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Satish Khanna
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Pharmaceutical market in and from India is on a twin-engine-powered growth path. The domestic engine continues to log 15+ per cent CAGR on a growing base and exports engine is ascending at even higher pace. Both engines are likely to maintain existing growth trajectory with impressive intensity even in the coming years.
Despite the fact that Indian companies, through credible performance, have created respectable position both in the developed and the emerging markets, a few blind spots remain:
- Indian pharma industry, despite efforts by many, has not done much in two very potent global markets i.e. Japan and China
- On the credibility front too we have faltered more often than what we should have due to short cuts adopted by few companies for cutting down on timelines or costs of execution
- On the innovation front, Indian pharma industry has nothing much to claim, yet
- Industry has neither focused much nor achieved enough on the brand building exercise; just having the cost advantage can make it grow further, but to a limited extent
Indian pharma industry has done well so far because it is quite competent, competitive and capable. And if we are able to address the above blind spots too, the industry can create much bigger opportunities for itself. However, addressing these blind spots is not within the reach of every pharma company, as each of these require deeper pockets, unwavering commitment and lots of patience, which barring very few companies, the Indian pharma industry can afford.
The industry will still continue to grow, but for creating more and bigger success stories in this huge possible opportunity, just a linear extension of the past mindset and approach may not be adequate.
New entrants will have to find out newer and disruptive business models to create a place for themselves in this crowded but lucrative industry. Existing smaller players will have to either grow or go; medium players will have to grow bigger through strategic alliances or deeper arrangements with national or international biggies; larger ones can not keep on doing more of the same for migrating from their current orbit of $1-2 billion annual sales size to the next orbit of $10 billion annual sales; they have to be undoubtedly more credible, more innovative and more focused players in whatever they do. Basket approach of multiple products in multiple therapies and multiple geographies can create unimaginable and unmanageable level of complexities and that route may not be the right path for them to shift to the next orbit of the $10 billion annual sales club.
Teva, Mylan, Watson and the likes have reached or are planning to reach this club largely through aggregation of businesses by deploying lots of inorganic strokes and even they are finding that they have to grow differently here on. Teva, the giant generic company, is now banking on biosimilars and OTC for their next orbit and even they have realised that they can not do it on their own and hence have tied up with Lonza and P&G respectively.
Mergers and acquisitions to propel growth does not always create the desired value, on the contrary sometimes it erodes the value. If the target is not strategic, or valuation is unjustified or the post acquisition integration process is not effective, it becomes a problem child and a big drag on the new parent. Experience of most of the Indian companies who ventured out in the last five-10 years to buy pharma assets or businesses in Europe, the US or elsewhere have not been favourable, mainly because most of these inorganic moves were done with the objective of top line growth and at much higher valuations. In most of the cases, post acquisition synergies either could not be created or could not be effectively leveraged. We know the experience of Wockhardt, Ranbaxy, DRL and many more is not pleasant, however, there are exceptions like Lupin and Sun.
Following ‘what more’ and ‘what better’ can only enhance business excellence and thereby the quality of business; it is the ‘what new’ that needs higher attention. So far many of the Indian companies, including the large ones have followed the ‘me-too’ approach and that has eroded their value. Companies have not only copied each other’s processes and products, but also each other’s business approach. This may sound as a simpler and quicker way for growth but without much of the bottom line; thereby restricting the depth of pockets for all in the game and not leaving enough gunpowder within the industry to take a shot on some of the areas that have now become the above-listed blind spots.
Companies are not leveraging or even exploring the idea of deploying collective wisdom and collective resources to resolve the blind spots and tackle challenges that are too big for a company on its own. The issues would become more manageable, if pursued collectively. But, shared resources, shared wisdom and shared risks would mean sharing the fruits of achievements and that is where our industry has issues, our industry does not have a sharing gene in its DNA.
There is no serious effort in that direction. Why not? That’s not clear. However, LAZORR initiative was a pilot experiment that succeeded and could have opened up future collaborative roads that do not exist but can be co-created.
In the field of growth through generics business currently, everyone is referring to the same database to do business planning for the future, pursuing the same macro business approach for growth, same or similar products, similar processes, with same set of moving professionals from one organisation to another, trying to tie-up with the same distribution channels and finally what happens, a dozen strong companies land up in the market on the day-one with the same product, when the patent expires. Not that the industry does not know about this phenomenon, but little effort is being made to avoid wasting precious resources doing the same activity that another dozen companies are doing at the same time, without any real innovation.
Fortunately, there are some companies doing better than others, despite the above rat race, but, are they so differentiated in their approach that they can expect to continue doing better year after year for the next 10 years? Probably not. Have we not seen Ranbaxy, Cipla, DRL, Lupin, Wockhardt, faltering at times whether it is on the financial front, strategy front or on the credibility front. The journey of all these companies will become tougher and filled with challenges, even though some of these are or were amongst the best in the breed of Indian pharma companies.
