Pharma’s Rx for 2009
As the global economic meltdown unfolds, there will be more casualities to report. And with Indian pharma till now mimicking the moves of the global pharma industry, what new prescription do industry veterans suggest? Arshiya Khan gives a low-down
The old Chinese belief that crisis and opportunities are two sides of the same coin has never been more relevant as in the current climate of economic meltdown.
While it is generally believed that pharma industry is recession proof, the fact of the matter is, people do cut down even on healthcare expenses when faced with economic crisis particularly in a country like ours where 80 percent pay for medicines from their own pocket. How does then industry not only survive in these uncertain times but also come out stronger? As industry battles with liquidity crunch, rigid price controls, weakening rupee and plunging sales, it also gives an opportunity to reengineer the business. While fiscal prudence, waste elimination and productivity improvement are conventional tools for weathering the storm, what strategies should Indian pharma adopt to emerge stronger and better, if not bigger?
The consolidation pill
|“Whether a new management will be able to bring about the changes needed to turn around the acquired company, and will there be synergies and savings due to the acquisition. If answers to both questions are positive, it is good to acquire even with borrowed money”
– Abhay Kanoria Chairman and Managing Director
Anglo French Drugs & Industries
“Now is the time to acquire companies or brands based on proper evaluation and having strategic fit with the core business and also divest those which are classified as ‘dogs’.”
– Dr Ajit Dangi President and CEO
|“A good strategy, identified by Indian pharma companies, that is expected to continue into 2009 is to explore smaller targets maybe in niche segments that can add good value in terms of product portfolio, brands, sales set up and even regulatory expertise”
– Hitesh Gajaria Executive Director
|“Entry into biotech, building unique technology platforms, novel dosage forms, building areas of expertise in ‘non-traditional’ pharma including ayurveda with a view to the Indian market could be some areas of focus”
– Ajit Mahadevan Partner-Advisory Services
Ernst & Young
Consolidation has for long been an integral growth strategy for Indian pharma companies focused on developing a strong and sustainable business model through expansion across multiple geographies, multiple product portfolios and even multiple business segments. Given the dynamics of the global pharma industry as well as the highly fragmented nature of the domestic industry, the M&A strategy is expected to continue to play an important role and in fact is likely to gain further momentum in the years to come in the global as well as the domestic market, is a common stand point of industry analysts.
And this could not be otherwise when the global industry is already witnessing mega deals including Pfizer’s $68 billion acquisition of Wyeth and Roche’s attempt for $42 billion hostile bid for Genentech. These deals are not only tactical in nature, but are also attempting to redefine the business models for better value proposition to the end customer.
Last year, there was a considerable decline in terms of big ticket acquisitions. This is probably because Indian companies have been integrating their previous large-scale acquisitions and some are even finding it very challenging to do so. “A good strategy, therefore identified by Indian pharma companies, that is expected to continue into 2009 is to explore smaller targets maybe in niche segments that can add good value in terms of product portfolio, brands, sales set up and even regulatory expertise,” remarks Hitesh Gajaria, Executive Director, KPMG India. (KPMG India is one of the leading providers of risk, financial and business advisory, internal audit, corporate governance, and tax and regulatory services, with a global approach to service delivery).
In fact many attractive buy-outs are known to already exist, since these smaller but technically efficient companies face the challenge of pursuing growth due to lack of adequate funding, he adds.
“Companies are also expected to continue targeting US and Europe—the primarily generics markets for acquisitions—maybe smaller in size, in order to capitalise on the potential opportunity from these markets,” he points. These buy-outs will facilitate the Indian companies in moving up the value chain, achieve scale, fight competition and gain international reputation.
However, with valuations coming down, the question still remains—whether a company should borrow or not to make an acquisition; or whether the target should be big or small? This decision would depend entirely on the motive underlying the acquisition, the cash reserves available with the acquirer and its debt capacity, believes Ajit Mahadevan, Partner, Advisory Services, Ernst & Young (Ernst & Young is a global leader in assurance, tax, transaction and advisory services). He explains, if the acquirer wishes to obtain entry into a previously untapped market, it might be inclined to acquire a large well-established pharma company.
Whereas, Abhay Kanoria, CMD, Anglo French Drugs & Industries (a pharmaceuticals, nutraceuticals and parenterals company based in India) makes another point. “Whether a new management will be able to bring about the changes needed to turn around the acquired company, and will there be synergies and savings due to the acquisition. If answers to both questions are positive, it is good to acquire even with borrowed money.”
He continues, making a large number of smaller purchases, unless it is to fill a basket of therapy groups, will not be wise as it is very difficult to manage multiple companies.
However, Sanjiv Kaul, Managing Director, ChrysCapital (a leading India based investment firm) points out, “There are some assets that look attractive. Hence if it is of strategic value and balance sheet permitting, companies should look at raising smart capital for making such acquisitions in these times. One need not only look at debt financing as an option, one should also contemplate equity dilution for better risk management.”
