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Big Pharma’s Eastern Sunset

How are Indian pharmaceutical firms threatening to erode Big Pharma’s dominance?

November 26, 2007

How are Indian pharmaceutical firms threatening to erode Big Pharma's dominance?

Big Pharma firms historically generated high returns by developing and marketing drugs protected by patents — particularly blockbuster drugs, defined as ones that generate more than $1 billion in annual revenues.

In recent years, however, Big Pharma has come under a great deal of pressure. Accenture calculates that the overall market value of the pharmaceutical sector — mostly accounted for by Big Pharma — dropped from more than $2 trillion in 2000 to less than $1.5 trillion by 2005. Big Pharma’s problems are various and include declining R&D productivity and general bloat.

But the real challenge may come from generic drugs. They must meet the same quality standards as branded drugs, but are typically sold — after a six-month period of exclusivity for the first generic in the United States — at prices that are 20-80% lower than their branded counterparts.

Generic drugs account for between 10-15% of the pharmaceutical market by value and significantly more by volume. Moreover, they are thought likely to attack another 30% of the current market in the United States alone over the next five years, as key drugs go off patent.

There are many generic-drug manufacturers worldwide — about 150 significant ones by one count. The largest, Teva of Israel, had $5.3 billion in sales in 2005.

Teva owes its existence to the Arab boycott of companies doing business with Israel. In response, Israel let local companies copy drugs patented overseas if their owners didn’t market them locally — which is how Teva built up its process expertise.

The larger Indian manufacturers have developed low-cost manufacturing capabilities that have let them build up significant position in generic drugs.

One indication is that Indian companies account for 25% of the Abbreviated New Drug Applications (ANDAs) filed with the U.S. Food and Drug Administration (FDA) to launch generic drugs.

Some Indian firms continue to focus on imitating drugs coming off patent or drugs that are still under patent in some places but can be marketed in other, unregulated markets.

Other Indian firms have started collaborating with Western firms by either licensing the latter’s products — usually with a view to manufacturing and marketing them in India — or manufacturing active pharmaceutical ingredient intermediates that are then marketed by Western firms outside India.

Yet other Indian pharmaceutical firms — such as its largest, Ranbaxy — have come to focus on innovating or, more broadly, pioneering. Like most other Indian firms, Ranbaxy built up overseas sales — now 80% of its total — with generic exports. But in recent years, it has pushed the envelope in a number of ways.

To benefit from a statutory six-month period of exclusivity in the United States, Ranbaxy has been particularly aggressive in its attempts to be the first to manufacture generic versions of drugs going off patent.

This approach has entailed extensive litigation, sometimes unsuccessful (such as its challenge to Pfizer’s patent on the world’s top-selling drug, the anti-cholesterol drug Lipitor), but other times successful (such as the case involving the anti-cholesterol drug simavastatin).

Another, even more important innovative approach employed by Ranbaxy — and other larger Indian firms — has been to invest in developing entirely new drugs. In total, Indian firms are estimated to have as many as three dozen “new chemical entities” at relatively advanced stages of development.

But the cost (including failures) of discovering and developing a new drug is estimated, in the West, to exceed $1 billion — more than the annual turnover of all Indian pharmaceutical companies but Ranbaxy.

Thus, most Indian firms that are attempting to develop new drugs — for example, the third-largest firm, Dr. Reddy’s — have been explicit about their intent to sell licenses for promising drug candidates as a way of defraying the costs and risks of clinical trials and launch.

In addition they engage in a variety of related activities other than drugs manufacturing:

  • Contract R&D: Instead of simply engaging in contract manufacturing, a number of Indian firms are also undertaking contract R&D for Western manufacturers. Such an approach focuses on the largest arbitrage differentials in the sector. Pfizer estimates that Indian chemists make about $5 an hour, versus more than $50 an hour for U.S. scientists. Thus, in early 2007, Nicholas Piramal and Eli Lilly signed an agreement under which the former will be responsible for the global design and execution of pre-clinical and early-stage clinical work for some of the latter’s new drugs.
  • Clinical trials: A new medicine must go through clinical trials — the final and most expensive stage of trials — on a carefully selected sample of patients. These trials have also attracted great attention — from drug-industry arbitrageurs. Forty percent of all clinical trials are now conducted in poor countries. India attracts particular attention because of a large supply of patients and of English-speaking doctors.
  • IT-enabled services: India has also been successful as a destination for IT-enabled services, accounting for nearly half of total off-shoring activity in 2005. As a result, the pharmaceutical sector has shown great interest in exploiting its potential to contain the surging costs of data management and informatics support during the drug development process in areas such as data entry, database management and trial study design, customer support services and data analytics.

The responses from Big Pharma in the West have been varied. Novartis, the fifth-largest pharmaceutical company in the world, is one example.

Novartis bought out Hexal of Germany for $8.3 billion in 2005 to cement its position as one of the two largest generic-drug manufacturers in the world, and tried to bundle generic and branded medicines to offer health-care providers “one-stop shopping.”

As far as India is concerned, Novartis participates in the market there, as the fifth-largest foreign player.

It also undertakes clinical trials and software development in India, and in early 2006 opened a global R&D center for over-the-counter medicines near Mumbai. But Novartis’s big resource commitment has been to China, which a number of Big Pharma companies view as having even more potential than India.

In late 2006, it announced an investment of $100 million in an R&D facility in Shanghai that would initially focus on cancers caused by infections — a significant proportion of Chinese cancer cases.

Novartis has also been active on the legal front. In January 2007, it challenged an Indian court’s decision not to grant it a patent-modified form of its leukemia drug, Glivec — prompting an official of Médecins Sans Frontières to comment, “Novartis is trying to shut down the pharmacy of the developing world.

After it lost in court, Novartis CEO Daniel Vasella said, “This [ruling] is not an invitation to invest in Indian research and development, which we would have done. We will invest more in countries where we have protection.

“It’s not a punishment. It’s just a question of the culture for investment. Do you buy a house if you know people will break in and sleep in your bedroom?”

Editor’s Note: This feature is adapted from REDEFINING GLOBAL STRATEGY by Pankaj Ghemawat. Copyright 2007 by Harvard Business School Press. Reprinted with permission of the publisher.