The Indian pharmaceuticals industry has grabbed the attention of the world with its aggressive acquisitions and by offering cost-effective manufacturing and research services. Mostly makers of off-patent or ‘generic’ drugs, the Indian firms have not just challenged patents of large drug companies in the US and Europe but are also taking steps towards launching new products and services. In a recent interview audit firm Ernst & Young Llc.’s global pharmaceuticals markets leader Christopher Gray , a close observer of the industry, talks about what the Indian firms should watch out for and the opportunities ahead. Edited excerpts:
Some Indian drug makers have hived off their R&D divisions to derisk operations. Is this a smart move or short-term fix on their books?
As far as I have heard, this (strategy has not been seen) in China or in Russia. In Brazil, the companies are at an earlier stage, may be three-four years behind Indian drug makers. They are still considering their role in R&D and looking to take lessons from the Indian experience. I can’t say (yet) if it is good or bad that Indian companies are carving out their R&D activities. The carved units could operate as small centres of excellence, be nimble and entrepreneurial. Private equity may, in fact, have a role to play there by embedding some rigour in the process and putting some metrics around their R&D.
A lot is made out of the cost advantage of the Indian pharmaceutical sector but is there realization that this could erode over time?
It is a short-term advantage though I can’t say what short term in this case means. Companies realize that they don’t want to put all their eggs in one basket. They want to spread their risk and portfolio, so that as costs go up in India, they can quickly shift work to say, the Philippines. Also, Indian pharmaceutical companies have been going up the value chain. Indian companies, in some cases, have gone farther with their models in moving from the active pharmaceutical ingredient stage to dosages to delivery to finally the bedside stage. They are even experimenting with investments in healthcare and that is an area multinational drug companies have not woken up to.
There is a belief that manufacturing and clinical research work outsourced to India is largely low-end work. Your thoughts?
The multinationals drug makers started several years back, with basic back office and accounting work and now moving up to marketing and strategy. They are beginning to be more comfortable in outsourcing strategic roles that have traditionally been done at the headquarters. There might be sensitivity in the pharmaceutical industry about certain core functions but going forward, they will not have any reservations about advancing in the value chain. The trend is that more advanced, sophisticated work will be coming to India or other places for outsourcing.
What are the big risks before Indian drug makers?
These companies are growing very fast and acquiring a lot. (The big risk is) if they are not thorough in their due diligence and, what is more risky, if they are not effectively integrating acquisitions. They can take a lesson from the multinationals who failed in this area and are addressing it even after 10 years. Some of them (post acquisition) faced lack of data transparency, were unable to make accurate forecasts or really understand where their costs were, simply because their own information technology systems didn’t talk to each other.
Political risk is something that companies, including the multinationals, haven’t paid much attention to. To really understand the risk environment, companies need to develop a better understanding of the relationships with policymakers. I think they still have an adversarial approach. They need to make allies of policy makers and realize that all governments are under cost pressures.