2006/08/29 11:20 Som Garimella, "Indian Pharmaceutical Value Chain: Opportunities and Challenges", SEM 2006, HUT

Services Engineering and Management Summer School, Helsinki University of Technology, August 28-September 2

This digest was created in real-time during the meeting, based on the speaker's presentation(s) and comments from the audience. The content should not be viewed as an official transcript of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should be directed to the originator. The digest has been made available for purposes of scholarship, posted on the Coevolving Innovations web site by David Ing.

S. Garimella, International Management Institute, New Delhi

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Was working on a project on alliances in India

• Not many studies in the Indian context
• Took up 3 sectors to improve the supply chain, one was pharma
• Realized certain important aspects of the Indian pharma value chain
• Quiet revolution industry, some related to busines process outsourcing or IT related industries
• India will be known for contract manufacturing, contract research

While trying to get information, little comes from pharma industry, little comes out

• Had to collect through anecdoctal, secondary sources
• Contract services relevant to the SEM 2006 audience in general

Agenda:

• Overview of Indian pharam industry
• Value chain and R&D
• Factors for success
• Opportunities nad challenges, particularly in contract manufacturing
• Impact on health care

In 1947, no pharma industry at independence, but now has one beginning 1970, meeting 95% of country's pharmaceutical needs

• 1.3% of world value, 8% of world production
• Highly fragmented, 23,000 licensed units, range of 100,000 drugs
  • Whatever is supplied, customers will buy
  • Substitutes coming up, working on older drugs
  • $50,000 investment would be large, low technology, not more than 5 to 10 people in an area
  • Work like small production, then supply to larger manufacturers
  • In south India, see this:  small manpower, low capital investment

Indian companies focus on bulk drugs (about 400 types) and formulations (mixes in combination)

• Bulk relates to volume, not profit
  • Few companies in formulation, more profit
  • Formulations by larger companies, have marketing
• Drug price control order, from 1970
  • At one time, drug prices were high, and people couldn't access drugs
  • To provide access to drugs, government brought in price controls to be available to common man
  • Government has a formula to calculate
  • A lot of drugs are under this order
  • Some drugs were under this order, but then brought the number of drugs so that MNCs are interested
  • Control of 74 or 75 drugs, rest are deregulated
  • In other countries, it's not the government that controls prices, but maybe health providers
• Indian Patents Act, 1970
  • Recognition of process patents
  • Has created a revolution in the industry
  • Indians went abroad, and then brought back and reverse engineer
  • In 1995, drug takes $500 million, now costs $800 million, and no Indian company could do this.
  • Controversial
  • Not equitable
  • Different process, and then put drug back into the same market, at the low cost
  • Amendment: Indian has signed GATT agreement in 1995, converted to WTO, new patent regime, where the product is patented and not the process, can't reverse engineer
  • Cost to make drug about 1/6
• Knowledge-intensive sector, lots of universities churn out chemistry graduates
  • R&D still low, 1.5%, compared to MNC 15% to 24%
  • Most Indian pharma companies dependent on someone else
• 20% to 25% cheaper to produce drugs in Europe, as compared to elsewhere
• Only 18% public funded, the rest by people themselves
• No insurance to support, so drugs came in handy
• 16% of expenditures is medicine

Indian Industry

• 1947, non-existent industry
• 1946-1970: Government created large public sector companies: Indian Drugs and Pharma Ltd., and antibiotechs company
• 1970-1979: Watershed, Indian Patents Act created a lot of companys that would ride on reverse engineering
  • Also DPCO to control prices
• 1979-1995: Reduction of drugs in DCPO from 247 to 63
• 2001, signed GATT
• Have to change by 2005, so companies have to change R&D
• 2002-2004, more reduction in DPCO, amendment of Patents Act

Key success factors:

• Look at R&D as an essential component of business, investment for long-term survival
• Good access to technical manpower, but need foreign experts, being done
  • Access to long-term funding, huge investment required
  • Indian companies still don't have access, mostly out of pocket funding, need to look to long-term funds
  • Need to access new technology platforms
• Manufacturing, have technical competence, but lag behind companies worldwide
  • Distribution could be improved, 50% of cost is raw materials
  • Need to contain the cost
  • Most companies acting more as job shops, no thought of management, single man show
• New to introduce new products
  • Most companies don't have a lot of patents in portfolio
• Refocus target markets
• Most don't have blockbuster drugs
• Need distribution efficiencies

Value chain:

• Discovery chemistry: lag behind
• Process R&D, good
• Manufacturing good for a few companies

