Indian Pharmaceutical Industry – In-Depth Strategic Analysis of Top Pharma Companies

Indian Pharmaceutical Industry – In-Depth Strategic Analysis of Top Pharma Companies – Ranbaxy, Mankind, Biocon, Pfizer and Merck

In this report, the corporate level strategy of the Indian Pharma Industry is discussed in detail.

Position In The Global Market: The Indian Pharmaceutical Industry is one of the largest among the developing countries. Advancements are happening at a rapid pace. India ranks 10th in terms of value and 3rd in terms of volume globally.

Corporate Level Strategy – 2013 In A Nutshell: A Year of Mixed Fortunes
According to analysis report by Dun & Bradstreet, the Indian Pharmaceutical industry has grown at an estimated CAGR of approx. 13% during FY 2009-2013.

- The robust performance of the sector was due to the demand led by exports and domestic sector

- Availability of high skilled labour at lower costs and lower cost of production have led to the rise of Indian pharmaceutical companies who have now armoured themselves to compete with the global big wigs of the business.

- All the pharma companies, globally and domestic, have and are still facing the heat of slowing economy and other economic factors. The domestic economy had grown at a very subdued growth rate of 9.8% in 2013 as against 16.6% in the previous year period. The cumulative sales -for first nine months of 2013 grew by just 9% against 17.4% in the previous year 2012.

- Adding to the increasing government intervention, the stringent regulatory measures and quality norms acted as a hurdle to the growth of this sector. But it is wise to believe that these steps will improve the domestic market to global standards.

“India has emerged as major global player in Pharmaceutical sector. It should now achieve the symbol of highest quality of medicine. Self regulation by the industry coupled with logical government regulations with strict enforcement are the key to achieve the quality branding of Indian Pharmaceutical product. Indian Pharmaceutical companies are determined to demonstrate it.” – Prof Y.K Gupta (Head of Department of Pharmacology  – AIIMS)

- The depreciation of the value of the rupee and the slowly recovering U.S and European economies have been a boost to the export-driven sectors, helping many Pharma and IT companies rank among the top performers in the stock market in the year 2013. The pharmaceutical companies which feature in the list are Sun Pharma and Dr.Reddy’s Laboratories (Please ref fig). Their corporate level strategies have been to focus on the export markets for a major chunk of their revenues.

All In All, The Industry Has Faced A Few Challenges But It Has Stepped Up To Them In The Last Year.

Flashback 2013 – Indian Pharmaceutical Market Trends

1. Market Growth

• Pharma Market Value in 2013 :- 72069 Cr. INR
• Pharma Market Value in 2012 :- 65654 Cr. INR
• Growth :- 9.8%
• KEY FACTOR: National Pharmaceutical Pricing Policy (NPPP)

2. Contribution of Companies

• Top 10 :- 41% of total sales
• Next 10 :- 22% of total sales
• Others :- 37% of total sales

3. New Product Launches

• Total :- 1700 in 2013
• Fall of 4.1% in number compared to 2012
• Maximum were in anti-invectives (468), pain-analgesics (435) and gastro (389) therapies
• The average value per new product was 0.89 crore INR for the overall market and was the highest for vaccines (4.32 crore INR)

4. Acute to Chronic Therapies 
The share of Chronic therapies (cardio, gastro, CNS and anti-diabetic) is increasing. Companies are hence shifting their focus to chronic medicines.

5. Other Notable Trends

Research And Development
Companies have started spending ~7% of their total revenue for R& D purposes from ~2% spend.

Increase In Exports
Due to increase of presence in generic segment, export market in India is thriving.

Patent Act In 2005
The R&D spend has increased to find new products and Patent act 2005 has played a major role in it.

Mergers And Acquisitions
Strategic alliances/joint ventures by companies to stengthen their domestic/international presence.

Increase In Clinical Trials
Lower cost high quality labour is making India a hub for clinical trials.

