2010 Business Prognosis

It may not be necessary to have a generic-like strategy for the developed markets of US and Western Europe

Shiraz Bugwadia and Prashant Jain, Life Sciences and Healthcare Team, o3 Capital Global Advisor, speak about the 'Things to come' in the Indian pharma industry against the backdrop of the global recession

26th Jan 2009: 'Pfizer to buy Wyeth for $68 billion in cash and stock deal'.
28th Sep 2009: 'Lupin acquires rights for Antara $38.6 million, a cholesterol drug'.
17th Dec 2009: 'Hospira acquires the injectables business of Orchid Chemicals for $400 million'.

The above news articles are an evidence of what we should expect in the coming years. Global pharma will see consolidation on account of growing exposure to patent expiration and slow replacement, hence requiring presence in the generics market and having a generic portfolio of products.

It is estimated that close to $80 billion worth of drugs are slated to go the generic way by 2012. GSK and Pfizer alone are set to face seven patent expirations each in 2010. An analysis of some of the largest innovator drug companies shows over a fourth of the products going off-patent in the near term. Yet, their R&D pipeline has been growing weak for the past several years. Added to this is the fact that most of the developed economies of the world are focussing on curtailing their healthcare expenditures.

Against this backdrop, three key themes have emerged over the past few years that are shaping the Indian pharmaceutical landscape.

1. Cost control measures being implemented by developed economies

2. Growing importance of emerging markets

3. Growing significance of India's domestic market

Cost Controls

Germany and UK have the highest penetration of generic drugs and also have one of the highest spends on healthcare as percentage of GDP. Germany surprised the pharma market in 2007 when it changed the way it procured drugs for its healthcare system. Keen to curb rising healthcare costs, the government allowed public health insurers to choose cheaper drugs for patients through a system of tenders, replacing a structure where doctors or pharmacists made the choice of the drug brand. This had a significant impact on the overall EU market as countries like the Netherlands, Austria and Scandinavian countries follow the German prices before setting their own prices. Romania has been focussing on cutting its healthcare expenses and it is estimated that the country will cut its healthcare spending by 50 basis points (bp) of GDP in 2010.

Japan, the third largest pharma market, is perhaps the only large market which has yet remaining under penetrated by generic drugs. It currently has only 19 percent of all prescriptions for generic drugs, as against 65-70 percent in the US. Japan's government has been encouraging the use of generic drugs for the past decade, but the penetration has been slow. Educating the doctors and the pharmacists, and reformation of the reimbursement system are the key to increasing the penetration. In the past, the Japanese government has resorted to patient marketing, which has had limited success.

The US, which is the largest pharma market in the world, has been for the past several years attempting to clamp down on its spiralling healthcare expense. The new healthcare bill under discussion, proposes to discount prices of certain drugs by 50 percent from their current levels and provide coverage for people currently not eligible for coverage. Though, the new bill is expected to act as a disincentive to research and innovation, it is expected to provide a big impetus to generic drug manufacturers, globally.

Exhibit 1 showcases the opportunity world markets provide to generic drug companies. Barring Japan, most large markets already have a high acceptance of generic drugs. Yet there are several markets that provide huge opportunities. It is no wonder then, that innovator drug companies are increasing their presence in these economies.

Growing importance of emerging markets

With increasing exposure to off-patent drugs and a depleted R&D pipeline, global pharma companies to aggressively forming alliances and refocussing their efforts in the emerging markets, which have largely been generic product markets. Countries like India, China, Russia, Turkey, Mexico and Brazil offer huge opportunities to these companies. These emerging countries together form over 70 percent of the overall market.

India, with its twin advantages of having a large domestic market and having the highest number of US FDA approved plants outside of the US which offer a low cost manufacturing base, has seen the maximum number of formation of strategic alliances and acquisitions. Realizing the demand, most Indian pharma companies have huge CapEx planned aimed at expanding their manufacturing capacities.

Growing significance of India's domestic market

The Indian pharma market is the 3rd largest in terms of volume and thirteenth largest in terms of value, making it one of the most important markets in the world and perhaps the most important in the Emerging Markets category. The domestic market has been growing at 10-12 percent for the last few years and is expected to continue the trend in the near future.

Indian pharma industry has been a challenging market for the global pharma companies to get a toehold in. First with the patent regime which was heavily skewed against the innovator companies, and then the introduction of price controls in an already competitive market. However, with the change in the patent laws in 2005, several global pharma companies have introduced their patented drugs in the Indian market, and introduced them at prices lower than what they are priced globally. This strategy has paid huge dividends.

At the same time, Indian companies have realized that to compete with the global pharma companies, even on home turf, will involve new strategies and evolving into an innovator drug company.

Based on this assumption, the Indian companies have been increasing their R&D spend over the last few years (exhibit 4) and building a product pipeline, which they hope would give them a competitive advantage over their global counterparts. They have also entered into alliances and formed partnerships with their global counterparts on the research and development front, and as a step to gain market share, have in-licensed products for the Indian geography.

Till now…and what's next?

The desperate need for global pharma companies to form alliance and partnerships with generic companies would see more and more Indian companies being targeted for their portfolio of generic drugs and their capability to manufacture drugs at low costs, which has implications on their global operations.

The cost containment measures of the developed economies have also provided an impetus to the generic drug companies. Their products are suddenly finding favour with the very governments that were till sometime back blocking their introductions and innovator drug companies are going out of their way to attract these generic companies into their fold.

Indian drug companies on their part have been nimble footed in forming R&D relationships, supply agreements and product acquisitions, which helps their global ambitions, without hurting their India business. Big ticket acquisitions, a strategy followed in the past by most of the big Indian pharma companies to gain market share in the developed markets and a product pipeline, have been running out of favour with the meltdown in the markets. What they have realised is that it may not be necessary to have a generic-like strategy for the developed markets of US and Western Europe, but a more specialized focus on products that are difficult to manufacture or have limited generic competition, even though the target market may be small.