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Are Indian Pharma Players Ready for New Strategy?

14.02.2008
The article discusses issues of patents, role of WTO, issues in New Drug Approval and R&D strategies adopted by Indian pharmaceutical companies and provides the basic understanding of the key success factors vital in the pharma industry. Written by Dr Anand Agrawal

April 11, 2001, when people saw a short, bespectacled figure waving from the balcony of the New York Stock Exchange, after his company became the first Indian - in fact, first Asia Pacific (non-Japanese) pharmaceutical company to list on NYSE, is unforgettable for fifty-nine years old, Kallam Anji Reddy.

That figure founded Dr. Reddy’s Laboratories (DRL) in 1984 and had worked hard enough to develop competencies for his company covering an entire pharmaceutical chain – basic research, finished dosages, generics,* bulk actives, biotechnology and diagnostics in less than 20 years. The result - DRL once ranked 2nd as most successful company in Pharma industry in India, just one rank behind Ranbaxy Laboratories (that was founded in 1961 -twenty three years older than DRL) and was regarded as a major competitor against Chemical, Industrial & Pharmaceutical Laboratories, popularly known as CIPLA (established in 1935 - regarded as India’s 2nd largest drug maker by market share after Ranbaxy Laboratories). In fact DRL had even surpassed CIPLA - a company that was about 50 years older than it, once (in 2003) in terms of annual turnover (Refer table 1, Appendix 3).

Dr. Reddy, a padmashree and PhD. from National Chemical Laboratory, Pune, said while establishing the Research Foundation,

“Many feel this was a daunting task. Even today, I am often inundated by various "facts and figures": for every new drug that is launched, some 10,000 molecules fail; that the average cost of bringing an NCE to market is over US$ 800 million; and the time taken is anything between 10 and 12 years.”

Now, after more than 10 years of the research activities the company was publicizing its success in developing more than seven NCEs, of which five are at Phases II and two are at pre-clinical phase of trial. The company was also emphasizing its status of being the first company in India to out-license a molecule for clinical trials to Novo Nordisk – the world leader in diabetes. But, after seeing so much silver lining, when in 2003, Novo Nordisk discontinued the further clinical trials of DRL molecules, the shock was not easy to absorb for the company, especially for Dr. Reddy, who decided to rethink the company’s’ strategy along with his team, including his son, Satish Reddy, Managing Director & Chief Operating Officer, who was running the company with Reddy casting a paternal eye over research, for the future ahead 2005 when patent laws has been enforced in India according to the WTO agreement.

THE GLOBAL PHARMACEUTICAL MARKET

The World Pharmaceutical market is estimated at US$ 650 billion and is expected to grow to US$ 842 billion by 2010 . With inflation adjusted compound annual growth rate of 20 per cent over the last two decades, growth of this market has significantly outstripped global economic growth. Developed countries represent not only the largest, but in some cases, also the fastest growing market. The US is the largest single homogeneous market, currently generating around US$ 182 (1) billion in annual pharmaceutical sales. This is followed by Europe and Japan, each of which account for sales worth US$ 169.5 billion and US$ 60.3 billion respectively.

Fig 1. provides the region-wise share of the global pharmaceuticals market. Despite the huge, and growing, size of the global market, the industry continues to enjoy consistently high return on invested capital - even after capitalizing the huge R&D investments. Several factors have contributed to these high returns, but the chief among them are low levels of competition. This shows up at several levels. First, there are huge entry barriers, and over the last few years there has been a contraction in the number of international players owing to consolidation and concerted M&As. Second, in sharp contrast to other industries, any two given drug companies usually only narrowly compete with each other. There are more complementarities in product portfolios than direct substitutes. Third, patents create significant periods of product protection from generic products. Thus, in a particular therapeutic segment, the typical global scenario is one where only three or four products compete with each other in mass consumer markets with powerful underlying growth.

And, while generics constitute a very large and rapidly growing market throughout the world, it is occupied by distinctly different pharmaceutical players. There are hardly any international companies that are strong in both new drug discovery and in generics.

