This white paper was written by Robert Go, global managing director for the Life Sciences and Health Care practice at Deloitte, and Ruth Given, director of Health Care with Deloitte Research. It was presented at the Governors' Meeting for Health Care at the World Economic Forum's Annual Meeting in Davos, Switzerland, January 2005. A version more suitable for printing is available via the PDF file attachment at the bottom of this page.
The pharmaceutical industry in India stands on the brink of profound change. In the past India has recognized process patent protection, but beginning in January 2005, the country will formally recognize product patents.1 As a result, some of these firms may no longer be able to survive, but those that do will now be able to compete in regulated markets around the world.
New business opportunities are also likely to emerge as Big Pharma in Europe and the United States evaluate outsourcing manufacturing, research and clinical trials to other countries — a move reminiscent of trends in information technology (IT). However, numerous challenges remain. The current changes come at a time of considerable upheaval in the global pharmaceutical industry. In response, new strategies may be needed if India is to take advantage of the opportunities now becoming available.
Background
A major achievement of the so-called Doha round of world trade negotiations in 2001 was the final agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In particular, this wide-ranging agreement established ground rules for patent protection among member countries of the World Trade Organization (WTO). Previously, patent law in India had protected manufacturing processes, but not products, thus allowing Indian pharmaceutical firms to reverse-engineer drugs patented in other countries on a massive scale. Under TRIPS, however, both processes and products can be protected.2
The effect of TRIPS is likely to vary considerably within India's highly fragmented life sciences industry. Although there are over 20,000 pharmaceutical firms in the country, the top 10 control about 30% of the market, and the top 250 control about 70%. The largest companies, such as Ranbaxy, Dr. Reddy's, and Cipla, are already aggressively penetrating global markets — mainly with generic drugs and bulk pharmaceutical ingredients manufactured under contract. Smaller companies that rely on generic sales to the domestic market may not survive under the new regulatory regime.
India-specific challenges: Parallels to the Indian IT industry
"Just as China in the past decade became the world’s workshop, India in this decade is becoming the world's back office," declared Fortune magazine in 2003.3 The question now arises whether the country will also become a powerhouse for the outsourcing of drug research, clinical trials and manufacturing.
Trends already emerging suggest the answer is "yes," but significant underlying differences indicate that India's IT experience may not prove the best model for the pharmaceutical industry. One difference between these two industries relates to output characteristics. Indian IT industry outsourcing growth has been driven almost entirely by the sales of commodity services as a result of its incredible cost advantage.4
In contrast, India's leading pharmaceutical firms already have achieved a level of sophistication that goes well beyond the ability simply to perform routine tasks for contractors in other countries.5 As a result, these companies are becoming welcome partners with some of the world's leading pharmaceutical firms. Ranbaxy, for example, recently signed an agreement with GlaxoSmithKline (GSK) to commercialize compounds they develop together — although the two companies were locked in a patent lawsuit only a couple of years previously. Prospects for the Indian pharmaceutical industry will be bright if it can move beyond the commodity production model and share in the significant financial benefits stemming from co-development and ownership of new, patented products.
Another difference is the high degree of regulation the pharmaceutical industry faces. Unlike IT, virtually all aspects of the pharmaceutical industry are tightly regulated, from R&D through production to sales and marketing. The most basic hurdle to clear is getting marketing approval, both locally and in major markets abroad and, in particular, in the United States, where the Food and Drug Administration erects high barriers to entry by requiring costly and time-consuming clinical trials to demonstrate new product safety and efficacy.
But while regulation presents challenges, it also creates opportunities. In the recent past, India has become a major center for administering clinical trials.6 The main attraction is the potential to save time and money, with drug tests requiring only one-third to one-half of the cost and duration that would be involved in Europe or the United States. To the extent that Indian pharmaceutical companies maintain a competitive advantage with respect to clinical trials, regulation could be viewed as the cloud with the silver lining.