Key Corporate Level Strategies Followed By Companies In 2013

Aggressive Pricing Strategies For Growing Population
As India’s population is marching towards the Chinese, it is projected by the UN population body that India will be having the 2nd largest working age group in the world in the future. Hence the buying powers of the majority of population will be significantly higher than ever before.

But Indian Pharmaceutical Industry still remains a price sensitive market. Some MNCs are trying to reach a larger population by reducing the drug prices and thereby increasing affordability.

Shift In Focus To Chronic Therapies
With Chronic issues (cardio, gastro, CNS and anti-diabetic) increasing, the companies establish a long term relationship with the consumers. Acute therapies involve one time application. Hence these days, Pharma companies are into focussed area production.

Merck Followed Indian Sentiments
Merck & Co. launched differential pricing through Januvia, its anti-diabetic drug, which is priced at approximately 1USD per dose in India – a fifth of its price in the US.

Biocon Followed Suit
Biopharma major Biocon launched its monoclonal antibody BIOMAb EGFR at one-fourth of its price in the global markets.

Rural Market Target
With more than 70% of India’s population residing in rural areas, the pharma companies have decided to tap this market.

OTC Still Remain In Focus
OTC sales in India are on the rise, offering opportunities to achieve high volumes.

This trend is driven in part by aggressive efforts of global pharma companies to leverage the brand equity that major products have attained during the patent period.

Joint Ventures – A New Corporate Level Strategy Adopted In The Last Fiscal
Joint ventures have been a trend that have picked pace in the pharmaceutical industry. As part of their corporate level strategy, many companies (international and domestic) have made their presence felt.

The foreign firms had followed this so as to get a grip on the Indian Pharmaceutical industry while achieving cost reductions and operational efficiency with an Indian company.

While in an Indian company’s perspective, joint ventures help them benefit from advancement in technologies/ research and development scope and sufficient impact bearing capability in case there is a loss.

Most significant corporate level strategies followed by various companies are shown below:

An Interesting Case Of How Mankind Pharma Managed To Push The Big Boys Out

BOTTOM-OF-THE-PYRAMID CORPORATE LEVEL STRATEGY BY MANKIND PHARMA
Source: How Do Incumbents Respond to Bottom-of-the-Pyramid Firm Entry?, 35th DRUID Celebration Conference 2013, Barcelona, Spain, June 17-19

Mankind Pharma, the successful pure-play bottom-of-the-pyramid company in India, was founded in 1995 by a former medical representative (also known as a detailer) after years of prior intra-industry experience. In its early years, the company outsourced its manufacturing but in the late-1990s, established its own manufacturing facilities. The management now claims to manufacture 95 percent of its drugs.

The company’s corporate level strategy has involved manufacturing and marketing drugs to general physicians (as opposed to specialists) and pharmacists in rural India’s small towns and villages, whom MNCs and other large domestic pharma companies had neglected.

- According to IMS Health, a U.S. based firm that collects proprietary industry data, Mankind Pharma was present in every village in India that had 1,000 or more inhabitants in 2009, which contributed to 58 percent of the company’s revenues (Bisserbe 2009).

- The company—characterized by low overhead costs and austere corporate offices—leads the industry in terms of the number of prescriptions per doctor per month.

- Consistent with the company’s mission to provide affordable medicine, Mankind Pharma placed limits on executive compensation. Mankind Pharma’s founder notes that, “there is no creamy layer of employees in our management; we do not have highly paid vice-presidents or presidents” (Bisserbe 2009). The transformation from a niche, low-end generics producer for rural India with seed capital of $100,000 and sales of $760,000 in 1995 to an industry giant with $330 million in sales in 2011 was, according to its founder, made possible by its pricing strategy”

 Mankind Pharma introduced a bio-equivalent substitute for Zenflox, a drug sold by India’s leading generics production company, Ranbaxy at Rs. 26, for only Rs. 6. Similarly, Mankind introduced a substitute for GlaxoSmithKline’s best-selling antibiotic at half the price.