Taking the thought further Dr Ajit Dangi, President and CEO, Danssen Consulting (Danssen Consulting is a firm specialising in pharmaceutical and healthcare sector based in India) highlights, “Now is the time to acquire companies or brands based on proper evaluation and having strategic fit with the core business and also divest those which are classified as ‘dogs’. Also do not over leverage. Leveraging based on current and historical cash flows and leverage based on future income are two different things. Many companies today are suffering from the latter.”
The generics way ….
With economic climate worsening, governments across countries are reeling under pressure to reduce healthcare costs and increase health coverage, thus more aggressive in pushing the ‘generics’ agenda.
The increasing penetration of generics in regulated markets, clubbed with the expected significant patent expiries in the leading markets to the tune of approximately $24 billion in 2009 is expected to open up lucrative opportunities for Indian pharma industry that is largely composed of generics players. Further, with India’s low cost-high quality value proposition combined with its strengths in manufacturing, growing dominance in Drug master Filings (DMF) and Abbreviated New Drug Application (ANDA) filings, and adherence to global regulatory standards, India has already made its mark in the global pharma supply chain. It has gained excellent visibility and is also emerging as a major destination for outsourcing —contract research, contract manufacturing and clinical trials. Big Pharma globally is under constant pressure to reduce costs and hence this has boosted outsourcing activity to low cost destinations such as India.
Thus to weather out the slowdown, Gajaria feels, Indian companies should capitalise on their strengths and leverage on this global opportunity, to not only come out stronger and better, but also to become bigger. He adds, the slowdown is expected to intensify competition among the generic players. “Companies should therefore also focus on niche segments like dermatology, ophthalmology, controlled substances, new drug delivery systems etc. in order to sustain the intense competition and develop a competitive advantage rather than trade only in plain vanilla generics.”
Invest in R&D
Further, the Research and Development (R&D) scenario in India appears to be progressing well with approximately 60 molecules under different stages of development and increased collaborations with Big Pharma.
Indian companies having realised that innovation is inevitable to long term sustainability are investing time and money in R&D. “Most Indian companies are therefore building a hybrid portfolio ie a presence in more than one sub segments—generics, NCE research, CRAMS, and domestic market, in order to diversify risks emerging from a single segment. This is certainly a good strategy forward to withstand a slowdown,” believes Gajaria. Adds Kaul, “In R& D, we are still nascent players and should focus selectively on certain therapeutic areas and build competencies selectively in some pre-clinical and clinical phases. In CRAMS, we should focus on sweating our ground assets better and be much more judicious in Capital Expenditure (CAPEX) employed.”
In doing so it might be wise to only focus on the US and regulated markets, building a strong capability in smaller but often more profitable geographies like CIS and some Latin American countries could be valuable, suggests Mahadevan.
Focus on biotech
|“2009 provides good opportunities for Indian pharma companies to focus on their core businesses, taking some hard decisions on exiting from non-core businesses and acquiring assets that fully align with their growth strategy. A few companies may even have to redefine their core businesses in the changing global economy, to build a solid foundation for future growth based on their own strengths”
– Vikram Gupta Chief Operating Officer
|“Strategy of all Indian pharma companies could be to revitalise their major cash cows as well as heritage brands, improve productivity of their existing field force, improve efficiency measures in sales and marketing and arrive at co-marketing networks to improve the total value of brands”
– Dr R B Smarta Managing Director
|“In R& D, we are still nascent players and should focus selectively on certain therapeutic areas and build competencies selectively in some pre-clinical and clinical phases. In CRAMS, we should focus on sweating our ground assets better and be much more judicious in capex employed”
– Sanjiv Kaul Managing Director
The year 2009 provides good opportunities for Indian Pharma companies to focus on their core businesses. This would mean taking some hard decisions on exiting from non-core businesses and acquiring assets that fully align with the growth strategy of their core businesses. A few companies may even have to redefine their core businesses in the changing global economy, to build a solid foundation for future growth based on their own strengths, feels Vikram Gupta, Chief Operating Officer, IndiaVenture Advisors, an Ajay Piramal group company, which has launched a $200 million healthcare fund focusing on investments in hospitals, specialty clinics, IT and BPOs, besides hi-tech equipment manufacturing units.
Over the last decade, pharma companies faced with dwindling product pipelines have increasingly looked at the biotechnology sector and smaller pharma companies for replenishments (Eg Novartis’s acquisition of Chiron for vaccines, GSK’s acquisition of Corixa for immunotherapeutics and vaccine adjuvants, Pfizer’s acquisition of Bioren and Roche’s acquisition of GlycArt Technologies for monoclonal antibodies). Therefore entry into biotech, building unique technology platforms, novel dosage forms, building areas of expertise in ‘non-traditional’ pharma including herbals/ayurveda with a view to the Indian market could be some areas of focus. And this has to be the future for Indian pharma, asserts Mahadevan.
