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The collapse of western pharmaceutical companies is inevitable Ranbaxy, Dr. Reddy’s Laboratories, Nicholas Piramal, Cipla, that there are only so many competitors that can be acquired, and and Biocon – are these Indian pharmaceutical companies eventually these companies will not be able to sustain themselves familiar to you? They may not be today, but in the coming without developing their own new products.
decades these are the brands that will likely be lining the shelves of pharmacies across the western world. Between 2010 and 2013, In contrast, the lesser-known Indian pharmaceutical companies Eli Lilly will see four of its five patents on top-selling drugs expire. have spent the past 20 years building strong capabilities in the ear- Other leading members of “Big Pharma”, such as Pfizer, Novartis, ly stages of the value chain: R&D, production, and distribution. Merck and Sanofi-Aventis will each be facing a similar predica- Improvements were facilitated by India’s ability to conduct clinical ment by 2016. These inevitable patent expirations will provide ge- trials faster and an abundance of inexpensive local talent. These neric drug producers with a tremendous opportunity to capture a advantages, matched with the Indian companies’ focus on R&D, large part of the pharmaceutical industry worldwide.
rather than marketing, allowed them to reap the benefits of their The Death of the Blockbuster Drug
Western pharmaceutical companies, under the traditional Big Pharma has long known that its blockbuster drug business blockbuster drug strategy, simply cannot compete on cost and do model would come to an end. For years the major industry players not have the R&D pipeline to be sustainable on their own. In fact, have struggled to develop new drugs that would be able to replace the only real advantages that these companies have over their In- giants such as Lipitor, which generated close to $13 billion during dian counterparts is their brand equity and existing relationships 2008 alone. Furthermore, Big Pharma has very few opportunities with consumers. Though this is a crucial selling point, it is one that to accelerate new drug development due to the laborious and time cannot be sustained without having new, unique and life-altering consuming processes involved in developing a drug, undergoing drugs for an extended period of time. To mitigate this, Big Pharma trials, and obtaining regulatory approval.
has begun to aggressively pursue both joint ventures and acquisi- Industry Value Chain
tions with a number of different Indian pharmaceutical companies. GlaxoSmithKline recently purchased a stake in Aspen (a South African generics manufacturer) and entered into an agreement Explosive growth in the sales of pharmaceutical industry gi- with India-based Dr. Reddy’s laboratory to sell generic products in ants in the 1990s and 2000s was a direct, but not shocking result Asian emerging markets under the GlaxoSmithKline brand. Simi- of the heavy investments Big Pharma made throughout the 1980s. larly, Pfizer created Greenstone, a spin-off company selling gener- During this time, the major industry players also began to make a ics, and has entered an agreement with multiple Indian companies series of vertical acquisitions designed to bring more operations in- to sell their products in the US and other markets. Though these house in order to protect their intellectual property and bring their strategies will help the Western pharmaceutical giants to sustain promising drugs to market faster. The success (and expense) of Big their profits in the short term, how much longer will it be until their Pharma’s activities during this period prompted the industry’s Indian competitors no longer need them to succeed and grow? biggest companies to shift their financial resources from R&D to marketing in an attempt to fully capitalize on their high-potential The Black Clouds
portfolio and swelling asset base. However, the result of this strat- egy was a weakening of these companies’ most essential capability: Joint ventures between Western and Indian pharmaceuti- cal companies allow Indian generic drug makers to leverage the brand equity of their Western counterparts to sell “branded gener- Due to the long-lead times associated with bringing a new drug ics”. The two-tiered selling scheme allows Big Pharma to continue to market and the favourable patent terms available to Western selling its higher-priced branded drugs in Western markets while pharmaceutical companies, the effects of this industry shift are only accessing developing markets by selling branded generics at sub- being felt today. Since recognizing their lack of prospective drugs stantially discounted prices. in the late stages of R&D and exhausting their efforts at acquiring patent extensions, Big Pharma has commenced a series of acquisi- However, the long term implications of this strategy have yet to tions to build their patent portfolio, such as Pfizer’s US$60 billion be seen. Will consumers from developed countries sit back quietly acquisition of Wyeth in early 2009, or have teamed up with generic as the exact same drugs they purchase, made by the same com- drug makers to take advantage of their low-cost manufacturing panies, are sold for a fifth of the price abroad? Or will consumers and widespread distribution capabilities. The problem, however, is speak up and demand lower prices or seek alternatives, as we have seen in other industries? The “medical tourism” industry, which is social pyramid in rural areas of India that plans to reach 50 mil- quickly growing internationally, is a prime example of the lengths lion consumers that, before now, were not able to afford or access consumers may be willing to go to reduce their healthcare costs. almost all major drugs. Hence, the company’s strategy lies in dis- North Americans are now frequently traveling to developing coun- tribution not marketing. An alternative sustainable strategy for Big tries such as Argentina, Cuba, Columbia, India, Malaysia and Thai- Pharma lies in innovation. Instead of drug discovery, pharmaceuti- land in order to obtain faster and cheaper medical treatment.
