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OCTOBER 22, 2006
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The Building Boom
Is an asset price bubble building up in the real estate market? Flats in posh Mumbai areas sell at the rate of Rs 50,000-70,000 a sq. ft. and housing plots in Gurgaon are going for Rs 1 lakh a sq. yard. This may sound like music to those who have been clinging on to their assets, it portends danger to buyers. The high real estate prices keep the majority out of the housing market and make the dream of owning a house more distant.


The Learning Curve
India's investment in education-as a percentage of GDP-is lower than not just of countries in the West but also some of the emerging economies, including China. The percentage of population in the relevant age group enrolled in higher education too is the lowest among countries with which it must compete. Clearly, there is a need to scale up substantially the physical infrastructure and attract better faculty by offering market wages.
More Net Specials
Business Today,  October 8, 2006
 
 
BT SPECIAL
PHARMACEUTICALS

The Alchemists

New drugs may be some way off, but India's pharmaceuticals industry has enough process skills to make global competitors sweat.

India tops in the number of US FDA-certified factories outside the US

For every 10 drug master filings (a regulatory filing needed for an active pharmaceutical ingredient, API, or bulk drug manufacturer) received by the us Food and Drug Administration (FDA), four come from India. And of every 20 abbreviated new drug applications (ANDAs), or an application to seek an approval to market generic drugs in the US, five come from India too.

India is also home to the largest number of US FDA-certified factories outside of the US. In other words, India is a global pharmaceuticals factory that is getting bigger and bigger. Five years ago, annual exports were about Rs 10,000 crore; today, it's a little over Rs 20,000 crore. "Costs of production are a by-product of efficient manufacturing, and here Indian pharma companies are globally competitive," says Satish Reddy, MD & COO of Dr Reddy's Labs (DRL). "In fact, in a few products, Indian manufacturers are among the lowest-cost producers."

What makes Indian drug companies so competitive? Years of reverse engineering branded drugs (until 2005, India only recognised process patents and not product patents) has resulted in superlative expertise in chemistry. To quickly tell you what that means, such an expertise allows drugmakers to come up with superior processes, scale up in terms of both range and speed of reactions, improve yields, and package drugs in a variety of forms. In a fiercely competitive industry like pharma, the know-how makes a big difference and the larger players see it as a way to strengthen their place in global markets.

SECTORAL SNAPSHOT
» India's pharma industry is the fourth largest by volume and 13th largest by value. In just five years, exports have more than doubled to Rs 21,578 crore
» India accounts for 40 per cent of the US drug master filings (a regulatory filing needed for bulk drug makers)
» India has the largest number of US FDA-approved manufacturing sites outside of the US
» A quarter of ANDA filings (abbreviated new drug applications to market generic drugs) in the US are from India

Take Sun Pharmaceuticals, for instance. Six years ago, international markets accounted for a quarter of its revenues, but today they fetch 40 per cent. Formulations exports accounted for just 7 per cent of revenues back then, today they make up 29 per cent. The Mumbai-based company is now adding manufacturing capability in 'complex' areas such as controlled substances and injectibles, which have relatively few competitors. "Steps are being taken to eventually be completely integrated for controlled substances," says a company spokesperson.

Another Mumbai-based major Cipla too has been growing exports at 40-50 per cent a year over the last six years. And it is the development and manufacturing partner of choice for generic companies like IVAX and Watson, and has formulations/bulk drug supply arrangements with eight generic players in the us. Some other global generic firms have chosen to acquire companies. A case in point: Mylan's recent acquisition of Hyderabad-based Matrix Labs.

Five years ago, India's pharma exports were about Rs 10,000 crore; today it's doubled to over Rs 20,000 crore

India's biggest pharma company, Ranbaxy, which has also been under tremendous cost pressure, is banking on process efficiencies to boost its bottom line. "Optimising manufacturing costs is one of our key areas of focus. We continuously evaluate and implement newer technologies and leverage our strong scientific capabilities to squeeze costs and extract greater value and efficiencies from our manufacturing operations," says the company's CEO & MD, Malvinder Mohan Singh. In fact, Ranbaxy has created a separate global business unit (GBU) for bulk drugs so that the back-end can be looked at in a holistic manner and "make-or-buy" decisions can be evaluated as a means of containing costs. DRL too is investing in new cutting-edge infrastructure that will increase automation and reduce the possibility of human error, thereby "significantly improve our competitiveness in the global market", says Reddy.

Then, there is Nicholas Piramal (NPIL), which seems poised to emerge as an important player in the custom manufacturing space. In June this year, it acquired Pfizer's Morpeth facility, marking its third acquisition in the UK after its acquisition of Rhodia's inhalation anaesthetics business in December 2004 and Avecia's custom manufacturing business in December 2005. The Morpeth facility comes with a buyback agreement with Pfizer valid until November 2011, giving NPIL potential revenues of $350 million (Rs 1,610 crore). With the acquisition of Morpeth, NPIL becomes the biggest supplier (in terms of spend) within Pfizer's global contract manufacturing network.

The China Factor

Indian companies continue to have a headstart, particularly in the highly developed and regulated markets

What is, however, becoming increasingly important is the China factor. Ranbaxy's Singh feels China is emerging as a strong player in the global pharma industry. "We see this as an opportunity to source API and intermediates from them as a means to lower our own cost of production." While sourcing from China may be the right thing to do at the moment, all seem quite wary of China. Says Amar Lulla, Jt Managing Director, Cipla: "There is a very serious threat from China. Not only are they fast learners, but they also have a very supportive government," helping with everything from infrastructure to soft loans. Which is why, Lulla feels, it is time the Indian government began following the Chinese example. The only hurdle China seems to be facing on its way into the bulk drugs or formulations market is regulatory compliance. But it is only a matter of time before China crosses this hurdle as well.

But then as Ranbaxy's Singh points out, Indian companies continue to have a headstart particularly in the highly developed and regulated markets, where a strong front-end and integrated play remain the key factors determinants of competitive advantage. What is more, as Reddy notes, "Putting our analytical capabilities to work and pushing our research teams to go beyond infringement and create proprietary products does give us a global edge." That means a global blockbuster drug should soon be coming out of India.

 

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