The leading global pharmaceutical firms are facing some challenging times as a significant number of patents for branded drugs are set to expire over the next five years. From 2011-2015, the total value (as measured by annual sales) of patent expirations is expected to be around $100 billion, a significant increase from $73 billion in patent expirations over the previous five years. Indian pharmaceutical companies can capitalise on this opportunity due to their first mover advantage, strong process engineering skills and access to low-cost talent.
However, global pharmaceutical companies are increasingly focusing their attention on the generics market. So what will it take for Indian pharma companies to be successful in a competitive marketplace?
First, let us briefly discuss the recent evolution of the Indian pharma industry and the factors which have contributed to the success of Indian companies. Prior to 2005, Indian pharma companies were permitted to sell generic versions of patented drugs in the domestic market, as long as manufacturing processes used were different from those used for patented drugs. The requirement of process re-engineering allowed the Indian drug companies to develop expertise in process innovation.
In 2005, with the advent of the WTO patent regime, Indian pharma companies were barred from copying patented drugs via process re-engineering. However, the same WTO agreement also allowed Indian companies to sell generic versions of off-patent drugs in the developed markets. While the quality and regulatory demands from the developed markets were more stringent than the domestic markets, the best Indian pharma companies were able to adapt to the markets needs and have established themselves as leaders in the global generics business. Today, four out of the top 20 generic drug companies in the world are from India.
Indian firms have been globally competitive in the generics business due to the following reasons:
The First mover advantage: Indian companies have invested significant resources toward the development of a robust pipeline of generic drugs. Over the last three years, Indian companies have been responsible for one-third of the Abbreviated New Drug Application (ANDA) filings (new drug application made to the US FDA for launch of generic formulations).
Low-cost manufacturing base: The cost of setting up a US FDA-approved plant in India is up to 50 per cent lower, compared to developed markets. As a result, outside the USA, India now has the highest number of US FDA-approved plants. Further, production costs in India are 40-70 per cent lower because of local equipment sourcing, tax incentives and general focus on process innovation.
Deep and low-cost talent pool: Labour costs in India are 60-70 per cent lower due to the availability of a large pool of highly qualified personnel with strong chemistry skills. India produces about 100 thousand chemists and chemical engineers every year.
While these factors have contributed to the recent success of Indian firms, these advantages may not be sufficient as global innovator firms focus their attention on the generics business. Some of the global pharma companies have established partnerships with emerging markets-based manufacturers, in order to improve their cost competitiveness. In such an environment, the future winners in the generics sector are likely to have the following attributes:
Focus on complex and niche segments: Long-term growth can be generated by focusing in specialised therapeutic areas and/or more complex molecules. Also, generic firms with an advanced drug development pipeline may end up being defensive acquisition targets, as innovator companies look to protect their patented drugs.
Strong competitive positioning: New drug delivery systems can be used to compete with drugs whose formulation patents have not expired. These segments tend to be less competitive, but development of such applications requires significant capabilities in both research and marketing. Another leading indicator of strong competitive positioning and future profitability for a company can be its ANDA Para-IV pipeline, especially for companies who enjoy initial marketing exclusivity (a Para-IV filing involves challenging existing patents).
Backward integration: Backward-integrated generic players with captive Active Pharmaceutical Ingredient (API) manufacturing capabilities are likely to enjoy higher margins. Backward integration can enable generic players to maintain quality standards and improve cost competiveness.
In addition to pharmaceutical manufacturers, other players in the Indian pharma eco-system can benefit from the upcoming patent cliff. For instance, contract research and manufacturing services (CRAMS) are poised to generate strong business from global pharma firms due to cost pressures resulting from declining R&D productivity, rising drug development costs and fewer new drug discoveries. Due to these factors, these firms are rapidly increasing spending on outsourcing non-core activities to emerging markets. While API manufacturing is currently the most dominant form of outsourcing service in India, demand for clinical research outsourcing (CROs) has grown by more than 60 per cent CAGR between 2007 and 2010 to reach the size of $1.5 billion. This strong growth can be attributed to the diverse genetic pool, strong technical expertise and increasing compliance with international standards, which augment the low-cost proposition of Indian players.
In summary, the upcoming patent cliff provides strong growth opportunities for the Indian pharmaceutical companies. But Indian firms need to develop a stronger focus on value-added and differentiated products in order to capitalise on this opportunity.