Interview

'Focus on the 'clever' parts of outsourcing'

Peter Berweger, European Chair of KPMG's Pharma & Chemicals Practice spoke to Viveka Roychowdhury on the sidelines of the recent CII Pharma Summit. Excerpts from the interview …

KPMG released the report, 'India Pharma Inc. - A Continuing Success Story" at the CII Pharma Summit. What do you think are going to be the key factors to ensure India's continuing success story?

I mainly see three dimensions at play. Continuing what India is doing, being a global player in generics. India needs to gain better access to the global markets of generics that it can grow in the generics segment.

The second dimension is can India play in the branded pharmaceuticals space? Can you develop home brands and build a value add out of an Indian pharma corporation? Can you branch out of being a generic player into new molecule research? Whether that is a biological or chemical entity, I don't think that makes too much difference if can you bring the value add. Own R&D or in-licensing may be possible ways.

And the third is the outsourcing angle, the CRAMS market. And its not just manufacturing and clinical development. There are a whole lot of functions like HR, finances, basically back office work, that are very expensive to do in developed countries, which can be outsourced to India. These services can really support global players.

What do you think could turn this success story sour?

I guess on all those three dimensions, regulations could be one factor. Obviously the global regulations in all those regulated markets like the US, Europe and Japan make it demanding to sell in the generics space. If you look at the branded space, FDA approvals for new drugs are becoming tougher. Big Pharma is also facing the same challenge. So also in the generics space, all those companies who wish to market to the US, Europe and Japan need to meet the regulations of all those countries so Indian Pharma has to cope with these evolving global regulations, learn the language of these laws.

The other aspect is India's own evolving regulations. Obviously price controls are not particularly helpful. If India wants to get first class drugs and medical care for a larger population, one also needs to look at the matter of awarding patents. Global Pharma is apprehensive of certain issues, like the latest case of Novartis' Glivec. Obviously Novartis is disappointed with the decision. The consequence of that decision is that their recent investments have gone to China and Singapore, not India. India and China are both emerging markets and obviously have some good level of competition between them. So in order to be successful in that competition, that clearly wasn't very helpful.

In the outsourcing and CRAMS space, quality and safety concerns are a major consideration. If you have one major serious failure, on a global scale and that could ruin the reputation. Obviously the Big Pharma companies are monitoring this aspect very closely. There is a certain non-tolerance on this issue, quality is a big issue.

Where does India fit into global pharma gameplan, with its small market cap as compared to the Big Pharma? In terms of India as a market as well as what can India do for the global industry?

In terms of India as a market, right now the big opportunity in the domestic market is generic products. If in the future the local market gets more open to branded products, which obviously are much more highly valued, then the domestic market will grow exponentially. Consequently, there is a huge potential out there. That is also the reason why all the international Big Pharma companies want to be in India, looking at the size of the Indian market, the increasing purchasing power of the population, the rise in living standards, etc.

Coming to India's role in the global industry, I really feel that the generics space is a big opportunity with all the big drugs coming off patent. So if you can position yourself as a generics player and you also have the reputation globally, then you can become a global generics player.

Big Pharma has historically not focused very much on controlling costs in all aspects of the business given that the top line had been growing strongly, but that is changing. Everybody I have talked to has been saying the same thing. Companies are emerging into cost efficiency program. There is a huge transformation happening. And all those operations are shifting to countries like India and China. For India this is a huge opportunity to do the low value and some to the higher value activities for the Big Pharma players.

I think India particularly can be a good provider of these services. You need good education, good language, you need scale. The younger generation in India is highly educated and its absolutely up-to-date. That's absolutely fascinating. If you look at it from a European-US perspective, people look at India and say, 'There's a place out there where everybody's educated and wants to work!' This has actually only happened in the past ten years due to globalization.

For me the big difference between India and China, besides that fact that the Indian market size is smaller, is the infrastructure. In China, all that the government has to say is that you have to build a motorway here, and its built in a couple of months. But this will take more time in India. So China is already way ahead in infrastructure.

So I don't think India should try to copy what China is doing on the infrastructure scene. China is going to be the manufacturing hub of the world, and I don't think anyone is going to beat them. You may be a very close competitor, but you will not be able to overtake them. India's business model should be different. Rather than spending that money on infrastructure, (of course quite a lot of basic improvement needs to happen regardless), India should concentrate on putting it in education and building a powerhouse for services. That would be the logical thing to do, to focus on the 'clever' parts of outsourcing. That's where the potential is, not just doing simple manufacturing, but adding value. In relation to the pharma industry, this would be activities like drug research and development, etc. You take clever people, pay them a certain price and get the best service.

Due to price erosions in the US generic space, many Indian pharma companies have chosen to focus on getting a foothold in EU countries. How successful is this strategy and going forward, what could be the threats to this strategy?

I don't think you can neglect the US market. Of course it is clever to play in Europe, but the US will remain the largest market, also when looking the number of branded products coming off patent soon. If India is considering itself the lowest cost manufacturing space for generics, then who else would be in a better position to compete in the highly competitive US market!

The promise of biologics: do you think biologics will replace or complement pharma / small molecule drugs?

I wouldn't say replace, but the biologicals have been very successful over the past five to ten years. Also, if you look at recent FDA approvals, you see more compounds from Biotech than from traditional chemically derived products. You also see the boundaries disappearing, many Big Pharma companies are now also Biotech companies. Look at Roche for example, with all those products from Genentech. Or AstraZeneca with the recent MedImmune deal.

The pharma industry is seen as a 'risky investment' due to stagnating or choked product pipelines, changes in the competitive environment/ regulatory environment, product launch delays and the retention of key talent. How does a company present this risk to potential investors?

Going by the examples we have seen in the recent past, I think it is all about value and managing the risks. So in simple terms it is what drives the value of the product. So if you have an early stage product, you need to understand the science behind the product, the commercial potential of the product developed. Then you need to look at all the other variables like the management team, the financials of the company, the tax structure of the country where it is based, the market structure. It may be a fantastic idea but if it is structured wrongly, it may fail to take off.

What will be the key trends and challenges in global pharma in 2008?

We will mainly see transformation of business models as discussed above: cost reductions and efficiency programs and at the same time improving pipelines through in-licensing and M&A. Further, corporate governance and citizenship will become more important, e.g. access for poor people to good medicines.

viveka.r@expressindia.com