INDIAN PHARMACEUTICAL INDUSTRY

As presented in Fig. 1, despite having a very large number of players, India accounts for only 1.3 per cent of the global pharmaceutical market. Sales of the domestic industry are expected to exceed Rs. 260 billion in 2005-06. Bulk drugs (Active Pharmaceutical ingredients or APIs) business account for 21.42 per cent of this sales, while formulations account for the remaining 78.57 percent in Indian Pharmaceuticals market. For Details on what are pharmaceuticals, Bulk Drugs, etc

More than 60 per cent of India's APIs production is exported. The balance is sold locally to other formulators. Over 85 per cent of the formulations produced in the country are sold in the domestic market, which makes India largely self sufficient in formulations.

The pharmaceutical industry is a knowledge driven industry and is heavily dependent on Research and Development for new products and growth. However, basic research (discovering new molecules) is a time consuming and expensive process and is thus, dominated by large global multinationals. Indian companies have only recently entered the area. The Indian pharmaceutical industry came into existence in 1901, when Bengal Chemical & Pharmaceutical Company started its maiden operation in Calcutta. The next few decades saw the pharmaceutical industry moving through several phases, largely in accordance with government policies. Commencing with repackaging and preparation of formulations from imported bulk drugs, the Indian industry has moved on to become a net foreign exchange earner, and has been able to underline its presence in the global pharmaceutical arena as one of the top 15 drug producers worldwide. Currently, there are more than 2,400 registered pharmaceutical producers in India. There are 24,000 licensed pharmaceutical companies. Of the 465 bulk drugs used in India, approximately 425 are manufactured here. India has more drug-manufacturing facilities that have been approved by the U.S. Food and Drug Administration than any country other than the US. Indian generics companies supply 84% of the AIDS drugs that Doctors without Borders uses to treat 60,000 patients in more than 30 countries

Major issues concerning Pharmaceutical Industry

Patents
Patents are a vital aspect of the global pharma industry. Patent protection is essential to spur basic R&D and make it commercially viable. But, only the developed nations endorse product patents. Most third world countries have patent laws but enforcement is totally lax. Some developing nations like India, Egypt and Argentina allow only process patent registration. As a result Pharma R&D is concentrated amongst the pharma MNCs in USA, Japan and Europe. A researcher undertakes patent registration once a molecule shows some promise of therapeutic effectiveness. Patent life counter starts running from the day the patent application is made. The patent office then starts the process of establishing that the molecule is unique. The steps involved are:

• Within 18 months of filing the application, a brief write up of the molecular structure and its therapeutic utility is published as a public document.

• Patent office thereby invites objections, if any, from third parties e.g. competitors.

• Objections received are conveyed to the applicant who has a chance to defend or modify his claim to originality.

• The modified claims are republished and once again objections are invited.

• Once the patent office is satisfied about the applicant’s claim, it grants the patent.

The whole process takes 4-5 years due to significant backlog in the patent registration office. Once a patent is granted in one of the developed nations, it is relatively easier to get it in other countries. Also, certain patent authorities have coverage over many nations e.g. European Patent Office covers a large part of the European sub-continent.

New Drug Approval (NDA)
Prior to launching its products in any country, a pharma company undertakes patent registration to protect its own interests. To protect the interests of the consumers, it is necessary that the product be approved by the drug authorities in that country. Mostly the process for seeking approval is initiated alongside the patent registration process. An NDA (New Drug Application) is filed with the drug authorities - such as FDA in US or Drug Controller in India, detailing the new molecules’ therapeutic properties. Then, clinical trials are carried out in 3 stages.
• Animal toxicity (Testing on animals).
• Trials on a few select volunteers.
• Trials on a larger scale in hospitals/ institutions.
Drug authorities’ approval has to be taken at each stage and only when all three trial stages are successfully completed can the product be launched. Once a new product has been launched in any of the developed countries like USA, Japan or Europe, it takes relatively lesser time to get approval from drug authorities in other countries.
WTO
Due to pressure from the developed countries, across the world uniformity in patent laws is being implemented under WTO (World Trade Organization - earlier GATT i.e. General Agreement on Tariffs & Trade). Presently, different countries have different patent types and life period. WTO has decided upon a product patent life of 20 years in all countries. However, to ensure a smooth transition and provide local players in the developing countries, ample time for gearing themselves, a moratorium up to the year 2005 AD was provided. So, new products i.e. drugs introduced after this date has to be accorded product patent protection even in countries like India or Argentina.

