The Hindu Business Line : Pharma sector — The non-linear innovation

In the pharma industry, the true battle to be won is that of innovation, also its biggest challenge. This is not the one that moves linearly from one step to another but, non-linearly, from everywhere and anywhere.

At one point of time, any talk on the pharma sector was synonymous with the changing patent regime — from process to product. Analysts and advisors watched for the metamorphosis that the regulation change was expected to bring into the pharma sector.

January 1, 2005, came and went. The playersthat emerged unscathed were sturdy enough even before the regulatory climate change. From the pharma companies' perspective, the move to a stronger intellectual property protection was certainly not a battle to be won. To those striving to adapt to global trends, the shift was but inevitable.

The true focus of the pharma industry is something else, something more basic — innovation. Hence, given the impetus on innovation, intellectual property protection is merely a necessary accessory. The pharma companies have begun to leave more pronounced global footprints with many cross-border deals. Hence, it is important to understand the changing rationale behind the consolidation process across the world to bring out the not-so-subtle link between acquisitions and innovation.

A global overview

The pharma industry innovation does not happen linearly — from one step to another — but, non-linearly, from everywhere and anywhere. With the average life expectancy increasing, avenues are opening up for players to focus on therapeutics. Thus, American and European pharma majors have realised that the agiler smaller companies are riding the innovation wave better than themselves.

This realisation has spawned consolidations — the focus not as much to strengthen competitiveness as to capture potential innovation anywhere. Through the 1990s, the pharma industry saw a major consolidation process — Pharmacia and Upjohn (1995); Glaxo and Wellcome (1995; Sanofi and Synthelabo (1998); and Pfizer and Warner Lambert (2000).

The triggers for the consolidation were mainly the topline and bottomline synergies from combining the companies' varied therapeutic focusses and the resultant market reach. Also, given the risks in pipeline execution, companies resorted to acquisitions to strengthen their Phase-II and Phase-III product pipelines. For instance, the merger of Glaxo and Wellcome. This marriage was to result in a combined share of slightly over 7 per cent of the global pharmaceutical market, with toplines touching $25 billion, during that period. Also, the merged entity was expected to have roughly 13 new chemical entities and 10 vaccines in late-stage clinical trials.

The rationale was simple and made sense in the then pharma environment, when companies were sold on profits and reputation. Also, little was preached on the cost front with most bluechip companies ready to finance the fat prescriptions of their employees. Branded drug-makers enjoyed a higher weightage as the carriers of innovation, with generics looked upon as scavengers to take the booty leftover post-patent expiry.

Changes impacting pharma sector

The erstwhile pharma heavyweights are no more the sole founts of innovation, with the small- and mid-cap companies operating in niche areas.

The once-admired players are struggling to hold on to their reputation following controversies over hazardous side-effects on the use of their FDA-approved drugs

Generics are no more the backstage companies, with the latest US medi-care programme forcing a shift of preference to low-cost drugs.

Given this change in milieu, mergers of the 1990s will not make sense anymore as coming together of two pharma giants with pure focus on market share expansion may no longer prove as great. This is because such a merger will not only combine topline and bottomline, but also similar risks faced by the two companies.

As a result, companies that have understood this phenomenon have begun to diversify their portfolios by combining generics, biotechnology and other related areas with their traditional pharma model. A classic example is Novartis, one of Europe's largest pharma companies, which entered aggressively the generics space with the acquisitions of Germany's Hexal and the US-based Eon Labs. In doing so, it reduced the risk of over-reliance on its traditional pharma portfolio, staking, at the same time, a claim on the growing generics markets.

Merck KGaA's acquisition of the third largest biotech company in the world, Serono, explains why pure-play pharma majors and biotechnology companies need each other in the changed milieu.

With exposure to therapeutic areas, such as cardiometabolic care and oncology, Merck KGaA has interests in the generics business as well. With the acquisition of Serono, the company aims to take advantage of the pharma-biotech combination by capturing the innovations in biotechnology through Serono's pipeline.

These are high-profile transactions, but many other smaller deals have also happened, all with the same essence. Pharma players have indeed understood that the quickest way to innovation is to use their financial strength to acquire and enter into alliances.

Back to home-ground

Global trends are setting in but at a slower pace. Indian players are now focussed on improving their home-grown product pipelines. This is evident in the efforts of domestic biggies such as Dr Reddy's and Ranbaxy Laboratories. Between the two, Dr. Reddy's was among the first off the block in internal innovation efforts and has a strong pipeline in place.

While the pharma players have commendable strategies in place to reinvigorate their domestic dominance, much needs to go into strengthening global competitiveness. It is important, therefore, to understand that the future trends in innovations are never going to be the usual linear upward sloping lines but may have unpredictable shapes and origins.

(The author is a Chennai-based chartered accountant.)

More Stories on : Pharmaceuticals | Research & Development

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
It's the rate of return that matters

More bad news on inflation

Farm sector needs specific approach

Easing supply-side pressures

Pharma sector — The non-linear innovation

Expensive Upper Chambers

Where do funds come for India Inc?

A food revolution is apace

BSNL-MTNL merger