“Where as the profit making from business is the prime objective of any Pharmaceutical industry, contributing to social responsibility by making quality medicine accessible at affordable price to the Indian public (rural or urban) should also be the important consideration. Companies like Mankind must be appreciated for reaching to masses with more affordable band of medicine. What is required now is, such companies should also invest in to promote local R&D in the country with primary objective to make medicinal product at affordable price in the country” – Prof Y.K Gupta (Head of Department of Pharmacology  – AIIMS)

Ethical Marketing In Pharmaceutical Industry – An Important Cog In Corporate Level Strategy

Ethics as such is a very broad term, but here all descriptions are stuck to marketing related activities in the pharmaceutical industry.

The concept of ‘rational usage of drugs’ is important to be understood here. According to the WHO, ‘rational use of drugs’ “requires that patients receive medications appropriate to their clinical needs, in doses that meet their own individual requirements, for an adequate period of time, and at the lowest cost to them and their community”.

A recent National Rural Health Missions (NRHM) research points out that in the India, the rational use of medicines is not being practised. What is more concerning is that, it is common to see prescriptions that are heavy on antibiotics and drugs that have been banned by the DPCO (Drug Prices and Control Order).

WHO suggests that one of the ways to promote rational use of drugs is by

“Lack of financial incentives to prescribe particular drugs, and artificially withhold some other important and, perhaps, more efficacious drugs”

Similarly, the one (Doctor) who decides on what products to buy, and the one (Patient) that pays for the products are two distinct individuals. Therefore target marketing is even more important and hence pharmaceutical companies should aim their strategies towards the doctors with the view point of making the doctors understand the full implications of using them.

Example:
In a more regulated market like the US, the doctors write prescriptions by using the generic name (i.e.) for example, if the doctor wants to prescribe sitagliptin phosphate as active ingredient, he is allowed to write only the molecule name on the prescription. In this case, he cannot write Januvia ™, which is the brand name of sitagliptin phosphate manufactured by Merck.

The pharmacist then provides sitagliptin phosphate of whichever manufacturer he happens to stock. In most cases, the pharmacist is obliged to fill the prescription with generic medicine in case it is available. Once again, the sitagliptin phosphate case, since the generic is not available, the pharmacist provides Januvia. However, if the generic is available, then, he would not have given Januvia to the patient. Therefore, the pharmaceutical manufacturers need not indulge in marketing for the drugs that have lost patent status.

In India, however, the doctors write the brand name of the drug on the prescription. That is, even generic medicine is launched under a brand name, and several brands compete for the doctor’s attention, even after the expiry of the patent.

“One of the major area the Pharmaceutical sector must improve upon by voluntary initiatives is to fast phase out the fixed dose combinations of the medicines which do not make any sense in terms of either increased efficacy, reduced toxicity profile or significantly better patient compliance. Irrational FDCs must not be marketed. If doctors stop prescribing the irrational FDCs this will also automatically correct the irrational drug therapy to larger extent.” – Prof Y.K Gupta (Head of Department of Pharmacology  – AIIMS)

According to Prof. Viswanath Pingali, Indian Institute of Management, Ahmadabad, in one of his papers‘Improving the Consumer Interface of Pharmaceutical Sector in India’, said:

• If one was to dig deeper into this topic, some recent research has shown that different people hold different views regarding the idea of ‘gift giving’ to the doctors. In a research conducted in the early 2000’s, several physicians and patients were asked about their attitude regarding an array of gifts that a pharmaceutical company can give to a physician. These gifts ranged from a pocket knife to an expensive trip.
• The research highlighted that, significantly, patients thought that such gifts are inappropriate for the physicians to accept. They also felt that the physician prescription behaviour altered through accepting such gifts from pharma companies.
• A more revealing aspect of the research is that very few doctors were even aware of the proper guidelines regarding gift receiving; and that the trainee physicians felt the gifts were more appropriate and influence their prescription behaviour.
• The contention is that it might lead to wrong medicine being prescribed, thereby violating the requirements for rational use of drugs.