A final difference relates to international competition. In global IT outsourcing, India is the undisputed leader. In contrast, the Indian pharmaceutical industry is likely to face fierce competition from Chinese pharmaceutical and biotech companies.7 If China emerges a key force in this industry, it could exert a huge downward pressure on prices. Particularly in the development of biotech drugs, China appears to be ahead of India, having been the only country in the developing world to participate in the international Human Genome Project. Thanks to heavy state investment, Chinese companies can now produce hepatitis vaccines, recombinant insulin, interferon and other generic therapeutic biologics. India's biotechnology sector is growing rapidly, however, with initial emphasis on vaccine production and bio-services.8
Global challenges and strategies
In addition to the specific challenges just described, Indian pharmaceutical companies will also inevitably be affected by turbulent conditions now confronting the global industry. In such an increasingly competitive and rapidly changing environment, companies need a strategic approach that enables them to respond to current challenges as well as future uncertainties.
Through scenario planning, pharmaceutical companies can identify and prepare for possible changes in the scientific and competitive environment by developing strategies "contingent" on which of a number of scenarios ultimately comes to pass. Scenario planning can also help them identify "core" strategies — strategies that are expected to be critical for success under any future scenario.
Recent research on the global life sciences industry suggests four important core strategies for pharmaceutical companies to consider.9 Two are related to production and two are related to marketing. These strategies are described below:
1) Deploy a "cluster" approach to operations. One significant feature of the pharmaceutical industry is the fluidity and variety of its inter-company relationships, traditionally much greater than in other industries. It has relied to a considerable degree on contracting and outsourcing, especially "upstream" in R&D through various licensing arrangements and "downstream" through co-marketing agreements. This is referred to as the "cluster" approach. Its major advantage is that it allows for access to the broadest spectrum of physical and intellectual resources, combined with potentially greater operational flexibility than might be possible with all activities integrated into a single company.
2) Establish collaborative knowledge networks. Expanded sharing of information, including creation/use of collaborative knowledge networks (CKN), can greatly enhance a company’s performance under a cluster approach. Managing the many external relationships is complex. Flexible and pervasive communications systems that allow information to flow effortlessly within and between contracting organizations will provide the key to success. Increasingly, IT advances, including web-based approaches, will provide the foundation for these systems. The greatest positive impact of IT is likely to be in R&D, where systems can contribute to faster approval and market introduction of products.10
Indian pharmaceutical companies should be able to support production-related core strategies described above, with global pharmaceutical companies viewing them as valuable partners, outsourcing functions such as basic research, clinical trials and manufacturing to India. But further investments may be required to maintain their position as partners-of-choice in the future as other companies, including Chinese-based enterprises, increase the competitive pressure. Moreover, to advance beyond being primarily an outsourcing arm to the global pharmaceutical industry, Indian companies need to develop their own "upstream" R&D relationships. To attain a leading position in branded products, they must emulate their global counterparts in initiating strategic alliances with smaller biotech firms, which are expected be a key future source of innovation.11
3) Maximize the value of physician–focused marketing efforts. Focusing on physicians as key decision-makers has long been a priority of the pharmaceutical industry. Although physicians are not direct consumers of pharmaceuticals, their acceptance is critical for the successful introduction of a new product. Regardless of the industry's future level of pricing power, physicians will continue to be the most important gatekeeper to the market.
4) Develop provider/patient information-based strategies. The future will offer an opportunity for expansion beyond the physician communication channel to one that also connects with the patient–the direct consumer of pharmaceuticals. Pharmaceutical companies can do this through better collection and analysis of consumer data related to products both currently marketed and in development, including partnerships with provider and other organizations. This information can also help identify patient populations for clinical trials, greatly facilitating the expansion of research efforts related to personalized medicines and contributing to overall R&D productivity.
The marketing-related core strategies may prove more of a challenge, since future sales expansion plans call for a high level of growth outside of India. In particular, to increase share of the U.S. market, companies must cultivate strong relationships with U.S. physicians considered to be opinion-leaders, something their major U.S. competitors typically already have well established. Indian pharmaceutical companies also face high costs and other obstacles in implementing any provider/patient information-based strategies, without a substantial U.S. presence.
