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pwc cii-pharma_summit_enhancing value through partnerships

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pwc cii-pharma_summit_enhancing value through partnerships

  1. 1. India Pharma Inc.Enhancing valuethrough alliances andpartnerships
  2. 2. Contents03 Foreword04 Executive summary06 Growing through alliances and partnerships14 Bringing cost efficiencies24 Newer growth trends28 Conclusions
  3. 3. ForewordThe social, demographic and economic context in which the global pharmaceuticalindustry operates is rapidly changing. Globally, pharma companies are facing pressure fromgovernments and taxpayers alike for reducing prices of drugs and initiating outcome-basedpricing. Simultaneously, there is a vast decline in R&D productivity, diminished pipeline fornew drugs, increased drug discovery costs as well as increased regulatory measures thatcompanies need to contend with.The Indian pharma industry is showing signs of robust growth. The domestic pharma marketis expected to grow at a CAGR of 15% to 20% to reach a value anywhere between US$ 50billion and US$74 billion by 2020.1Foreign multinational companies along with Indian pharma companies are partneringtogether to tap opportunities in the fast growing emerging economies(BRIC nations) andthe larger established markets in the West and Far East (Japan). Acquisitions, alliances andpartnerships are some of the tools used to penetrate and capture a larger share of the potentialopportunity in these markets.We are also seeing companies collaborating outside the realm of manufacturing and R&Dwith players in health insurance, medical technology, Information Technology and mobiletechnology to deliver superior sustainable healthcare services. These developments bode wellfor the pharma industry and society as a whole who stand to benefit from such alliances andpartnerships through reduced costs and streamlined supply chains.Some Indian pharma companies are looking to increase the value of services they provide bymoving early on in along the value chain into biotechnology, drug discovery & development,which have primarily been the domain of large innovator companies. In this report, we lookat the different types of alliances and partnerships that have taken place in the Indian market,the synergies and benefits to the parties involved as well as the key success factors which needto be kept in mind to achieve productive and cohesive long term collaboration. Jai Hiremath Chairman - CII Pharma Summit 2011 and Vice Chairman & Managing Director - Hikal Ltd. Sujay Shetty Executive Director - India Pharmaceuticals and Life Sciences Leader - PwC
  4. 4. Executive summary The social, demographic and economic context in which the global pharmaceutical industry operates is changing. Developed economies with spiralling healthcare costs are looking to rein in healthcare expenditure. Payers are demanding a reimbursement model based on healthcare outcomes. The impending patent cliff and declining R&D productivity threaten the sustainability of the pharma industry’s current business model. Emerging markets in general and India in particular offer a ray of hope for the global pharma industry. India’s large domestic market, product development skills and scientific talent are being increasingly sought by pharma MNCs to tackle the challenges of growth and innovation. Indian pharma companies are also looking to move up the value chain and change the perception of India as a cheap manufacture base to that of a genuine intellectual contributor. One of the main ways MNCs enter the Indian market is through acquisitions. However, given the scarcity of assets, valuations in the sector have increased over the last 12 to 18 months. Companies are now exploring other ways of collaboration through alliances and partnerships. Such collaboration began with product sourcing and has now blossomed into other areas such as drug discovery, clinical development and marketing and sales. Collaboration between big pharma companies and Indian drug4 PwC - CII
  5. 5. firms has proved beneficial not just In addition, they will have toto the two parties but to the Indian devise strategies for inclusive andpatient society as a whole. sustainable growth.A PwC survey of opinion leaders The pharmaceutical industry inin the Indian pharma industry India is poised for a period of robustrevealed that quality as a key growth driven by alliances anddeterminant of the success of partnerships. Success in the marketalliances and partnerships. Other will be dependent not only on theissues impacting success include pharma companies but also onmanagement control, valuations, other stakeholders like healthcarecorporate governance, cultural providers, health insurancedifferences and awareness of local companies, medical technologyregulations. companies, government, patientThe key point of note for these groups as well as society at large,companies looking to do deals acting in concert. How well theyis to choose an alliance partner do will determine the future of theafter conducting a thorough due industry.diligence. While financial diligenceis a standard and integral part ofall deals and alliances, the pharmaindustry needs a more thoroughoperational due diligence priorto partner selection. No one sizewill fit all and companies willhave to choose and implement thecollaboration initiatives that bestmeet their strategic objectives.With increasing pressure onhealthcare costs all over theworld, pharma players will haveto pay attention to cost reductionefforts. Efficient managementof operations, supply chain andtransfer pricing are thus issues ofparamount importance.Pharma companies will also haveto strengthen collaboration withkey players outside the industrysuch as health insurance, medicaltechnology and information andcommunication technologies. 5
