Emerging Opportunities in Pharmaceutical Contract Manufacturing by cqp14386


									                                                                                                Special Report

Emerging Opportunities in Pharmaceutical
Contract Manufacturing

       merging trends in the global        of a drug, several generic versions are
                                                                                        PRATIK KADAKIA, JEFFRY
       pharmaceutical       industry       launched, which are available for a
                                                                                        JACOB & ANKUR SINGHAI
       present unique challenges and       fraction of the price of the original
                                                                                        Tata Strategic Management Group
opportunities for Indian contract          patented drug.
                                                                                        Nirmal, 18th Floor, Nariman Point
manufacturing        organisations
                                                                                        Mumbai 400 021
(CMOs). The age of one-size-fits-all           The global pharmaceutical indus-
                                                                                        Tel: +91-22-6637 6789.
strategy will no longer work in            try is projected to grow at 6% annu-
                                                                                        Fax: +91-22-6637 6600
today’s changing business scenario.        ally from US$700-bn in 2007 to about
                                                                                        Email: pratik.kadakia@tsmg.com
The time has come for managements          US$940-bn by 2012. The generics seg-
                                                                                        Website: www.tsmg.com
of Indian CMOs to decide on their          ment is expected to grow faster at 11%
focus segments and build capabilities      CAGR, compared to the innovator seg-
                                                                                       striking strategic alliances (e.g., GSK-
necessary to succeed in them.              ment at 5% CAGR during this period.
                                                                                       Aspen deal) in order to participate in
                                           This is mainly driven by governments
                                                                                       the fast growing generics market.
Global pharmaceutical industry             of various developed and developing
                                           countries increasingly promoting the
                                                                                           Innovators and generics compa-
    The global pharmaceutical indus-       shift to generics in an effort to control
                                                                                       nies are both increasingly facing pres-
try can be divided into innovators,        their rising healthcare budgets. Glo-
                                                                                       sure on their bottomline. EBIT (earn-
generic companies and independent          bally US$ 80-bn worth of drugs is ex-
                                                                                       ings before interest and taxes) margins
supply organisations. Innovator com-       pected to go off-patent by 2010.
                                                                                       for most global pharmaceutical com-
panies focus on developing innova-
                                                                                       panies have been stagnating or declin-
tive drugs and formulations that en-       Changing industry dynamics
                                                                                       ing over the past few years.
joy patent protection for a defined
period of time, usually 20 years. Ge-         Many stereotypes are being bro-
                                                                                           This has forced companies to re-
neric players focus on manufacturing       ken in the pharmaceutical industry to-
                                                                                       look at optimising their cost structure
versions of off-patent drugs, which        day due to changing realities of the
                                                                                       and increased focus on outsourcing
are similar in dosage, safety, strength,   marketplace. Innovator companies are
                                                                                       less critical activities to more cost com-
method of consumption, performance         increasingly acquiring generics com-
                                                                                       petitive locations/ options. Manufac-
and intended use. After patent expiry      panies (e.g., Daiichi-Ranbaxy deal) or
                                                                                       turing, which represents about 30% of
                                                                                       the annual cost base for a typical glo-
                                                                                       bal pharmaceutical company, offers
                                                                                       good opportunity for significant cost
                                                                                       savings, while simultaneously en-
                                                                                       abling the company to focus all efforts
                                                                                       on research and marketing. Innovator
                                                                                       companies like Pfizer, Merck and Astra
                                                                                       Zeneca have already announced in-
                                                                                       tentions to contain production costs
                                                                                       by increasing outsourcing of manufac-
                                                                                       turing activities to emerging econo-

                                                                                           This is expected to lead to an in-
                                                                                       crease in pharmaceutical contract
                                                                                       manufacturing globally from US$20-bn
                                                                                       in 2006 to US$40-bn by 2012.

Chemical Weekly November 25, 2008                                                                                            201
         Special Report

                                                                                           power is uniquely positioned to take
                                                                                           advantage of this opportunity.

                                                                                               Both innovators and generics of-
                                                                                           fer different opportunities and the age
                                                                                           of one-size-fits-all strategy is no
                                                                                           longer valid. While the generics seg-
                                                                                           ment will continue to bring in the vol-
                                                                                           umes, the innovator segment is likely
                                                                                           to be more profitable. Focusing on in-
                                                                                           novators will enable current Indian
                                                                                           CMOs to move from plain toll manu-
                                                                                           facturing to value-added offerings
                                                                                           with higher margins.

