Moving with the market

Viveka Roychowdhury reports on the successful right-sizing of strategies by both pharma MNCs and their Indian counterparts

Spencer Johnson’s Who Moved My Cheese?, a oft-quoted best-seller even 14 years after its release in 1998, is all about coping with change by modifying strategies to achieve success. And deal activity in the biopharmaceutical space in India seems to be bearing out his premise once more.

For instance, Aashish Mehra, Managing Director, India and Asia Pacific Practice, Strategic Decisions Group (SDG), a US-based consultancy concedes that Ranbaxy Laboratories’ woes with the US FDA had caused pharma MNCs to becomes “increasingly cautious to avoid multi-million dollar penalties, loss of access to the attractive US market and significant erosion of brand equity”. But he also points out that while the supplier relationships in the ‘big ticket’ zone have had some setback, there is modest activity in the terms of acquisition of mid-sized companies.

Not just sourcing but right-sourcing

Supplier relationships between MNC pharma and their Indian partners have been strained due to a number of issues, ranging from quality concerns to delays in projects.

“Emerging markets require MNCs to tailor their product portfolios to cater to the ‘middle of the pyramid’ patients (not only the ‘top of the pyramid’), especially in out-of -pocket markets like India, Indonesia, Philippines, etc.” Aashish Mehra Managing Director India and Asia Pacific Practice Strategic Decisions Group

For instance, Mehra analyses Pfizer’s sourcing arrangements with Indian pharma companies in the past few years. The MNC entered sourcing agreements with Claris Lifesciences and Aurobindo in early 2009, and with Strides Arcolab in early 2010. In 2010, Claris received a warning from US FDA and a subsequent warning for inadequate follow-up. Claris recalled some of its antibiotics and other products from the US in 2010, as a precautionary measure against possible contamination.

Pfizer also had to voluntarily recalled certain lots of Citalopram and Finasteride, sourced from Aurobindo, from the US market, due to possible labelling issues. These incidents strained Pfizer’s relationships with its Indian suppliers and the MNC down-sized its deals. In Aurobindo’s case, Pfizer reduced the number of target emerging markets from 60-70 to ~25, and the number of products to be launched from 800 to ~180.

Political tangles

“India has one of the weakest coalition governments which is not in a position to take strong decisions in spite of the Indian growth revised to an all-time low of 6.8 per cent for 2012.” Dr Ajaykumar Sharma Practice Head – Pharma Healthcare South Asia & Middle East, Frost & Sullivan

Among the macro factors impacting business in general in India, Dr Ajaykumar Sharma, Practice Head – Pharma, Healthcare Practice, Frost & Sullivan, South Asia & Middle East  says political stability is one of the stumbling blocks. He opines that India has one of the weakest coalition governments which is not in a position to take strong decisions in spite of the Indian growth revised to an all-time low of 6.8 percent for 2012.

Sharma opines that this “policy paralysis” has forced many MNC pharma and even big Indian corporates to look beyond India for safer havens to continue propelling their double digit growth story. Biocon’s announcement in October 2010 that it would invest around $161 million with the Malaysian Biotechnology Corporation has to be seen in this light, where the company obviously thought it could get a better and faster RoI elsewhere rather than within the country.

When compared to India, Sharma says China and Russia (for the most part), and Indonesia in relative terms, have stronger political stability. Besides these three markets, he feels that the CIS countries, African Federation, and the Middle East are other key markets attracting MNC interest. Will these markets outshine India, is the unspoken concern.

Pricing pitfalls

The impending price control regime is also a major worry for industry stakeholders. In a recent Standard Chartered Securities report, analysts Ravi Agrawal and Neha Kothari opine that the broad potential impact range – from a 1-2 per cent one-off industry profit hit to exponential outcomes to even more draconian cost-based, long-term growth-debilitating measures – creates an uncertain and higher risk investment decision profile for the sector.

Their key takeaway is that a combination of cost- and market-based pricing will be implemented, reflecting affordability concerns and industry profitability apprehension. Besides this, their analysis indicates that every 100-300 bps hit to India-based profit/growth assumptions would result in 6-28 per cent profit impact and 5-25 per cent valuation impact on companies. Given that the domestic business underpins the 50-100 per cent valuation premium to US generics peers, de-rating could be even higher in a lower investment/growth cycle scenario.

Besides these macro industry policy level upheavals, there are company-specific issues at play which may come to light only on hindsight. Biocon’s deal with Pfizer for generic insulin was called off barely two years after it was inked and created a perception that all was not well. Sharma rationalises that deals fall apart for various reasons. In this particular case, his analysis was that Biocon was supposed to start its operations in Enstek in Malaysia from the first payment received in 2009-2010 from Pfizer. But there were project delays which could have led to a fallout in the time line which Pfizer might have anticipated to get to market.