The credit crunch could mean that instead of focusing on capacity expansion, Indian pharma companies might focus on improving existing capacity utilisation and outsourcing to firms within India. Whereas giving a futuristic view Dr R B Smarta, Managing Director, Interlink Consultancy (Interlink is a business and management consulting firm) feels, for innovation, R&D, there may be no more capex allowed. Similarly, outsourcing would go to countries like Philippines, Eastern Europe, Central and South America and other South Asian countries due to their attractiveness.
On one hand, the economic slowdown could mean less number of orders for exporters. At the same time, the increasing pressure to use generic drugs in developed as well as developing markets could offer significant export potential for Indian pharma industry. Therefore companies should leverage on building exports, feels Mahadevan.
Companies should make a critical review of the product portfolio and weed out non performing products based on analysis of market attractiveness, competition, market share, profitability etc. Companies should also develop multiple therapeutic area focus and potentially exit from the unprofitable products and focus on building larger and more successful brands. Adds Smarta, strategy of all Indian pharma companies could be to revitalise their major cash cows as well as heritage brands, improve productivity of their existing field force, improve efficiency measures in sales and marketing and arrive at co-marketing networks to improve the total value of brands.
Over the years companies go on adding sales force without paying much attention to productivity as this is the surest way to shore up the top line. Sales force productivity is an important area to watch particularly in a pooled territory. Installed manufacturing capacities in most companies are under utilised and at the same time there is a considerable idle capacity. This needs to be balanced. Inventories, returned goods, line rejections, cost of goods sold (COGS) etc. need to be monitored rigidly. Outsourcing of non core activities should be evaluated on ongoing basis.
While industry can work towards keeping its house in order, Government also has a role to play to boost the growth. This involves reducing the interest rates, reducing the transaction costs, improving the infrastructure to smoothen logistics and distribution, remove illogical price controls (For example ten percent cap on price increase per annum on decontrolled products), help boost exports through subsidies and enforce fixed timelines for all regulatory approvals, feels Dangi.
Adds Smarta, in order to mitigate slowdown effect and provide impetus to pharmaceuticals, Government can act by providing fresh monitory resources to improve drug research, tax benefits for those who are developing new products through adjustment in pricing, as well as rebates or concessions for those who are encouraging anti-counterfeit measures and investing in anti-counterfeit equipments. This step will further help generics to consolidate.
Look backing and ahead
The year 2008 saw some major blockbuster patent expirations including Johnson & Johnson’s anti-psychotic Risperdal, Merck’s osteoporosis drug Fosamax, GlaxoSmithKline’s epilepsy treatment Lamictal, Pfizer’s cancer drug Camptosar and allergy drug Zyrtec, Abbott’s epilepsy drug Depakote and Wyeth’s heartburn drug Protonix. However, the year 2009 is expected to see only a few major patent expirations, including Johnson & Johnson’s epilepsy drug Topamax and GlaxoSmithKline’s antiviral treatment Valtrex. On the other hand, the US pharma industry is expected to see some major patent expirations beginning in the year 2011. This defines the direction for the generic pharma companies for their launch programs in the US markets and thus their acquisition strategy as well. Indian players having an edge in the generics stand in good stead to be amongst the leaders in that segment.
The year 2009 is also expected to see launch of some big value drugs which is expected to support long-term growth in the industry. There is a significant chance (almost about 80 percent) of approval for Lilly’s cardiology drug Effient, Schering-Plough’s and Johnson & Johnson’s rheumatoid arthritis drug golimumab, and Bristol-Myers’s and AstraZeneca’s diabetes drug Onglyza in the year 2009. All of these drugs should have the potential to reach over $1 billion in peak sales. This provides partnership opportunities on the global commercialisation of blockbuster drugs, feels Gupta.
He cites an example. Companies such as Sun Pharmaceuticals and Piramal could be looking for enhancing their own innovation programs through acquisitions in defined strategic areas. Piramal’s recent acquisition of Minrad and RxElite are cases in point.
Indian Pharma companies will have enough opportunities to acquire companies that strategically align with their overall business strategy. However, they will also be faced with challenges. Gupta points out a few of them — good target assets are fewer in number, hence the competition for such assets is significant. With the widening gap in the expectations of the promoters not only in terms of valuations but also in terms of the strategic fit, the chances of deals happening are low. The balance sheets of companies looking to acquire assets may not fully support their acquisition strategy. Thus the companies have to be really smart in planning their funding sources in order to keep their debt: equity structures within manageable ranges.
Keeping this in mind as Indian players focus their efforts to build successful business models spanning multiple markets and business segments while leveraging on India’s low cost base, some of them could themselves be viewed as attractive takeover targets by foreign companies, feels Gajaria.