Hyderabad :Glen Giovannetti is the leader of the global life sciences (pharma, healthcare, biotech) practice at accounting and consulting firm Ernst and Young and author of the 25th edition of Beyond Borders, an annual biotech industry report published by the company. In an interview during a recent visit to Hyderabad to attend a biotechnology conference, Giovannetti spoke about trends in the global and Indian pharmaceutical industries. Edited excerpts:

On Big Pharma, research and development (R&D):

Industry strength: Giovannetti says the research services side is well-formed in Indian pharma sector:

The problem was made worse in some respects by all the consolidation that happened in Big Pharma because there was a theory at one point that you could put these organizations together and get more efficiency in R&D. But as they grew too large, it became too bureaucratic and probably stifled the creativity that you need in research and development. So they have been implementing strategies of breaking into smaller units or focusing more narrowly... There is a multitude of strategies, but they are all very focused on whether they can improve their productivity.

One important way is to partner outside—much more over the last 5-10 years but really accelerating recently, much more accepting of the idea that not all the good ideas will come from inside the organization and they need to be out touching partners globally.

On Big Pharma venturing into the generics business:

Well, it’s a market strategy so it won’t help them at the R&D end, but when they look at growth, they see that the developed markets are going to face more generic competition because of these big patent expiries. But they are also not growing very fast because of pricing pressure from governments and private insurance payers. The expectation for growth in the US or Europe might be 2-3%.

In order to get a higher growth level that their investors expect, they know they need an emerging market strategy and so that often falls in the brand of generics, either through acquisitions or partnerships and other arrangements. A lot of them are realizing that they have large portfolios which are effectively branded generics that they already own and can market in a different way for different markets. So it has become an important part of the commercial strategy for many Big Pharma companies.

Some have actually gone exactly in the opposite direction and said “we will sell all that. We have it, but we’re going to be a pure-play innovation company." Bristol-Myers Squibb comes to mind, Eli Lilly is more in that area. So there is not one strategy that you can say applies to all the Top 10 but certainly they see their growth coming out of emerging economies. The branded generic strategy is an important component to drive growth.

On the impact on Big Pharma of cuts in healthcare budgets:

It’s starting now but the pressure’s only going to build because even if we were in slightly better economic times, the healthcare model is not sustainable, with aging populations and overall delivery of medical care costs going up. Interestingly, drugs are not the most significant expenditure. They are actually very small compared to doctors and hospitals and so forth, but it is very visible. Sometimes the drug price is very high and so it is an easy target from a political standpoint to say we are paying too much for drugs.

However, all companies realize that the pressure on pricing will continue, somewhat by budgets but it is also going to be a drive by the payers to say “I’m only going to be willing to pay a premium price if you can show me a real differentiated outcome for patients," or it is really improving the quality of life for somebody. Or it might be equal therapy to something that exists today, but it is a lot more efficient and it is keeping people out of the hospital, it gets them back to work faster.

So that’s driving a lot of the pharma companies to think about their commercial model ...Now they are beginning to step back and say “if the patient outcome is the most important thing, may be the drug is only one piece of it. May be we need to look at the whole solution." So that might involve medical education, it might involve helping with people staying on their drug. So you could think of collaboration with an IT (information technology) company to send SMS messages to make sure someone is taking their drug... There are all kinds of changes going on in the commercial model because they are trying to respond to these pressures.

On how India fits into the emerging commercial model:

From an India standpoint, to date the partnering here has been more on two fronts—one is outsourcing clinical research and manufacturing sometimes and at the commercial end with co-promotion and the question here is how will the innovation space grow in India so that it is directly contributing new ideas and molecules to the pipelines of these companies.

Certainly the research services side is well-formed here and well-recognised and that will continue to be there but will the innovation space grow in a way that there are new therapies? Not necessarily new therapies that would apply to the developed world, but could be India-specific or an emerging market solution. But I think that the key from a pipeline stand-point is where does innovation go and is there that ecosystem of companies, capital and academic institutions that can come together in a way that there are lots of new innovative ideas being produced?

On valuations in emerging markets like India:

Abbott (Laboratories) has set the bar very high. One would have to say based on that marker that yes, valuations are high. But I think it gives everyone else pause—is that an evaluation that they can sustain? I don’t know that that should be taken as a trend. That’s a very unique deal. (Abbott bought Piramal Healthcare Ltd’s generic medicines unit for $3.72 billion in 2010.)

On prospects of success for the acquisitions by Abbott and Daiichi Sankyo Co. Ltd, which purchased Ranbaxy Laboratories Ltd:

It is too early on those. I think the proof on those valuations will come much later. I think they were both bold moves where they saw the need to make a bold move in emerging markets.

I wasn’t in either boardroom to know what the exact psychology was, but some of this was to send a signal to the market and some of this was to send a signal to your own company that this is important to us, we are changing and we cannot survive just by selling in a developed world, we need to have a strategy. So some of that could have influenced the willingness to pay a high valuation so as to get in the game.

On evolution of the Indian pharma market:

The strength in the market has historically been generics and there is going to be a very big play here for a while in generics globally. The US obviously has these very large medicines coming off patent and that is going to be a phenomenon in the next few years, the big opportunities. Then it sort of moderates a little bit. You are seeing other markets that had very low generic penetration growing and then you have got other emerging markets. So there is a real growth story around generics and the globalization of products and expertise here. So I think that’s an optimistic story.

We haven’t even talked about biosimilars, but that’s coming up in a big way. It’s not as easy. There won’t be many players. There will be only a few that will have the capability to really compete in biosimilars. So in a way that will be a more profitable business. It should be for those who are able to do it.

And then I think the real question about how the pharmaceutical industry evolves here is the NCE (new chemical entitiees) space and what happens in terms of bringing together the elements necessary to create a discovery and development-based and an innovation-based industry, which is a very pressing challenge because there are smart people in other universities everywhere doing this research—so that’s not a doubt.

The question is: how is that research translated into commercial opportunity? Are there mechanisms to enable it to go from discovery into a commercial setting? And then, is the management capability and the capital available? I think that’s a real challenge because capital is going to remain very tight.