Thus the answer lies with the pharmaceutical companies. The right practice should prevail.

Uniform Code On Sales And Marketing – Regulation 2013:

In an attempt to standardize and streamline the marketing efforts of Indian Pharmaceutical companies, the Department of Pharma (DoP) has issued guidelines on a uniform code on sales and marketing practices which are applicable to the pharmaceutical companies. This is a significant step aimed at preventing corruption.

But there needs to be more clarity here, as the DoP guidelines on sales and marketing practices are different from the MCI guidelines. To add to the confusion, tax authorities use the Central Board of Direct Taxes (CBDT) circular based on MCI guidelines to decide on permissible sales and marketing expenses. Thus there exists a need for integrated and clearly communicated guidelines.

“Contribution of Pharmaceutical companies in promoting continuing Medical education is required, and is a global practice. This, however should be done in a very transparent and in a very generic manner. The practising physician must not get twisted or biased information with sole aim to promote a specific product. Sounds difficult but adopting strict ethical guidelines will automatically ensure it.” – Prof Y.K Gupta (Head of Department of Pharmacology  – AIIMS)

Challenges Faced In Pharmaceutical Marketing/Distribution

- Committed Employees – Most Importantly a ‘Committed Sales Team’

In any company, the sales team is the strength that influences the growth of company towards its goal. Most of the candidates join smaller pharma companies for exposure and in a year or two, become experienced professionals and move to an established company. Thus the effort involved in training the employee to match the company requirement takes a beating. But there are a few employees who consider working with a company as an opportunity to grow faster.

Thus the company should develop a strong corporate culture that invokes feeling of being committed and loyal to the company

- Product Availability To Maintain Competitive Advantage:

Newer pharma companies have come up with new innovative distribution network/corporate level strategies/ideas and thus need for rapport, regular visit to find stock status from time to time play a vital role in helping the companies stay competitive.

- Effectiveness Of The Medical Representative:

While a committed sales force is there and products availability is not a problem, it is important to have an effective medical representative team. This is the link between doctors and pharma companies. Every day, on an average, a doctor meets 15 to 20 MR’s and thus it is the ability/skill of the MR to remain in the memory of a doctor. The effectiveness of the MR’s marketing strategy and the implicit core competencies play an important role here.

The MRs must hence be given proper training and be imparted with marketing skills that help them to play with the Doctor’s memory and winning their confidence. 

The company should hence consider everything i.e. the knowledge about its quality products, service market, and its internal capabilities to develop a strong corporate level strategy.

India In The Global Value Chain

Indian companies are increasingly finding their places in higher value segments of the pharmaceutical industry value chain. A handful firms engage in the discovery of new concept drugs due to high investments and their high failure rates. Instead many companies follow the strategy of development of precedent generics and drugs.

The growing population in India makes it an exceptional market for low-cost generic drugs, and here domestic companies that have been successful in marketing them in volumes are using earnings from these to spend for R&D. These activities are either internal development of precedent drugs or development of the drug’s intellectual property rights through partnerships with big multi-national corporations.

It is very obvious from many research studies that domestic companies required assistance in the form of Joint ventures/partnerships to continue clinical trials, which requires huge investments and large patient pools.

Dr. Reddy’s Is A Very Good Proponent Of Achieving Leadership In This Challenge. Their Corporate Level Strategy Is Aimed at Performing Clinical Trials By Spending Huge Amounts of Capital Investment.

Company Analysis – Biocon

• FY’13 Revenues Cross $100Mn Milestone
• Leading Diabetology Company: Insugen® – #1 Indian Insulin Brand
• Recognized As Leading Oncology Company In India
• Largest Domestic Branded Biologics Company
• Portfolio Of 80 Brands Across 7 Therapy Segments
• Strong Presence In Fermentation Based Apis

More..