  6. 6. Growing through alliances and partnerships Why partnerships The global context As population grows and ages, new areas of medical need emerge. The diseases in the developing countries are growing increasingly similar to those of the developed world. Demand for new anti-infectives is mounting, especially for diseases like multi-drug resistant tuberculosis. Global warming can bring diseases such as malaria, cholera, diphtheria and dengue fever to more developed regions. These changes will generate opportunities for the global pharma industry over the next decade. Despite robust demand for its products, the industry is facing unprecedented challenges. The impending patent cliff which could see big companies lose over US$ 118 billion worth of patented drug sales by 20152 is a cause of great concern. Compounding this is the increased cost for developing new drugs and requirements of regulators for enhanced safety and efficacy monitoring. The governments of developed economies with huge fiscal deficits are also under pressure to reduce spiralling healthcare costs. At the same time, healthcare payers and providers everywhere have recognised that current6 PwC - CII
  7. 7. According to PwC’s pharma 2020 Trends shaping the report, Challenging business Lilly is currently transforming itself models, global pharma companies from a traditional fully integrated global industry pharmaceutical company into a will have to fundamentally change • Emphasis will be on their operating model to capitalise fully integrated pharmaceutical outcomes. network, so that it can draw on a on future growth opportunities. range of resources beyond its own • Compliance monitoring Most large companies have walls. Lilly hopes teaming up with will become a win-win traditionally done everything other organisations to create virtual for patients, payers and R&D programmes will enable it to from R&D to commercialisation providers. get better access innovation, reduce themselves. By 2020, however • Focus will shift from costs, manage risks more effectively treatment to prevention. and enhance productivity. For example, the Chorus Project is • New technologies will drive Bristol Myers Squibb (BMS ) uses a virtual organisation to take R&D. a slew of alliances, partnerships molecules quickly to proof of • The current linear phase R&D and acquisitions to complement concept. Lilly also uses external process will give way to in- its internal capabilities in drug networks comprising third parties life testing and live licensing. discovery and development. such as Piramal Life Sciences, BMS calls its string of pearls Hutchison MediPharma, Suven • There will be greater strategy in which each Life Sciences in the development of international regulatory transaction will be aligned to molecules .4 cooperation. the company’s focus on specific • The blockbuster sales model disease areas. will disappear. 40% of BMS patents and 50% • The supply chain functions of revenue come from such Several pharmaceutical firms like will generate revenue. alliances.3 Lilly and BMS have already begun • More sophisticated direct- to use more collaborative models. to-consumer distribution The pressure to change to new channels will diminish the business models, triggered by role of wholesalers internal and external factors has led this model may no longer work for many organisations. If they to increasing mergers, acquisition, are to prosper, they will need to alliances and partnerships in the improve their R&D productivity, pharmaceutical sector.healthcare expenditure levels arealso unsustainable unless they reduce costs, tap the potentialdeliver more demonstrable care of emerging economies andand cost benefit over the long term. switch from selling medicines toPayers are demanding evidence of managing outcomes. Alliances andoutcomes from pharma companies partnerships with firms within andbefore including the medicines in outside the pharma industry is apharma benefit plans. key requirement of the pharma operating model of the future. 7
  8. 8. The Indian context Indian generic pharma companies have strong product development GovernmentThe Indian pharma industry is skills and have set up world-classtoday, the third largest market announces new norms active pharma ingredients (API)globally in terms of volume and for FDI in pharma and formulation manufacturing14th largest by value. According facilities to cater to the price- As of 2011, FDI through theto PwC’s report Capitalising sensitive India market and global automatic route was allowed inon India’s growth potential, generics market. Many of these the pharmaceutical sector in India.the domestic pharma market is dominate India’s domestic market Currently, 100% FDI is permittedexpected to grow at CAGR of 15 through a large sales team, strong via the automatic route.to 20% annually to be a USD 49 relations with physicians and Given the trend of acquisitions ofbillion to 74 billion market by medical institutions. Indian pharma domestic pharma companies by2020.5 companies are now seeking to global players, the governmentIndia is an attractive market for a move up the value chain to drug has expressed concerns about thevariety of reasons: discovery and development by accessibility and affordability of leveraging the country’s scientific medicines in the Indian market.