as to who would get the much talked about "exclusivity", and challenge innovator drug companies.

Customers to partners

Today, Indian companies are no longer scouting for customers, rather they are looking for partners. Strategic partnership is the new mantra, and this does not restrict one just to tactical outsourcing contracts, but to a whole range of partnerships across the drug life cycle—starting from drug discovery research to clinical trials; custom synthesis and finally contract manufacturing. Contract Research and Manufacturing Services (CRAMS) is a fast growing industry in India. While contract research (which typically constitutes discovery research and clinical research) constitutes only about 13 percent of the total CRAMS pie, it is contract manufacturing of intermediates, APIs and finished dosage forms that constitutes the remaining 87 percent. However, it is seen that while clinical research and discovery research in India is growing annually at 20 percent and 35 percent, respectively, contract manufacturing is growing at about 22 percent year-on-year.

Given the increasing penetration into generics, and subsequent saturation levels in the Indian pharmaceutical space leading to margin erosion, Indian companies have ventured into the lucrative offshore markets, both strictly regulated and those with lesser regulation by establishing such strategic partnerships and alliances (including marketing tie-ups).

Bio-alliances come of age

Increasing costs of biopharmaceutical R&D and manufacturing have driven many multinational biopharmaceutical companies to consider outsourcing their activities. Reducing costs and increasing efficiency and productivity are vital to maintaining competitiveness. It has been observed that biopharma companies have increased their outsourcing expenditures quite significantly over the last decade, with an estimated 40 percent of pharmaceutical drug development expenditures committed to outsourcing.

The biopharmaceutical outsourcing industry is estimated to reach $60 billion over the next five years. While early drug discovery outsourcing is growing at an annual rate of 15 percent, contract manufacturing is expected to grow at about 10-15 percent annually. Today, only a small percent of the biopharmaceutical contract manufacturing is done in Asian countries. However, Asia's share is expected to grow as pricing pressures in biopharmaceutical markets increase, intellectual property issues are effectively managed, and production quality continues to improve. (Source: BioProcess International, Jan 2007).

Biopharmaceutical contract research market in India was valued at about $100 million in 2005, and is expected to reach $500 million by 2010. On the other hand, biopharmaceutical contract manufacturing in India, valued at $150 million in 2005, is estimated to reach more than $1 billion by 2010. (Source: Dinesh Dua's presentation at Frost & Sullivan's Global Lifescience Summit, Goa 2006). Biopharma's focus on India for clinical research is increasing day by day. At least 20-30 clinical trials of US-based companies are currently going on; India being the most preferred destination for clinical trials today.

India has around 30 CROs providing one-stop solutions for the entire umbrella of clinical services whereas nearly 30 companies provide specialised services such as DM, ITES and BA/BE. In comparison, China has about 300 CROs of all sizes, and the number is growing. These companies form an integrated service chain offering a wide variety of services from the earliest stage of drug discovery and development through clinical studies, new drug applications and post-approval research.

Growth through M&A

While traversing the learning curve through alliances and partnerships with international pharma companies, Indian companies have also moved up a step in the value chain and are looking at the inorganic route to growth through acquisitions. Many top and mid-tier Indian companies have gone on a global shopping spree to build up critical mass in international markets. It must also be noted that mergers and acquisitions as a strategy is a means to an end and not an end in itself.

Some of the key reasons as to why companies go for acquisitions can be summed up as:

• Establish front-end presence
• Overcome entry barriers
• Tap newer geographies, therapeutic segments and customers
• Enhance intellectual property portfolio
• Build critical mass in marketing, manufacturing and research infrastructure

Given the increasing spate of mergers and acquisitions in the global pharmaceutical sector, valuations are at an all time peak. There is too much money chasing too few targets. Going forward, this trend is expected to slow down as valuations are cyclical in nature. The consolidation trend will however continue with Indian pharmaceutical companies playing a major role. With access to capital, higher staying power because of low costs, and above all managements willing to globalise, this trend will continue.