The Hindu Business Line : Pharma alliances, a shot in the arm

The stage is set for collaboration rather than confrontation between the pharma majors and Indian drug companies. The Ranbaxy-Daiichi Sankyo deal is a pointer to the shape of things to come.

— G. R. N. Somashekar

The Indian drugs market, which was $6.3 billion in 2005, is expected to touch $20 billion in 2015.

Sunil Kewalramani

The loss of Ranbaxy to a Japanese predator may be a bitter pill for corporate India to swallow, with the country growing accustomed to the idea of its leading companies, from Tata to Reliance, being global acquirers. But the deal signals further consolidation within the Indian pharmaceutical industry. By joining forces, Daiichi Sankyo and Ranbaxy will complement one another and offer a new business model that could spur other drug makers to revisit theirs.

In a quandary

According to an article in The Wall Street Journal, over the next few years, generic competition is expected to erode $67 billion from top companies’ annual US sales between 2007 and 2012 as more than three dozen drugs lose patent protection. Bank of America estimates the same at $55 billion. Conversely, intense competition in generics market has substantially eroded the operating margins of generics drug manufacturers. The stage is set for collaboration rather than confrontation between the pharma majors and the Indian drug companies. The Ranbaxy-Daiichi Sankyo deal is a pointer to the shape of things to come.

Pfizer Inc will face an adverse impact when the patent expires as early as 2010 on Lipitor, the cholesterol-lowering blockbuster and its first-quarter 2008 profits were hurt by generic competition to two big drugs: hypertension treatment Norvasc, and allergy medicine Zyrtec. At the same time, lacking are new blockbusters to replace ones such as Lipitor, Plavix and Zyprexa. Eli Lilly’s anti-blood-clotting drug Prasugrel posted results that left some doctors and analysts questioning whether the drug would be a big seller. Pfizer’s Torcetrapib has been one of the industry’s costly failures with $800 million in budgeted research costs. Would-be blockbusters such as Novartis’s diabetes drug Galvus and Sanofi-Aventis’s weight-loss drug Rimonabant have all recently been delayed by the FDA over safety concerns.

Quagmire to goldmine

Big Pharma so far has focused on diseases that afflict people in rich countries, while neglecting research into diseases of the poor. However, developing regions such as Asia-Pacific are now being recognised for their potential. Price waterhouseCoopers identifies the Asia-Pacific region as a world contender for attracting the largest share of the global pharma industry, in its report: Gearing up for a Global Gravity Shift. India is among the more promising markets in this region.

McKinsey estimates that the value of Indian drugs market will grow from $6.3 billion in 2005 to $20 billion in 2015. Drivers of growth in India include population, which at 1.5 billion, should exceed China in 2025. The share of people over 65 will rise from 5 per cent currently to 8 per cent in 2025.

As a result, typical age-related illnesses such as cancer and cardio-vascular diseases will be more widespread. Today, it is estimated that nearly 60 million people in India’s middle class can afford western-produced medicines. In 2025, this number of middle-class in India looks set to rise to approximately 580 million (higher by 12 per cent annually) according to McKinsey estimates.

Allying to win

Big Pharma is changing its strategy and combining emerging and maturing scientific ability of India with the R&D leadership of the Western pharmaceutical industry. This will provide a platform for innovation in India, resulting in development of next-generation drugs and developing a parallel processing platform.

With 84 facilities, India has the largest number of USFDA-approved manufacturing facilities outside the US. Indian firms now account for 35 per cent of Drug Master File applications and 25 per cent of all Abbreviated New Drug Application filings submitted to the FDS. Currently, 1 out of 100 global clinical trials is conducted in India, but Oxygen Healthcare, a British consultancy, estimates that in five years’ time that figure would have risen to 1 out of 10.

Licensing deals: Out-licensing models have been in existence for some time now. Pfizer’s $10 billion (in sales) Lipitor was actually discovered by Yamanouchi, a Japanese company, while Bristol Myers Squibb’s three biggest drugs — Pravachol, Glucophage and Taxol — are compounds developed by other companies. Most Indian companies work on compounds and take them through to least Phase I or early Phase II before out-licensing them to multinationals who take it the rest of the way. In return, they get payments for each phase of the clinical trial that the molecule manages to cross.

There are already several instances of such deals involving Indian companies. In October of 2007, Glenmark signed an agreement to license a painkiller molecule to Eli Lilly.

In November 2006, Merck signed a discovery and clinical development agreement with Advinus, a drug discovery company founded in 2005 and part of the Tata group. In 2007, Glaxo SmithKline extended a 2003 agreement with the Indian generics-maker Ranbaxy that will see the latter take candidate molecules through the early stages of development in exchange for payments that could total $100 million.

Partnerships: Wyeth works in partnership with GVK Biosciences and Eli Lilly with Jubilant Organosys. Dr. Reddy’s collaborative discovery services company works with international pharma companies such as Denmark-based Rheosciences on early discovery work.

Nicholas Piramal India recently signed a pact with Merck & Co to discover and develop two new cancer drugs up to the initial stage of clinical trials. In October 2007, Glenmark Pharma licensed to Eli Lilly & Co the rights to develop and sell a pain reliever, which Glenmark took through the initial stages of clinical trials.

Collaboration, not Confrontation

Collaboration between Big Pharma and the Indian drug firms will be beneficial to both. It will alter the perception of India of being merely a cheap manufacture base to outsource synthetic chemistry, to that of a genuine intellectual contributor. Strategies that will work in the future are those of collaboration, not confrontation by challenging patents.

Combining the maturing scientific skills in India with the R&D leadership of the Western pharmaceutical industry is the key will sow the pharma industry’s evolution from here. India seems to have truly arrived on the world pharma scene and the Big Pharma boys are clearly ecstatic to join hands with them. After swallowing Ranbaxy Daiichi Sankyo, at the moment 22nd by global sales, will still only rank 15th. Further consolidation in the pharma sector is inevitable.

The author is CEO, Sunil Kewalramani Global Capital Advisors.