1. First Indian Company To Manufacture And Export Enzymes To USA And Europe
2. Unilever Plc. Acquires Biocon Biochemicals Ltd. In Ireland And Merges It With Its Subsidiary
3. Unilever Sells Its Shareholding To The Indian Promoters.
4. Biocon Becomes An Independent Entity
5. India’s First Clinical Research Organisation (CRO).
6. Biocon Biopharmaceuticals, India’s Largest Multi-product Biologics Facility
7. Biologic Itolizumab- A Drug For Chronic Plaque Psoriasis

Biocon – Competitors Analysis

The two major competitors of Biocon Ltd. are

• Wockhardt Ltd.
• Dr Reddy’s Laboratories

Revenue Comparison Of The Companies
Any company’s performance is determined by how it sells its products and pharmaceutical companies are no different. The chosen three companies have been profitable when revenues are observed. The trends are shown below in the form of a bar graph. The CAGR of the three companies are also mentioned below.

The revenue earned by all the three pharma companies has seen a rise greater than the pharmaceutical industry growth for the year 2013 (~13%). Hence it can be inferred that all the three companies have tried to achieve the competitive advantage but Dr. Reddy’s appears to be the best performer among the three.

Geographical Distribution Of Revenue:
The US and Europe have been the biggest markets for most export oriented companies. It is no different for all the three companies with majority of exports to the mentioned regions.

The percentage contribution of the domestic and export markets to the revenue of the three companies is represented in the graph on the below.

Research And Development Expenditure

The capital R&D expenditure of the companies is shown below. The R&D expenditure is very less when compared to their revenues. It is little surprising considering the fact that majority of expense in a pharmaceutical company is the R&D.

Profitability Comparison

The net profits are taken into account so as to determine the profitability of the company. The net profits after taxes for the 3 companies are shown below.

As it can be clearly seen, the best performer among the three has been Dr. Reddy’s Laboratories Ltd. The initial negative profits of Wockhardt Ltd. happened when it was trying to recreate itself. Biocon had seen an almost constant rate of growth in terms of Profit after Tax for the considered period.

But Biocon is trying desperately hard to increase in revenue and it expects to reach its goal of $ 1Bn in top line revenue by 2018. It has considerably kept increasing the R&D spend. Its strategies for 2014 are aimed towards the goal.

The cost incurred by each of the three companies to the revenue earned is also shown on the graph below. It can be seen that all the 3 companies have tried to maintain the ratio same level as in the previous years.

Biocon’s Plan For The Future

In 2013, the management of the company underwent an organizational structure change so as to become a business led organization from a function based organization. The company believes:

• This functional corporate level strategy will give the company’s management greater clarity on business needs and also a better understanding on deliverable.
• This change in structure will enable shorter response times and faster decision making thereby enables better execution of set corporate level strategy.
• Each SBU head will hence have greater autonomy and greater accountability for the financial performance of their respective businesses and make business administration easier.

The newly formed SBUs will be supported by teams from Human Resources, Legal, Quality, R&D, Regulatory, Procurement & Supply Chain, Corporate Communications, Finance and General Administration. Research Services comprising of Syngene and Clinigene platforms from its inception has been a standalone integrated business and has now evolved its independent support functions.

The company believes that this will act as a main driver of the corporate level strategy so as to achieve the organization goals set (given in figure below).

“Any efforts in making biosimilars with similar efficacy and established safety is much desired so that very expensive molecules are made available at affordable cost. Ensuring the quality is of paramount importance. Several Indian Pharmaceutical companies have taken lead in this. Department of Biotechnology is aggressively promoting biosimilars.” – Prof Y.K Gupta (Head of Department of Pharmacology  – AIIMS)

Swot Analysis of The Indian Pharmaceutical Industry

The below analysis shows the SWOT analysis of the Indian Pharmaceutical Industry. This gives an overall picture of the industry.

STRENGTHS

• Lesser production costs.
• Significant expertise(Human Resources) availability.
• Low cost of high quality labour.

WEAKNESSES

• More emphasis is given on generics, both for international and domestic markets, which makes filing and approval of DMFs and ANDAs leave little room for R&D on quality product development.
• Poor R&D Infrastructure.
• Poor Industry‐Academia linkage.
• Unclear Regulatory reforms.

