Ranjit Sahani, VC and MD, Novartis India: Is eager to tap into the parent's pipeline

Talk to pharma analysts, and they will tell you that what excites them is not multinational pharma companies, but the home-grown challengers. After all, these are the companies spreading their wings elsewhere abroad, fighting and winning fierce battles in the generics markets, and raking in tidy profits in the process. It is not surprising, then, that the market cap of the top three pharma MNCs is just a quarter of the top three Indian companies-Ranbaxy, Dr Reddy's Labs, and Cipla-combined. The MNC rivals, in contrast, have had to focus on the lacklustre domestic market, and make do with minimum support from their colossus of parents. Expect that scenario to change soon.

Starting January 1, 2005, India will bid goodbye to its system of process patents that has held sway over the last 25 years, and say hello to a brand new, and vastly more competitive, product patents regime. The switchover has grave implications for Indian companies. Until now, Indian drug makers have launched products by "reverse engineering" popular and patented drugs (i.e., by finding a slightly different way to make the same drug). But under the new regime, the patent will be to the product and, therefore, Indian companies will be unable to produce the same drug, never mind that the process of making it is different. Their new launches will have to be either their own drug or a drug that no longer enjoys patent protection.

Getting Into Shape

That implies a big opportunity for pharma MNCs who, having sat on the sidelines over the years, will race to make up. As of now, the $4 billion (Rs 18,000 crore) pharmaceutical market is dominated by generics, a large number of which are copies of the original molecule. Often, as many as seven companies produce variations of the same drug. In the last couple of years, a number of Indian firms, fearing that they may not have access to these products post-2005, rushed to get a toehold in as many products as possible. As a result, the number of launches in 2003 was a whopping 1903, compared to 563 a decade ago.

With product patent in place, the pace of launches by Indian companies will likely slow, and those of MNC rivals will accelerate. Says Ranjit Sahani, Vice Chairman and Managing Director, Novartis India: "Novartis like other MNCs will launch its latest discovery products, given the changing environment." But don't expect a flood of new drugs. For one, pricing will continue to be an issue. Prices of key drugs are controlled in the country, and those that are not, won't be able to sell at international prices-at least not in the mass market. McKinsey & Co., however, estimates that by 2015, one out of every five dollars spent on medicines will be for the patented variety, and fetch $3 billion (Rs 13,500 crore), which is two-thirds the current market size. Says Kal Sundaram, Managing Director, GSK Pharma: "It's going to be a transition phase for the next four to five years, and one has to gear up and prepare to face the real patent protected market that we'll see from 2007."

In the transition phase, MNC players like GSK will move on several fronts, ranging from product launches and marketing to research and manufacture tie ups. On the products front, the initial years will likely be devoted to pruning the portfolio. After 2008, when the patent protected products start entering the market, GSK may consider dropping drugs that are mature and not a part of its core therapeutic segments. Bangalore-based Astra-Zeneca is reported to have already trimmed its portoflio down to 14 patented products from 35 earlier. Pfizer India plans to simultaneously launch in India drugs put out by its parent in the US. "We are waiting for the right signals to come," says Kewal Handa, Executive Director, Finance, of Pfizer. Till that comes, it will focus on launching products outside patent protection.

The dawn of product patent will demand newer skills of the pharma MNCs. Most of them do not have a field force comparable to, say, that of Ranbaxy, Dr Reddy's or even Cipla. Why is the presence of a big sales force important? "In India, the name of the game is reach," explains Sameer Narayan, an analyst at Enam Securities. "It's important to have a good communication line with doctors and patients." Besides, in the last 10 years, the market for drugs related to chronic diseases such as diabetes, treating which requires a longer and more intensive doctor-patient interaction, has grown at 31 per cent per annum compared to the overall market growth of about 9 per cent.

It's this last mile that pharma MNCs now want to strengthen. GSK's strategic five-year plan, for instance, aims to "upskill" its sales and marketing teams using global models. Pfizer has set up a core team to study post-2005 issues, including sales and marketing. Besides beefing up their own marketing machines, these companies will almost certainly strike co-marketing partnerships with big players abroad. Agrees Anupama Arora of ICRA: "Some of them may in-licence products from players who do not have a presence in India and offer comprehensive therapeutic coverage besides entering into co-marketing arrangements." A revenue sharing arrangement will ensure that it's worth the while of both the players.

The Outsourcing Opportunity

It's not the domestic market alone that excites pharma MNCs. They see equally big opportunities in outsourcing research, clinical trials, and manufacturing. Novartis has two projects underway in the country, one at Dr Reddy's for a diabetes molecule and the other at Torrent Pharma for an age-breaker, a novel drug for dealing with metabolic disorders relating to hypertension and cardiovascular illnesses. Novartis has created manufacturing capacities for group sourcing in the generics business under Sandoz, where the company has a healthcare development centre for generics. Pfizer India has been a pioneer in clinical research having begun its clinical research operations way back in 1995-96. GSK, which considers clinical research as a crucial, scientific, regulatory and pre-launch medical marketing tool, plans to use it to get blockbuster drugs to India in competition with other countries. Eli Lilly is sourcing bulk drugs such as Nizatidine and Methohexital for its global requirements from Shasun Chemicals & Drugs, which is also working seven other molecules for Lilly's industrial production process. But data exclusivity is still an area of concern for those outsourcing research to India.

Kal Sundaram, MD, GSK Pharma: Plans to launch new drugs starting 2007 and in the interim beef up marketing

Nevertheless, in each of these areas, therapeutic diversity, quality of trained investigators, computing infrastructure and cost are a big edge. For example, in the US, it takes about a billion dollars to bring a drug to market, with most of the time and money getting spent on the four phases of clinical trials. Done in India, the cost of the entire process can be reduced by half.

There are several issues that pharma MNCs need to grapple with before they start profiting from their new products. Cost is one big stumbling-block. To recover the cost of research and development, new drugs are usually priced sky-high. For example, Viagra sells for $8 a pop-a price unaffordable to most Indian patients. Says D.G. Shah, CEO, Vision Consulting: "The biggest problem for pharma MNCs is going to be that they can't sell in India at international prices and at Indian prices, given the size of the market, the new drugs won't be viable for them."

The ones that do decide to bring in patented drugs at international prices will have to sacrifice volumes. (That, however, does not mean they will not make money on those drugs.) More worryingly for them, such launches must be preceded by a legal infrastructure to ensure that product patent rights are not infringed upon. Says Handa of Pfizer: "Major issues like compulsory licensing and issue of remuneration of the patentee need to be resolved in the Patents (Amendments) Bill 2003, which has the prime objective of confirming to trips obligations under WTO."

But even the most pessimistic pharma mnc will agree that India 2005 and beyond promises to be their best time yet.

-additional reporting by Swati Prasad