The New Future of the Indian Pharmaceutical Industry
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Until yesterday, Ranbaxy was India’s No. 1 pharmaceutical company, with grand visions of becoming a global player. Now, a relatively unknown Japanese company, Daiichi Sankyo, has bought out the founders’ stake (35%) for $4.6 billion, recasting the Indian pharmaceutical industry and anticipating its future. The founders have been turned into billionaires, the present CEO (from the founders’ family) retains his position and at a 30% premium, experts are saying it is a good deal. The markets are not so enthused. On the other hand, stocks of other major players shot up by over 10% in the expectation that more takeovers are around the corner.
For decades, the Indian pharmaceutical industry was happily producing generic drugs and combination medicines of questionable efficacy and raking in huge profits. The phasing out of process patents in 2005 changed the landscape. The pharmaceutical companies were forced to look at R&D, something they had long neglected. R&D in pharmaceuticals is particularly difficult for two reasons – development costs that can run up to $300 million and time-to-market that can be as long as a decade. The risks involved are too high for anyone’s comfort. If a blockbuster drug is developed, the organization can make billions. If nothing is developed or what is developed is not approved by the regulator, the organization may sink. Faced with this situation, the big players started looking at acquisitions of companies that had a decent track record in R&D as the only way out of a possible crisis.
What was probably overlooked in the process was that not many path-breaking drugs have come out of small laboratories. Proprietary drug development is a big and serious business. It requires concepts like concurrent engineering that require major attitudinal changes (internal competition) and outlays that are multiples of normal R&D investments. As a result, nothing much of significance has come out of the acquisitions of small companies by Indian pharmaceutical players.
The other major problem that the industry has to contend with is fragmentation. A focus on generics has meant a spawning of entities – most of them small – that together churn out some 20,000 drugs – both single and combination. Compare this with the 200 drugs that the WHO has recommended as being vital for a nation’s well-being and you get an idea of the perils of needless proliferation. It is quite remarkable that a country like Bangladesh has been able to follow the WHO guidelines.
This brings us to the question – what is in store for the Indian pharmaceutical industry?
- We can expect a significant level of consolidation – a major portion of small players are likely to be wiped out.
- Many of the existing players are family owned businesses. No one should be surprised if many more deals on the lines of the Ranbaxy- Daiichi deal come through. It is the classic “bird in the hand” principle – if the founders can earn a few billions without too much effort, why should they spend hundreds of millions and ten years or more in trying to develop new drugs?
- The present scenario presents an excellent opportunity for multinational enterprises to establish manufacturing bases in India through the take-over route. The availability of talented scientists at a relatively low cost makes India an ideal location for manufacturing quality drugs. A word of caution is necessary though; such enterprises may have to follow a dual pricing policy, one for the local market and another for the global market.
- The Indian government would do well to take another look at its lop-sided policies. Where is the incentive for companies to invest in new drugs? The corporations engaged in R&D need tax breaks and innovative incentives.
Not long ago, in a scathing attack in Forbes magazine, Sramana Mitra termed India the back office for the global IT industry. Is the pharmaceutical industry the next in line for this rather dubious distinction? Or is this the revised version of a flat world: Indian companies eyeing the world for acquisitions, while global companies take over Indian companies. Time alone can provide an answer.
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B V Krishnamurthy is the Director and Executive Vice-President of Alliance Business Academy in Bangalore, India, where he is also the ASI Distinguished Professor of Strategy and International Business. An engineer with post-graduate degrees in industrial management, systems engineering and business administration, and a doctoral degree in strategy, he has worked in corporations in Europe and Asia for 23 years (his last stint as CEO of a consortium) before entering academia in 1998. BVK also teaches in business schools in the USA, France, Switzerland, The Netherlands and Russia.
Comments
The pharma industry is notorious for coming up with formulations that we neither need nor want. Since drug discovery is a costly affair, companies will do anything to generate profits. Indian industry has been relatively insulated due to various restrictions, price controls and so on. With deals like this, we may be opening the floodgates for all kinds of medicines to be pushed down the throats of gullible people. Age reducing "magic" medicines, performance enhancers and concoctions of every imaginable power may hit the markets. It is indeed a sad day for Indian industry. Of course globalization has many good features. But for promoters to sell off their stake just for the sake of money does not speak well of their attitude or ethic.
- Posted by Hiren Shah
June 13, 2008 8:56 AM
Just as lands in India are fragmented, the pharmaceutical industry is also fragmented. Most of these firms , as the author has pointed out are small and churn out as much as 20,000 drugs while WHO prescribes only 200 as vital drugs.
Consolidation has become the necessity of our times in many areas of operation including the Indian Pharmaceutical industry.In the era of globalisation, the MNCs can make efforts to take over route. The author is absolutely right in suggesting a dual price policy.Yes, incentives are vital for R&D.
S.Prabakaran,Princeton
- Posted by S.Prabakaran
June 13, 2008 11:58 AM
This is the time for Govt. of India to review the policy related to not only drugs but also pharmaceutical industry. Hatch Waxman act 1984, was the real turning point for pharmaceutical industries in India, which provided huge turnover with low investments. Indian pharma industries have long rosy successive stories because of ANDA. Today, there is a time to remodel the companies strategies as per global environment. If Indian pharma companies are not able prepare for their R&D investment, it will be a great difficulty to compete with global players. India is having more than 20000 small pharmaceutical forms, which are producing more than 80, 000 formulations for Indian market as well as rest of the world. It will be a great difficulty for people in developing countries and third world nations to purchase the medicines from global profit oriented pharma companies. The solutions are 1. Indian govt. should change the policies and taxation as for as concerning pharma industries 2. Pharma companies should change their mindset and focus towards R&D. 3. US policy makers should revise their ANDA policies. 4. Indian companies should make technical collaboration that will allow better R&D opportunities, which will provide better drugs at affordable price.
- Posted by Rajkumar M.
June 21, 2008 12:34 PM
OPEN TO THE WORLD IS GOOD FOR INDIA
Thank you again Professor B V Krishnamurthy for your insights into the state of this important intellectual-property focused industry. Your last point ("revised version of a flat world") sends a great message to the rest of the world: that India is open for acquisitions and other business combinations by/with companies based in other countries. While India is witnessing an unprecedented birth and growth of indigenous companies an open business environment will encourage more foreign companies to operate and/or seek relationships (e.g., acquisitions, alliances etc.) in India. This will lead to more competition which is good for most businesses.
- Posted by Shankar Saikia
July 5, 2008 7:29 AM
Thanks to prof.B.V.Krishnamurthy for his insights on the future of Indian pharma industry.
I'm working for a pharmaceutical consulting organization based in India.Till now we are not successful in breaking the mindset of the Indian pharma companies to move towards strategic thinking, i.e., to move towards a strategic marketing model from the traditional selling model. May be this consolidation of companies might open up new avenues.
The message i want to convey is that, I had served as a medical rep for 8 long years in the Indian pharma industry. There are lot of loop holes, no proper monitoring of sales force, lack of training etc,i'm really at pains to understand what would be the right prescription to transform the indian pharma industry more healthier?
I would love to engage in frequent discussions with this elite group!
- Posted by prabhakar
July 15, 2008 2:53 AM