ENTERING INTO THE U.S. MARKET

Beginning in the early 1970s, the U.S. government encouraged manufacturers to make duplicates of big drugs and sell them cheaply in the country. In the mid-1990s, Indian companies searching for overseas revenue streams began pushing into the U.S., where chronically high prices for prescription drugs created a ready market for generics. Dr. Reddy's, for example, was one of the hundred companies in the United States that over the years knocked off everything from the antibiotics to the specialized drugs. DRL now generates one-third of its sales in the U.S. To speed up approvals for generic firms filing for approvals in the U.S. markets, the FDA formulated some statutory approval mechanisms like 505(b)(2) new drug application, which drug makers can use if a generic drug they are trying to sell is not a virtual duplicate of an original patented drug. It is the most preferred route for seeking approval because it allows the chemistry of the copycat drug to differ slightly while keeping the main ingredients the same, and it also doesn't mandate a proof of safety and effectiveness.

When Indian drug makers like Dr. Reddy's, Ranbaxy and Cipla etc. decide to crack the global markets they do not simply wait for the patent to expire, as many generic drug makers do. Instead, they turn to lawyers and ask them to exploit a loophole in an existing patent, and consequently, file legal challenges on a range of drugs that seemingly have years of exclusive sales left.

With their new strategy, Indian generic drug makers do not even challenge a patent directly, rather they argue that their product doesn't infringe on patent protection because it is made of different ingredients, even though it has the same effect as a branded drug.

Indian pharmaceutical companies are also leaving other countries behind in the race to grab a share of the huge U.S. market. Worldwide, 37 percent of the Drug Master Files submitted last year came from India, the largest share of any country . In the first six months of the current calendar year, Indian companies filed 58 Drug Master Files (DMFs) - nearly double the number of DMF filings in the corresponding period last year and more than the combined filings from the next five countries. This is in sharp contrast to the situation a few years back. In 2000, Indian companies had 40 DMF filings, second to 44 by Italian companies.

One reason Indian companies are doing so well in America is that they have learned to exploit U.S. patent laws that two decades ago were amended to allow for the sale of copycat pharmaceutical products.

After the US, it is now destination Europe for Indian pharma companies. While domestic majors such as Ranbaxy, Dr Reddy's and Wockhardt have already set shops in Europe, Zydus Cadila has just made its entry by acquiring Alpharma France. Wockhardt also lapped up the UK-based CP Pharmaceuticals, which has helped it to get into the top 10 generic companies in that country.

RESEARCH & DEVELOPMENT (R & D)