Fine tuning emerging market strategies

But SDG’s Mehra also points to many other deals that still seem to be intact, like for instance AstraZeneca’s deal with Torrent, Glenmark’s deal with Daiichi Sankyo, GSK’s deal with Strides Acrolabs, etc. Pfizer still engages contract manufacturers from India in spite of the quality issues and reduced scope.

Sharma too echoes Mehra’s point that these deal breaks could be aberrations, reasoning that during this time Biocon announced other marketing deals for its analogue insulin stands like its tie up with Bayer Healthcare for China.

Mehra lists major deals like Aventis Pharma’s buy of Mumbai-based Universal Medicare’s marketing and distribution business of branded nutrition products and Abbott Laboratories’ buy of Piramal Healthcare’s domestic formulation business which are signs of continued interest.

Private equity investments into the sector have also continued, both from global as well as India-based PE firms. Bharat Serum and Vaccines picked up funding from Orbimed, the world’s largest life-sciences focused PE fund, while Chrys Capital invested in Eris Lifesciences, SIDBI in Centaur Group. Dilip Shanghvi, promoter of Sun Pharma as also invested, albeit in his personal capacity, in Natco Pharma. These are but some selected examples that buttress the argument that the Indian biopharma space is still an attractive investment.

“Not only has Matrix contributed to Mylan’s very strong growth through the success of its business, it has also made it possible for Mylan to integrate vertically and realise substantial ongoing operational efficiencies on a global basis. These benefits have been felt commercially in every region in which we operate.” Rajiv Malik, President, Mylan Inc.

An example of a successful long term combination between MNC- Indian pharma is the Mylan-Matrix transaction. Rajiv Malik, President, Mylan Inc also points out that in addition, to the Matrix transaction, Mylan also has strong partnerships with Biocon for biogenerics, Natco for Copaxone, and Famy Care for women’s health. Malik avers that not only has Matrix contributed to Mylan’s very strong growth through the success of its business, it has also made it possible for Mylan to integrate vertically and realise substantial ongoing operational efficiencies on a global basis. These benefits have been felt commercially in every region in which we operate.

Reading the market

Some course corrections seem to be in place as MNCs realise that emerging markets require different strategies from developed markets. For instance Mehra analyses that most MNCs like Pfizer, Sanofi, Novartis, GSK, MSD, AstraZeneca etc are increasingly focusing on emerging markets for their growth, and these markets require them to tailor their product portfolios to cater to the “middle of the pyramid” patients (not only the “top of the pyramid”), especially in out-of-pocket markets like India, Indonesia, Philippines, etc.

For this reason, Mehra predicts that they will continue their efforts to strike deals which reduce their costs, including partnering with Indian suppliers.

Malik too believed that that there are ample opportunities for the pharma industry in India and that the “right partnerships”, which can include overall or limited joint ventures, collaborations in therapeutic areas, and even outright acquisitions, will prove successful for both the MNC and Indian pharma company.

An important point Mehra makes is that the cost structure of Indian companies is much lower, due to scale benefits, which allows them to provide attractive price points to MNCs. He opines that this gives Indian contract manufacturers and API manufacturers a head start over contract manufacturers in other emerging markets, even though there have been recent contract manufacturing deals in other emerging markets such as Vietnam – GSK engaging Savi Pharm to produce branded generics from its Orange Line.

Thus he points out that Astra Zeneca’s deal (March 2010) with Torrent to market 18 branded generic drugs in nine emerging markets, is still going strong. A year later (March 2011), the two companies were said to have been engaging in talks to cooperate in clinical trials, co-marketing and new product development. There had also been speculation of a stake sale. Similarly, Bausch & Lomb entered into a deal with Micro Labs in mid 2011, for contract manufacturing.

Staying the course

But it is important that India Pharma Inc should take the right steps to continue on this path. Mehra of SDG says that India’s advantages should not be lost on quality concerns and the most important step is “greater emphasis on quality, particularly in mid-sized and small-sized companies. This is bound to happen as more such deals are forged, and issues identified.”

In addition, he says collaboration with MNCs could be to develop products tailored for emerging markets, as well as use Indian companies’ sales & distribution reach to improve access for MNC products. The MSD – Sun Pharma JV for emerging markets, signed in April 2011 is a case in point. The deal covers “innovative and differentiated” drugs, to be developed for markets in Asia Pacific, Latin America, Eastern Europe, the Middle East and Africa. These would be variations of known products and could be more convenient to take. The second example he cites is the Bayer – Cadila Healthcare sales and marketing JV called Bayer Zydus Pharma inked in January 2011, for the Indian market.

On the policy side, Malik believes that in a fast paced economy such as India, “it is imperative that policies are framed and implemented to ensure the sector’s growth impetus is not affected.” He believes that the Indian government will take steps to provide its 1.2 billion people with access to high quality medicine and Mylan is committed to partnering with them towards this cause.

Thus while deal sizes have reduced and may stay small going forward, global biopharma players and their counterparts in India seem to have now adopted the slow and steady approach. That’s until the market moves again.

[email protected]