cal companies can focus on new technologies like gene therapy, or In addition, there is reason for consumers to be concerned that this strategy ignores the real problem: Western pharmaceutical The key to being a sustainable global pharma company is to dis- companies are not rebuilding their capabilities at the early stages aggregate the value chain and focus on core competencies based of the value chain. A recent study conducted by two professors at on available resources. A company with a great R&D pipeline, and York University indicates that drug companies in North America weak distribution should partner with a company that has strong continue to spend three times more on advertising and promotions marketing capabilities and a widespread distribution infrastruc- than on R&D. In an industry that places so much emphasis on the ture. It is these weaknesses in the value chain of the Big Pharma size of its R&D investments, consumers should question the extent companes that will force them to outsource non-core processes. to which they trust the big branded companies over their smaller counterparts and other generics producers.
On the other hand, the Indian pharmaceutical companies have engaged in numerous joint ventures with their Western counter- One further aspect to be considered is the actual sustainability parts, and with any joint venture comes the transfer of knowledge. of this plan when it comes to emerging markets. Economic growth Joint ventures and the establishment of reputable brands by the will eventually bring these countries the levels of government and Indian companies will allow them to be able to gain the support of insurance provided healthcare that we’ve come to expect in the de- insurance companies in both developed and developing markets. veloped world. However, who is to say that the drug policies of With high regard from insurance companies, Indian pharmaceuti- these emerging market countries will cover the purchase of identi- cals will finally be able to secure brand trust and ensure consumer cal, higher-priced drugs instead of cheaper generic drugs that are confidence. produced domestically. Instead, it is more likely that consumers will be encouraged, if not forced, to purchase the cheapest generic Finally, these Indian companies are ideally located in areas of drugs (that still meet the necessary quality standards), in order to large populations. Many of these companies have distribution al- obtain coverage by insurance companies. This trend will further ready set-up in India, and are very close to other large Asian coun- diminish the market power of today’s big pharmaceutical compa- tries such as China. This will provide them with a huge, and in- nies, and help give rise to India’s budding giants.
creasingly important population to target before moving to North Winds of Change To The West
America and the rest of the developed world.
Indian pharma companies are already ahead of the race. Further Many pharmaceutical companies, such as GlaxoSmithKline, acquisitions in this industry have allowed the Indian drug giants to Pfizer, and Novartis, have realized their long term survival de- build their R&D pipeline. With strong capabilities in manufactur- pends on their success in emerging markets. Western pharmaceuti- ing at a low cost and widespread distribution infrastructure, the cal companies employing a vertically integrated strategy simply Indian pharma companies are outsourcing their only weak compo- cannot sell their products at a lower price in emerging markets. To nent of their value chain: marketing. be successful in emerging markets, the Western pharma companies While the Western pharmaceutical companies build their strat- egy on a disaggregated model, the Indian pharmaceutical compa- For example, Western pharmaceutical companies could decide nies will gain marketing knowledge, build their brand equity and to outsource distribution and on developing their R&D pipelines. eventually become vertically integrated. At this point, these com- Another strategy that Big Pharma could employ would be to target panies will have strong capabilities in every component of their a population in a lower economic strata and develop a new market value chain. Though it is impossible to know who will come out rather than focus on more mature markets. Novartis has taken the on top, these changing industry dynamics suggest that “Indian initiative to develop a pilot program targeting the bottom of the Pharma” is poised to lead the industry in the coming decades. Selection of Most Valuable Drugs in the World Probable
Annual US
Expirary
revenue at risk
AstraZeneca
Bristol-Myers Squibb
AstraZeneca
Purdue Pharma
Zydus CND
Forest Laboratories
Bristol-Myers Squibb
Eli Lilly

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