Spin-offs spell good news for research firms

Updated: Dec 31 2007, 06:00am hrs
The Indian pharmaceutical industry has weathered many a crosscurrent on the basis of strong fundamentals. Today, investors once lured to other sectors, are returning to the pharma industry on the basis of its competitive strengths. Estimated at $6 billion, the Indian pharmaceutical industry is gradually climbing into global prominence. In world ranking, Indian pharmaceutical market is 4th in terms of volume with 1% of global sales. Exports contribute over 40% of industry revenues to over 100 countries. By value, the industry produces approximately 24% of the worlds generic drugs.

Recent times, however, have been a mixed bag for the industry due to fiscal uncertainties. The rupee dollar disparity brought the pharma exports down by as much as 20% over last year. There is intense competitive and pricing pressure in US and EU and margins in the generics business has come down, product development is becoming increasingly complex due to patent fencing and aggressive litigation and there is rapid commoditisation of once highly profitable markets.

Despite this, the pharma sector holds out a good promise in the long run. According to McKinsey, the Indian pharmaceutical market is set to grow from $6.3 billion in 2005 to $20 billion by 2015, with a growth rate of 12.3%. In addition, favourable undercurrents in the market such as the new patent regime, increasing focus on research and development are expected to bolster the progress of Indian drug industry. With $27 billion worth of drugs going off patent in 2007 and signs of pro-generic reforms in EU and Japan have opened up a huge opportunity for Indian drug makers. Indian companies are increasingly using strategic ventures, local cost and manufacturing advantages, availability of skilled manpower and product expertise and greater knowledge assimilation to overcome bottlenecks on the growth path. Indian companies also offer economical and effective advantages in research and development, to the extent of 30-50%.

Today, the Indian pharma sector employs about 3 million people directly and indirectly and the availability of technically qualified manpower and presence of strong capabilities across various skill sets has led to India being an attractive destination for pharmaceutical manufacturing and research. India has approximately 100 US FDA-approved plants, the largest outside the US.

Little wonder they account for nearly 25% of total generic drug applications made to the USFDA. Indian companies have also been able to build their US generic pipeline with Indian filings of around 408 products.

The Indian pharmaceutical market reportedly comprises approximately 24,000 companies in a fragmented landscape. Revenue share of the domestic market in 2006 reached $6.2 billion. With compounded annual growth rate (CAGR) of 13.5%, Indias pharmaceutical sector is projected to reach $10.3 billion in revenues by 2010. The growth drivers include a burgeoning population, a rapidly expanding consumer base, strong preference for improved healthcare infrastructure and the profound reverse-engineering skills possessed by Indian companies.

To tap these opportunities, Indian players have to participate in the current consolidation wave to remain globally relevant and continue partnering across value chain to create medium to long-term value. The last few years have seen India pharma companies aggressively pursue overseas acquisitions to gain entry into newer markets and access to better technology. The results are distinctly visible in the form of market indicators.

At the same time, companies are discovering a more viable way to leverage Indias economical and effective advantages in R&D. With the global generics business as a whole undergoing changes, investing heavily in research with no guarantees on the ROI is weighing heavily on the top line. So companies are hiving off their drug research operations into separate money spinning units, reducing the pressure on other group businesses and increasing valuation.

The spin-off spells good news for new research entities. Today, the industry size is around $150 billion and $20 billion is collectively invested by firms in R&D. Yet, analysts predict that if the top ten pharma firms hive-off their entire R&D divisions, the collective market capitalistion will touch $120 billion in less than a decade.

If generics is Indias continuing success story, the Indian contract research and manufacturing services (CRAMs) market is the new kid on the block. CRAMS is expected to acquire a global market share of 15% by 2009-10. It is also a driving force in attracting venture capital and investors back to the pharma field. The custom pharmaceuticals services (CPS) segment continues to show remarkable progress. In February 2007, revenues catapulted to $36 million from $2 million in Q3 FY06. The clinical trials market is also looking up with a growth of about 65% in 2006.

Against the backdrop of these changing global trends, Dr Reddys is taking a three-pronged approach of diversifying our presence, leading innovation and execution excellence. As a part of our growth strategy, we will consolidate our presence in the main markets of US, Germany, Russia and India. We are also keen on tapping the emerging markets like the CIS region, Middle East, Eastern Europe and Latin America where there is low penetration, better margins and predictable sales translating into high growth rates. The Latin American presence had been challenging for us, but after the acquisition of Roches facility in Mexico, we are pushing our efforts in this region. We are looking for small buy-outs in Mexico and have started looking at Brazil. Within east European countries, we are scaling up presence with our own products in Romania and are pursuing partnerships to enter other east European countries such as Hungary and Czechoslovakia.

We are also looking to break into the highly competitive markets of Japan and Western Europe. Many of these markets are seeing favourable regulatory changes. There markets offer better margins and with growing economies, the business in these regions is set to grow as citizens are likely to spend more on healthcare and wellness.

In CPS, we will pursue inorganic growth through acquisitions while in the organic growth we will have product pipelines for big pharmaceutical companies. Our innovation business is built on three broad platforms: speciality: where the focus in on dermatology and oncology; biologics, where we already have two products in the market, Grafeel and Reditux (the worlds first biosimilar monoclonal antibody) and NCE business which will be the long term value creator. We are betting big on biologics and already have eight products in the pipeline.

Execution excellence will remain central to Dr Reddys future growth plans. Innovation, constant upgradation of knowledge and skill capital and lean manufacturing would be extended to all our areas of operation ultimately resulting in quantum benefits and strategic advantage in this very competitive pharmaceutical space.

Over the years, Indian pharma has crossed many a landmark and has emerged as a notable player in the global stage. The key driving factors have been affordability and accessibility of medicines to the people, and innovation for long-term sustainable growth. I am confident that the future will be extremely promising with many more milestones to come in the journey of the Indian pharmaceutical industry.

The writer is MD and COO, Dr Reddys Laboratories