OPPORTUNITIES

• Clinical trials: According to various studies, India is among the leaders in the clinical trial market.
• High End Drugs: Market would open up for the production of high-end drugs in India due to the growing demand.
• Rural market opportunities: With 70 per cent of India’s population residing in rural areas, there are immense opportunities for pharma companies to tap this market.

THREATS

• Increasing non‐tariff barriers and stringent regulatory norms to generics markets in developed countries.
• The competition for generics and bio‐generics production is increasing with higher capacity and production costs.
• The barriers to entry are higher so as to enable market share in development of in doses new drugs.

Corporate Social Responsibility
In India, while the Companies Bill 2012 was passed in the Lok Sabha on December 18, 2012, CSR (Corporate Social Responsibility) has been made mandatory on all the corporate houses having a net worth of Rs.500 crore or turnover of Rs.1,000 crore or an average net profit of Rs.5 crore in last three financial years.

The corporations need to spend at least two per cent of average net profit in the last three years on CSR every year.

This rule also contributes in enhancing business competitiveness of an organization. The companies thus need to have a planned and structured approach, strategies, policies and goals to manage this rule. In most companies, there is now a separate specialized department for this purpose and have specific budget allocations made for this activity.

All In All – Conclusion

There can be many ways through which a pharmaceutical corporation can achieve success in today’s competitive market. The simplest step which does not need any corporate level strategy analysis is the use of “cost” as an element to achieve elementary commercial success. 

Some other tips that can be gained from the past success stories are:

Pharma companies can join hands with multi-national corporations, co-operate and compete at the same time, because it is obvious that a company by itself does not have enough resources to taste the potential of new quality products. They also could lack in knowledge and skills required to convert its vision into reality. Thus companies are pushed to form strategic alliances to lower risks, and follow innovative management styles to increase business effectiveness and competitiveness.

If one were to analyse like managers, the best ideas would be:

• Differentiate in corporate level strategy: Advanced strategic management is needed with a strong orientation towards the market should be the priority of each and every company that wants to be successful or maintain long term sustained growth.
• Differentiate in organizational structure: It is necessary to have an organizational structureand a suitable corporate strategy that aligns with the organizational goals (E.g.: Biocon Ltd.)
• Differentiate most importantly in ‘CUSTOMERS’: Successful companies which achieve leadership are those, which constantly find innovative ways to use their competitive advantage and develop a corporate level strategy to satisfy future needs of the customers.
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Recommendations

1. Pharmaceutical companies should concentrate on Generic drugs: With an expected generic medicine market size of USD 26.1 Billion in 2016, pharma companies should focus more on Generic drugs. India has also a cost advantage attached. Hence it carries huge potential for the generic drug market.
2. OTC drugs to be a huge market in rural India: Increased penetration of chemists in the rural market (70 per cent of India’s population residing in rural areas) makes it a huge avenue for OTC drugs.
3. Target chemists instead of doctors for OTC drugs: The general tendency for a consumer to purchase OTC drugs is by approaching the chemists instead of the doctors. Hence companies can focus on marketing through this channel.
4. Pharma companies can concentrate more on Oncology related drugs other than diabetic drugs: Despite diabetes being the major target market, Oncology has risen in terms of value by a huge way (Please refer fig beside). Hence companies which are producing oncology related drugs can focus on this aspect and take advantage of it.
5. For India to continue exporting to the foreign markets, the Indian Pharma companies have to step up their quality and manufacturing compliance programs in line with the US FDA regulations.
6. The Indian pharmaceutical companies should have an robust internal compliance programme in order to combat regulatory issues/industry norms.
7. E-commerce/E-retail is an avenue unexplored in India. This can be looked upon in the future.
8. Transparency in process can be a very big boost as consumers expect to know about their drug when they buy. Dealings should be ethical and fair.

By Tarun Gupta