There is no single recipe that can create newer ways of ensuring sustainable profitable growth, I definitely don’t have it. There are better doctors seated within the industry guiding healthy growth for their respective companies with their tons of experience and wisdom. But, I am sure even they must be grappling with issues like how to differentiate and grow to the next orbit in a manner that creates significantly higher new value, rather than just doing the incremental play to satisfy the investment community for quarter-on-quarter or year-on-year performance. Even they feel relieved that this quarter or the year has done well but do not have much confidence about the next one’s performance.
I will try to share my thoughts as to how pharma companies, divided into few categories, can create their success strategies. This aligns the possible scene ahead, resources required and the challenges to be encountered while following an approach that is just the opposite of ‘me-too’.
SME API companies: Small sized companies, just generic APIs with sub-economical capacities and unintegrated with key building blocks related plays will not sustain for long. API manufacturing business necessitates handles of 3D chemistry (dirty, dangerous, demanding). For scale play of 3D, one needs high capex (capital expenditure) and high opex (operating expenditure). SMEs would find it challenging to manage and will continue to drain their resources if they continue to dabble with 3D chemistry.
Way forward: Have strategic access to unique green technologies (bio-transformations, green solvents, chiral synthesis etc.) that can reduce or eliminate complexities arising out of the 3D aspects of this business. Create global capacities with credible facilities deploying unique and exclusive technologies and be a preferred source of APIs to Indian or international biggies. Such an approach would create sustainable and profitable growth.
SME pharma marketing companies: Small size may be favourable initially but it soon becomes a liability. So, companies then tend to grow pan-India by recruiting large sales force and diversifying into multiple therapies or sales divisions However, soon the diversity with large size also becomes a liability; thereafter working capital, supply chain and managing the prevailing unethicality in the market place becomes a liability. But there are some success stories too, which later have graduated to large players. Current breed of large Indian pharma companies were SMEs in the last three decades of the previous millennium but the times were different then. It does not mean that new SMEs will not become future large pharma companies, many will but only those who develop and follow a business model that is relevant to the emerging scene where regulations of all kinds would be stricter and immense competition from big Indian and MNC companies would exist.
Way forward: Have focused play in chosen therapies with products that are unique and exclusive. Have international, smaller to medium companies on your side for obtaining strategic access to exclusive products, delivery systems that can address unmet needs. Be proactive in the game. Do not chase size but do chase exclusivity.
Large pharma companies: Typically they are already doing well, barring some occasional financial or compliance-related hiccups. These are companies who have significant integrated play and operate a very diverse portfolio of products, diverse therapies, multiple links of the overall value-chain and have good geographical presence, directly or indirectly. These are the ones which have successfully migrated to the current orbit after having managed the challenges of being an SME in the past. But now they have a new set of challenges. The biggest is managing complexities emerging out of too much diversity. The other challenge is that they are yet to discover the growth path which would take them to the next orbit without further addition of complexity, which could be exponential in nature.
Only very few large companies have a proven track record of global alliances, for e.g. Zydus (they have three 50:50 JVs running with large companies from three different continents). So, in a way, these companies want to pursue a solo journey, at least they say so. But can a solo journey give them enough energy to take their company to the next orbit of $10 billion club? The answer could be ‘Yes and No’. Yes, if they change their course and No if they do not.
Way forward: Large companies will have to implant the missing gene of working through strategic alliances and address some of the above listed blind spots. Successful alliances can happen only if the mind-set of shared risks and shared benefits are honestly implanted in the corporate DNA. Alliances could be amongst large Indian companies or it could be with global players.
Imagine, entrepreneurship and vision of Sun Pharma, management bandwidth of Lupin, Zydus’ ability to partner with MNCs and some such traits of other good companies are deployed to strike appropriate alliances for creating a unique kind of fresh value in the industry. Similarly, imagine if the innovation of Japan, building blocks from China, manufacturing and development skills of India and marketing reach of global companies are put to some integrated play, what kind of fresh value can be created. Establishing credibility and trust would, however, be a very essential requirement before such alliances are struck. Such an approach may sound like an utopian thought to some but to me it sounds doable and worth exploring. Another aspect for big companies is to be focused and be the best player globally in that focused area, be it a therapy, platform, geography or combination of these. We know there are multi billion dollar companies doing business only in Opthal, Derma or other fields. Why shouldn’t Indian companies follow such an approach? Fortunately, large opportunity, good track record, good capability level and desire to move on to the next orbit exist in the pharma industry and appropriate success strategies will continue to evolve for even happier times ahead.