• India’s economy continues to show signs of robust growth. talent. Given the strengths of To ensure that such deals do not The increased spending on Indian and and global pharma result in monopolies and an increase companies, it makes sense for them in drug prices, the government is healthcare needs is expected to come together to develop India’s now mulling over placing a cap on to drive revenue growth for FDI in the pharma sector. pharma companies. domestic market, source products for global market and to discover & A high-level committee has been• The emergence of chronic develop new drugs and therapies. . appointed by the government of diseases like cancer, diabetes, India to look into this. Cardio Vascular System (CVS) MNCs and Indian companies Government has decided the and Central Nervous System are stepping up their play in the following: 6 (CNS) disorders is likely to drive market through various kinds of partnerships to achieve the • 100 % FDI through the demand for newer therapies. automatic route would be following:• With increasing pressures allowed for Greenfield projects on curbing healthcare costs • Capitalise on the opportunities • 100% FDI through the FIPB in the US, India’s low-cost provided by the Indian market approval route for Brownfield manufacturing capabilities • Make the most of India’s investments in the pharma coupled with attention to quality capabilities in drug discovery, sector for a period of six months (India has the highest number product development and • During these six months, of FDA-approved manufacturing sourcing to serve overseas necessary enabling regulations plants outside the US.) will be markets. will be put in place by the sought by MNCs. Competition Commission This chapter explores the different of India (CCI) for effective• India has a large pool of kind of partnerships in the Indian threshold limits on mergers and scientific manpower which pharma space, the challenges acquisitions to ensure that there can be used in drug discovery, faced in creating and sustaining is a balance between public development and clinical trials. such partnerships and the benefits health concerns and attracting of these partnerships to various FDI in the pharma sector• India’s diverse genetic pool of treatment-naive population is stakeholders. • After six months the oversight attractive for clinical trials. will be done by the CCI entirely in accordance with the competition laws of the country8 PwC - CII (FIPB nod will not be required)
  9. 9. Serving the Indian market Types of AlliancesGiven the growth slowdown indeveloped countries, pharmacompanies are keen to address theopportunities offered by the growing AlliancesIndian market. and partnershipsa. Mergers and acquisitions (M&A)The Abbott acquisition of PiramalHealthcare’s domestic formulationsbusiness in 2010 is a good example.Other examples include Reckitt AcquisitionsBenckiser’s acquisition of ParasPharmaceuticals and the acquisitionof the nutrition business of Wockhardtby Danone in 2011. Addressing theopportunities in the Indian marketwas also one of the key drivers behind Domestic Globalthe acquisition of Ranbaxy by Daiichi market marketSankyo (though Ranbaxy did have aglobal presence).Recent M&A for addressing the Year Indian player MNC Nature of dealIndian market 2011 Wockhardt Danone Acquisition for US$However, given the scarcity of assets, 350 millionvaluations in the sector have gone 2010 Paras Pharma Reckitt Benckiser Acquisition for US$up over the last 12 to 18 months. 726 millionCompanies are now exploring other 2010 Piramal Healthcare Abbott Acquisitionmethods of partnership. of domestic formulations business for US$ 3.7b. Alliances and partnerships (A&P) billionGermany’s Bayer Healthcare 2008 Dabur (*) Fresenius Acquisition ofannounced a 50-50 joint venture with 73.3% stake for Euro 139 millionZydus Cadila to create a new company,Bayer Zydus Pharma focussed on 2008 Ranbaxy (*) Daiichi Sankyo Acquisition for US$ 4.6 billionthe India market. Bayer Healthcare’spharma division will contribute its Source: Industry reports, PwC analysissales and marketing business in India (*) While these deals were predominantly aimed at gaining access to the domestic market, they also provided a platform for the acquirers to target global markets.to the new company while Zyduswill contribute its women’s healthproducts, diagnostic imaging andother products.7 9
  10. 10. Lupin has signed a deal with drivers have created the need for the title of a genuine intellectualEli Lilly for anti-diabetic drugs. collaboration between MNCs and contributor.Under the deal, Lupin will market Indian pharma companies to target Glenmark Pharmaceuticals becameand distribute the entire range global opportunities. the first Indian company to out-of Huminsulin brand of Eli Lilly license a biological product. Thein India and Nepal. Lupin will a. Mergers and acquisitions company licensed its biotech drug,deploy 300 sales representatives Pharma MNCs have acquired which has the potential to generatefrom its formulations business to Indian companies to maximise their revenue worth US$ 613 million,14promote the product and will also capabilities in serving the global to French company Sanofi Aventis.provide education to physicians and market. The acquisition of Matrix Glenmark sold the marketing rightspatients.8 Laboratories by Mylan in 2006 for North America, Europe, Japan,Novartis has signed a deal with USV is one of the