Other forces and consequences: "India and the World 2025"
Beyond these more immediate industry-specific scenarios, the Indian pharmaceutical companies and the Indian government will need to recognize a broader range of fundamental uncertainties that can exert a major impact on India's overall competitiveness as a country, as well as specific competitive position in the pharmaceutical industry over the longer term. Examples of these critical uncertainties include, among other things, India’s infrastructure development (be it power, export zones or education), stance toward international investment and trade, and sustenance of reform agenda, over a 20-year timeframe.
These critical uncertainties are discussed and explored in a broader framework of the "India and the World 2025" scenarios that the World Economic Forum and the Confederation of Indian Industry are jointly developing with their partners. The alternative outcomes will have direct strategic relevance for companies formulating global business and investment strategies in pharmaceutical, IT and other industries. A workshop on these scenarios will be held on 29 January 2005 during the Annual Meeting at Davos and further addressed at a number of the Forum's events during 2005 and 2006.
This white paper was written by Deloitte's Robert Go, global managing director of the global Life Sciences & Health Care practice, and Ruth Given, director of Health Care within Deloitte Research.
FOOTNOTES:
1 The global TRIPS Agreement covers virtually all types of intellectual property protection across relevant industries. In this short paper, we focus on the segments of the Indian life sciences industry most significantly and immediately affected, those developing and producing pharmaceutical and biotech products for domestic and international markets.
2 http://www.wto.org/english/tratop_e/trips_e/intel2_e.htm
3 R. Kirkland, "If Things are so GOOD Why Do We Feel So BAD?" Fortune, November 24, 2003.
4 "Faster, Cheaper, Better," The Economist, November 13, 2004.
5 "Patently Ambitious — India's Drug Firms Look Abroad," The Economist, September 6, 2003; Joanna Slater, "Indian Pirates Turned Partners — Once Copycats, Its Drug Makers Emerge as Industry Powerhouses," Wall Street Journal, November 13, 2003; M. Kripalani, "Big Pharma’s New Promised Land? Drugmakers Are Heeding the Siren Call of India's Well-trained, Cheap Chemists," BusinessWeek, January 12, 2004; K. Merchant, "India's Drug Companies Join the Club: Patent-busters Are Linking Up with Pharmaceutical Giants as Local Companies Opt for Co-operation," Financial Times, January 22, 2004; N. Karmali, "Copycats No More; India Makes Great Knockoff Drugs. Now One Company is Originating Its Own," Forbes, April 19, 2004.
6 J. Slater, "Clinical Trials — Increasing Doses in India: Pharmaceutical Companies Have Discovered a New Laboratory for Testing Drugs: Disease-rife India has Plenty of Patients and Low Costs; But Ensuring Proper Patient Safeguards are in Place is a Challenge," Far Eastern Economic Review, February 19, 2004; V. Gombar, "The $1-Billion Opportunity," Business Today, January 4, 2004.
7 B. Einhorn, P. Magnusson and A. Barrett, "Go East, Big Pharma; Drugmakers are Expanding in China, but Patents are Still a Worry," BusinessWeek, December 13, 2004; "Southern Comfort, Eastern Promise — Third World Biotechnology," The Economist, December 11, 2004; L. Santini, "Drug Companies Look to China for Cheap R&D," Wall Street Journal, November 22, 2004.
8 P. Vaishampayan and V. Chen, Will India and China Dominate pharmaceutical manufacturing? UBS Investment Research, October 8, 2004.
9 Deloitte Research, Strategic Flexibility in Life Sciences: From Discovering the Unknown to Exploiting the Uncertain (New York: Deloitte Consulting and Deloitte & Touche LLP, 2002).
10 Deloitte Research, Collaborative Knowledge Networks: Accelerating Pharmaceutical R&D in the New Millennium (New York: Deloitte Consulting and Deloitte & Touche LLP, 2002).
11 Deloitte Research, Growth Strategies for Large Biopharma Companies: Sustaining Future Growth through Expanded Capabilities and Targeted Innovation (New York: Deloitte Development LLC, 2004).