The vision of DRL as stated in company documents after 1992 was "To be a discovery-led global pharmaceutical company." Though, when it was started in 1984, like some other players of that era in India, it concentrated on strengthening reverse engineering capabilities to produce high quality bulk drugs and formulations at low costs, and sell them in the domestic market. Dr. Reddy, who claims that his first love had been the research, knew the importance of these skills, for they created the technological foundations for the Company's successful foray into the international generics market. But, within next 8 years, he realized that the ultimate accolade for a pharmaceutical company comes from the strength of its drug discovery programme and the size of its new chemical entity (NCE) pipeline. And the results are company’s’ five R&D facilities in India and the US. Dr. Reddy’s Research Foundation (DRF- focusing lead optimization, lead profiling and pre-clinical trials) and the New Technology Development Centre (TDC- aims at reducing the chemical cost of producing NCEs) at Hyderabad, Dr. Reddy's US Therapeutics Inc. (RUSTI - a bio-pharmaceutical company for discovery and design of novel therapeutics focusing on diabetes, inflammation, lipid metabolism, oncology and cardio-vascular disease with molecular biology technology platforms) in Atlanta, USA, a specialized research laboratory set up by its subsidiary Aurigene Discovery Technologies (a post-genomic discovery services company focusing on building skills in automated medicinal chemistry, structural biology and structure based drug design) in Boston, USA, and Aurigene's Bangalore laboratories in Bangalore, India. In 2006–07, Dr. Reddy’s filed 33 Abbreviated New Drug Applications (ANDAs) in the U.S., including 7 Para IV filings. With these, Company has joined the elite club of 100+ ANDA filers. Earlier in 2001-02 DRL got 180-days exclusivity grant in US to sell its Fluoxetine 40 mg capsules, due to which company saw a tremendous growth of 58% during that period. Howwever, after the shocking news of failure of their out-licensed molecule to Novo Nordisk, Dr. Reddy was reminding his team their earlier claims of pursuing a strategy of going up the value chain incrementally to manage risks intelligently by out licensing new molecules to larger pharmaceutical companies, which have the resources to take the molecule to the market faster. They further devised their strategy plan of conducting target-based drug discovery in Atlanta complemented by the chemistry-based research approach in India. Further, they identified their core businesses of API, Branded Formulations and Generics whose businesses can offset the risks inherent in discovery and specialty, and provide a cushion against unforeseen events and risks by building critical mass for the organization.

Now, Dr. Reddy is keen to see the status of his company along with other Indian Pharmaceutical companies in terms of relative performance (annual turnovers) and R & D investments (Refer appendix 3). It is to be noted that DRL once managed to surpass CIPLA in terms of turnover in 2003. But, that achievement was short lived. DRL has been lagging behind CIPLA and Ranbaxy since last three years. However, till now, the research and development is directed toward supporting the business to focus on marketing of process development and manufacturing services to emerging and established pharmaceutical companies. The company claims of pursuing an integrated research with their laboratories in the U.S. focusing on discovery of new molecular targets and designing of screening assays to screen for promising lead molecules.

THE COMPETITION

The aspect in the figures of the R & D investment by Ranbaxy Laboratories Ltd, the biggest competitor of DRL and currently India’s largest pharmaceutical company, which Dr Reddy had noticed was an inconsistent investment. In 2006, Ranbaxy invested more than eleven percent of its sales in R & D (as compared to less than 11% by DRL), but in absolute figures Ranbaxy had been investing much more in R & D. However, it was not just the amount of the investment but the main issue, which was disturbing Dr. Reddy but the direction of the research.

Ranbaxy is primarily involved in the manufacture and marketing of anti-infectives, cardiovasculars, Gastro-Intestinal tract, and sedatives. Though was incorporated in 1961, only in 1993, it decided to go full throttle with R & D by setting up a Research Centre at Gurgaon, (near Delhi). The CEO of the company said,

“Our coordinated efforts in R&D, international operations, marketing and global networking would see Ranbaxy evolve into a research oriented specialty/branded pharmaceutical Company”

Ranbaxy claims having 550 scientists with well-defined research programs in the areas of Chemical Research (Synthetic Chemistry, APIs), Pharmaceutical Research (Dosage forms), Novel Drug Delivery System (NDDS), New Drug Discovery Research (NDDR), and, Fermentation Research (APIs). Ranbaxy had already made significant progress in its NDDS programmes, which was its main R & D focus. Within a span of five years of full throttle research, they successfully developed four products in the area of Oral Controlled Release Systems, using its patented technologies, which were launched in India setting the base for roll out in various markets. But the company feels that the development of a unique once a day formulation of Ciprofloxacin, which has been licensed to Bayer AG - originator of this molecule has been a breakthrough success for the company. Bayer, thus, obtained exclusive development and worldwide marketing rights to an oral once daily formulation of Ciprofloxacin. But Dr. Reddy had a different view, who was now trying to analyze:

Whether it would be more advantageous for a company to commercialize its newly discovered molecule than out-licensing its marketing rights to some other companies having more developed R&D facilities?