                                              the industry, along with the rapid pace          Focusing on innovators would,
                                              of infrastructure development, result        however, require basic changes in the
                                              in their ability to get into the game and    DNA of an existing CMO. Adherence
                                              change it very quickly by focusing on        to regulations, FDA certifications and
                                              building scale, thereby becoming cost        GMP will no longer suffice as a differ-
                                              leaders. China, with strong basic            entiating edge. Focusing on innova-
                                              chemistry skills, has clear advantages       tors would require different capabili-
                                              in products featuring wide range of ap-      ties to be built and a different mindset,
                                              plications and requiring large produc-       business model and risk appetite, as
                                              tion volumes. However quality, reliabi-      enumerated hereunder:
Implications for Indian CMOs                  lity, environmental issues and IPR pro-
                                              tection are some of the issues need-            Change in critical success factors:
    The changes in the global pharma-         ing attention in China.                         Scale and size are no longer competi-
ceutical industry have far-reaching im-                                                       tive weapons. Adherence to IP, world
plications for their outsourcing partners.        With the changing industry dyna-            class quality standards and manag-
The generic companies spawned the first       mics and increasing competition, both           ing client relationships are the new
wave of contract manufacturing in In-         locally and from China, the erstwhile           determinants of success.
dia, led primarily by the need to be glo-     successful approach of most Indian
bally cost competitive and to protect their   CMOs of achieving economies of scale            Shift in business model: Innova-
margins. At last count, there were over       to reduce costs does not appear to be           tors prefer a company with a non-
1,500 pharmaceutical contract manufac-        sustainable going forward.                      conflicting business model — a
turing firms in India, most of them focus-                                                    partner who would always assist
ing on basic APIs and intermediates.          How Indian CMOs can stay                        in its operations, rather than launch
However, with the generics segment            competitive                                     a competing product. A number of
across the world increasingly under pres-                                                     domestic firms offering contract
sure due to increased competition, their          While the opportunity to service            manufacturing services today re-
outsourcing partners are now feeling the      generics companies continues to of-             invest the revenues in developing
heat. Mushrooming of a large number of        fer significant potential, increasing           their own compounds. This model
CMOs in emerging economies has also           interest in contract manufacturing by           is no longer preferred due to in-
decreased their bargaining power to an        innovator companies opens up an-                creased sensitivities around IP. As
extent.                                       other rapidly growing segment. India,           the market matures further, these
                                              with the largest number of US-FDA               two business models will separate
    Also, China is fast emerging as the       certified plants outside the US, maxi-          out completely. For e.g., Indian
destination of choice for production          mum number of DMF filings (more than            companies like Divi’s Laboratories
of basic APIs and intermediates. Gov-         twice its closest competitor) and huge          and Jubilant Organosys with non-
ernment subsidies and incentives to           pool of highly trained technical man-           conflicting business models have

202                                                                                       Chemical Weekly November 25, 2008
                                                                                           Special Report

  been able to successfully attract       lead to eventually transforming it-        ticals Inc, a subsidiary of Johnson
  global innovator companies.             self into an end-to-end CRAMS              & Johnson, to develop two drug
                                          (contract research and manufactur-         candidates for various disease tar-
  Developing additional capabilities:     ing) player. For e.g., Divi’s Labora-      gets. Advinus will receive an
  The CMO should support the cli-         tories offers services in custom           upfront payment, as well as mile-
  ent in his future growth areas, e.g.,   chemical synthesis to several glo-         stone payment of up to US$247-mn,
  high potency drugs, which may           bal pharmaceutical companies and           upon successful development of the
  require additional investment or        enjoys one of the highest EBITDA           two targets. Advinus is also eligible
  dedicated facilities. Business de-      margins in the industry.                   for royalties on the sales of any
  velopment and managing client re-                                                  drug products resulting from the
  lationships is critical. Acquisitions   Increasing risk profile: Risk shar-        collaboration.
  or strategic alliances may need to      ing agreements with innovator
  be actively considered to gain ac-      companies for custom synthesis          Succeeding profitably in the
  cess to technology or increasing        and milestone based royalty pay-        new environment
  global market reach. For example,       ments exposes it to the risk of non-
  Dishman Pharmaceuticals acquired        commercialisation of a potential            The Indian contract manufacturing
  Carbogen AMCIS, a Swiss com-            new drug. For example, Indian           market is expected to grow at 38% annu-
  pany, in 2006 for its high potency      companies such as Nicholas              ally from less than US$1-bn currently to
  manufacturing capability. This ac-      Piramal, Jubilant Organosys and         reach US$4.2-bn by FY 2012. Both the
  quisition enabled the company to        Suven Life Sciences have entered        innovators and generics segments offer
  broaden its technological base and      into risk-and-reward-sharing agree-     huge potential for Indian CMOs going
  also gave it an European interface      ments with Eli Lilly. The com-          forward. Critical success factors for par-
  with the global pharmaceutical          pounds, initially made available by     ticipating in the opportunity offered by
  community.                              Lilly, have to be brought forward       each segment are different and accord-
                                          by the Indian companies by invest-      ingly merit serious consideration by se-
  Offering end-to-end services: In-       ing their own financial and human       nior management. Indian CMOs will do
  novators prefer partners who can        resources. Eventually, if the drug      well if they identify their target segments,
  assist them across the entire value     gets commercialised, Eli Lilly would    develop necessary capabilities and re-
  chain. This could mean extending        pay the companies royalty on its        define their value proposition accord-
  services from drug discovery and        global sales. Similarly, Advinus        ingly, failing which they may risk falling
  development, at one end, to manu-       Therapeutics, a Tata Group com-         by the wayside as the industry consoli-
  facturing of formulations and           pany, has entered into a deal with      dates and new entrants jump into the
  injectables, at the other. This could   Ortho-McNeil-Janssen Pharmaceu-         fray.

Chemical Weekly November 25, 2008                                                                                        203

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