R&D plays a critical role

• At least 30 claim R&D
• Must be correlation between R&D and profits
• Define as ...
  • New Molecular Entities (few over the past years)
  • New Drug Delivery Systems: Indian companies good at this
    • Can differentiate drugs through delivery
    • Can support MNCs
  • Improved Chemical Entities: same molecule, maybe isomers separated to make more effective
  • Research in Generic Drugs, off patent: Indian companies will look at them
• Indian companies can't invest like Pfizer: Prizer talks of $40M revenue, and total Indian revenue is $7M
• U.S.A. accounts for 44% of global research expenditures
• Research is shifting towards lifestyle, e.g. elderly
  • Higher margins
• Need to balance to serve other infections, as in India

Scope of pharma research

• Basic research
• Prototype design or development
• Pre-clinical development: most expensive stage, countries are insisting longer and more subjects
  • Doing trials in India are cheaper
  • Criticism that India is being used guinea pig
• FDA filing
• Then launch

Indian is nowhere on any of the above list

• Neglected to do research.

Trends in Global R&D

• Rising costs, declining productivity
  • Costs fall 8% to 10%, number of discoveries coming down, large companies are failing
  • Potential for contract services, where India could emerge
• Increase in numbers of alliances
  • R&D expensive, better to shift to low-income countries
  • India, China, Singapore
  • India has also picked up in the last 3 to 4 years
  • Matrix Laboratories
  • A lot of comparison to IT Industries, e.g. started in Y2K problem
• Universities are still going to investors
  • Companies try to poach in on Indian ex-pats at NIMH, but salary differentials are huge, where paid 5x or 6x more in India
  • Arguing patriotism, to come back and serve
  • Also trend, where people from U.S. coming back
  • Large number of research institutions, but output is disappointing
  • CISR was developed on British model
  • Government labs, competent researcher, good research, but basic research that has little to do with the Indian industrial scene
• Licensing: many large MNCs would like companies who can take over, cheaper
  • Outsourcing, puts more drug into pipeline
• Generics are becoming important
  • Payers are specifying generics

Global scenario, driving outsourcing

• Significant price controls exist in developed countries
• High costs and long gestation period forces MNCs to sell drugs at a premium
• Large companies need to bring down R&D expenditures
  • Favourite targets: India, China, Singapore

Three types of outsourcing organizations in India

• Contract research organization: pre-clinical and clinical trials
  • Create molecule
• Contract manufacturing organization: formula given, put production at fraction at a cost
  • Need to see if a service machine works in this way
  • Similar to call centre work
• Contract sales organization: marketing on behave
  • Nicolas Perlman: know distribution network better

Benefits of oursourceing that companies are looking from on CxOs

• Can screen and focus efforts on most promising projects
• Can be first to market in different countries
• Study protocols, number of patients, period of time

Typical Indian outsourcing scenario

• Large generic houses from U.S. outsourcing
• Some using Indian subsidiary, e.g. Baxter
• Large Indian companies setting a trend: Raxbaxy-Eli Lilly
• India has over 500,000 doctors, hundreds of medicial colleges, abundance of diseases
• Low development costs
• Easy raw materials
• Follow Good Clinical Procedures, as prescribed by USFDA
• Pharma research more IT oriented, India has strong IT base
• As well as U.S., EU potential

Opportunities for India

Challenges for Indian companies:

• CEOs survey, not in favour: close interactions required, not as simple as BPO, travel and communcations and time differences are a challenge
• Asking for proven capability
• Major issue: weak in IP protection
  • Although subscribe to the new regime, hard to enforce
• e.g. software is something that you shouldn't pay for
• Companies resistant to share
• Quality and regulatory issues a risk
• Cost effectiveness has to be proven
  • In IT, took a long time to convince people
  • Not just cheap manpower, but whole cost, related to productivity

[Questions]

Style?

• Expats, professional, like startups.
• Even largest company is more family oriented
• Lots of MBAs, but decisions still by family method

Geographical distances. Clusters?

• Like IT clusters, Bangalore, or Hyerabad
• State on the west coast, more into manufacturing
• Mumbai, contract research

Clusters because of pools of labour, or collaboration between companies?:

• Little collaboration
• Clusters has been promoted by government, associations are formed, but companies are very closed
• Companies can't believe trust other companies
• Another school of thought:  you think it's a secret, but everyone seems to know
• Some reliance on local universities, e.g. Hyerabad is becoming a centre for life sciences
• Skilled labour, some fear of poaching
• Expertise across companies can't be transferred, because companies are working at different segments, skills not transferrable

Similar to Japanese pharma industry, fragmented, want to go international. Major relationship with clients? In Japan, symbiotics between medical community and pharma, consumption is high even for mediocre drugs and moderate production systems. Role of pharma industry in improving public health?

• Most companies are there to make profits.
• Top Indian companies focus on drugs that make profits, export potential.
• Should be a focus on drugs that solve infections, but who is going to fund that? Government says can't fund this.
• Could look at private-public partnership.

Some cross-subsidization, e.g. charge rich patients, distribute to poor patients

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