And the impressive record of Ranbaxy had shown that it was capable of doing both of these things, with many NCEs in pipeline, more than 40 products launched in India, 6 products launched in foreign market along with India, including South Africa, Poland, Hungary, Singapore, Malaysia, USA and Myanmar.

Now what made Dr. Reddy impatient was the announcement of a 10-year vision (till 2012) by Ranbaxy, for sustaining significant growth consistent with its Mission “to be an International Research-based Pharmaceutical Company”, under the rubric 'Vision GARUDA', with increasing emphasis on Novel Drug Delivery Systems Research (NDDS) and Drug Discovery Research (DDR). Now there is the belief that if the company develops state of the art R & D facilities for all stages of drug discovery, then it would not have to out-license any of its new molecules and it could reach market with its own molecule.

The competition was not just from a single giant for Dr. Reddy but also from other “Pharma Biggies’ like Wockhardt who claimed to possess 350 scientists in 2002 and having invested over Rs. 300 Crores in research and development during last five years. Till 1999 Wockhardt and DRL had about equal turnover. But DRL, in 2001, left Wockhardt a way behind and, in 2006, DRL had more than twice the turnover of that of Wockhardt. But. it was well known that a single exclusive marketing grant- like one obtained by DRL for Fluoxetine- or a new successful molecule can instantly change these comparative figures in Pharmaceutical Industry. Therefore, he seemed more concerned about the R & D activities of its competitors. And, therefore, he was aware by the fact that this company had a record of being one of the highest investor in R&D activities. But Dr. Reddy was not comfortable by the statement in the company’s web site:

In the longer-term, Wockhardt's R&D strategy is to discover a series of new drugs, especially in the field of anti-infectives, antibiotics and anti-bacterials.

It means, for him, that he would have to face a head on competition in the research field with Wockhardt too. The most ambitious R&D for Wockhardt was the New Drug Discovery Program, which it embarked upon four years ago. Another focus was on developing products based their patented Novel Drug Delivery Systems-like that of Ranbaxy. Like Ciprofloxacin of Ranbaxy, Kaizem CD, a unique once-daily cardiac drug used in treatment of Angina, was already seemed to be a success for the company. Moreover, it had already developed and launched two biotechnology and was claiming to launch Recombinant Human Insulin (RHI), that would make it the first in India and among the very few in the world to manufacture and market RHI. On the new drug discovery front, Cipla, another competitor for DRL was comparatively quieter. In fact, Cipla and Ranbaxy, in fact have been competing for being the number one company in the domestic retail market. CIPLA’s research is mainly focused on NDDS such as sustained and modified dosage forms, transdermal, inhalation, nasal, rectal and topical delivery forms, and CFC-free metered dose inhalers. On NCE front, the company was working on antifungals, antihistamines and anti-HIV.

However, Dr. Reddy seemed to be more interesting on having a comparative view on the major achievements by his competitors vis a vis DRL in the area of R& D to chalk out his companies’ future plans. He had realized after going through the reports that DRL needs a strategic change in the area of R & D when he said,

''The bigger challenge is to take a molecule from our pipeline all the way to the market place cost-effectively and also make it available at affordable price to the people. ''

However, even Dr. Reddy knows that bringing a molecule from research to commercialization has been the most challenging task for Indian Pharmaceutical players.

Acknowledgments
The author wants to extend acknowledgment to three students of ICFAI Business School, Hyderabad (2008 batch). Mr. Janpriya, Mr. Alok Agarwal and Mr. Saurabh Kumar for providing help in getting the data for this article.

Dr Anand Agrawal | ResearchSEA
Further information:
http://www.researchsea.com/html/article.php/eml/1/aid/2749/cid/4

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