earliest examples of Argentina, Chile and Uruguay, whileLtd to market Galvus(Vildagleptin) this trend.11 More recent examples it retained co-marketing rights forin the Indian metros. USV will include the acquisition of the Russia, Brazil, Australia and Newmanage marketing activities in injectables business of Orchid Zealand. In India, the companyTier II and Tier III cities in the Chemicals by Hospira12 and retained its exclusive rights.next phase.9 Also entering the Sanofi’s acquisition of Shantha Another example is of Jubilant. Thefray is Belgium’s Omega Pharma, Biotechnics.13 company entered into a three-yearwhich formed a JV with Modi- drug deal with US-based EndoMundipharma Group to create Mergers and acquisitions toModi Omega Pharma India. Eight target global opportunitiesbrands from Omega’s productportfolio will be manufactured in Year Indian player MNC Nature of dealIndia by the Modi-Mundipharma 2009 Shantha Biotech Sanofi-Aventis Acquisition for US$ 781Group. The marketing strategies millionand sales team will be provided by 2009 Hospira Orchid Acquisition for US$ 400Modi Omega Pharma India. 10 million 2006 Mylan Matrix Acquisition for US$ 736Serving the global market millionPharma MNCs are facing challenges Source: Industry reports & PwC analysisof impending patents and risingR&D expenditure. They are looking b. Alliances and partnerships Pharmaceuticals for developingfor opportunities to increase the oncology drugs.15 Under the deal,drug pipeline and reduce costs. Previously, A&P were formed to Jubilant will receive researchIn addition, given the pressures source out products. Today, it has funding and milestone paymentof reducing healthcare costs and expanded in R&D as well. on successful completion ofthe increasing use of generics, predetermined targets. Endo willpharma MNCs are also looking Research and development own the developed drugs and willto partner with companies with Pharma MNCs are looking for pay royalties to Jubilant on thesuperior product development opportunities to co-develop drugs, successful commercialisation of thecapabilities. At the same time, buy or in-license molecules from drugs.Indian companies are also looking Indian companies. Such dealsto move up in the value chain by have helped India shed the tag of adiscovering new drugs. These cheap manufacturing base and gain10 PwC - CII
  11. 11. Other deals for R&D Product sourcing Similarly, Pfizer signed licensing deals with Aurobindo Pharma17, Manufacturing deals areIndian company Pharma MNCs Products Claris Life Sciences18, Biocon19 common in India becauseGlenmark Forest Asthma and and Strides Arcolab. The deal will of the country’s legacy in Laboratories anti-lung strengthen Pfizer’s position in infection research chemistry, efficient emerging markets and expand its production and cost advantagePiramal Merck Cancer medicine portfolio in establishedResearch manufacturing. These products business units (EPBU). skills coupled with the factGlenmark Eli Lilly Pain relief The Indian companies will benefit that India has the highestSerum Institute MSD Pneumococcal from a steady revenue flow and the number of USFDA-approvedof India conjugate possibility of receiving significant vaccine plants outside the US, make upfront payment and royalties.Source : Industry reports & PwC analysis manufacturing alliances an attractive proposition. There Sun Pharmaceutical Industries and are several examples of such Merck and Co Inc entered into a alliances in India. JV agreement to develop, produce Importance of Japan and market innovative generics in GlaxoSmithKline (GSK) The Japanese pharmaceutical emerging markets.20 expanded its market share by market stands at US$ 96.5 Japan is an upcoming market for striking a deal with Dr Reddy’s billion.21 This market is collaborations given the opening- Laboratories16 and gaining largely innovator-based with access to a portfolio of more up of generics market by the the generics component contributing about 25% of sales than 100 drugs. For Dr Reddy’s, Japanese government. Please see by volume. In contrast, the the deal will help increase its the side bar for details. generics component of the US product reach in regions where, and UK stand at 88% and 71%22 till now, it only had negligible respectively. market presence. The Japanese market is fast shifting its focus towards A&P for product sourcing generics, driven by the Indian players MNCs Nature of deal government’s fiscal pressures and an ageing population. Aurobindo Pharma AstraZeneca, Supply of generic medicines for developed Pfizer and emerging markets The government of Japan has Strides Arcolab Ltd Pfizer Supply of 67 generic drugs to Pfizer with been aggressively promoting focus on oncology generics by providing incentives to the industry and physicians. Torrent AstraZeneca Supply of 18 products for various markets Pharmaceuticals Hence, we see an increasing Indoco Remedies Aspen Range of ophthalmic products for 30 number of Japanese pharma emerging markets companies seeking partnerships with Indian generics Indoco Remedies Watson Development and manufacture of generic Pharmaceuticals drugs with market size of US$ 670 million manufacturers. Cadila Healthcare Altana, Zyban JV structure for the manufacture of patent drugs Torrent Novo-Nordisk Contract manufacturing of formulations Pharmaceuticals Strides GSK Supply of drugs for semi-regulated markets ArcolabLimited Source : ICRA Limited. ‘CRAMS India: Overview & Outlook’. June 2011 11
  12. 12. Benefits of collaboration Benefits of collaborationPharma MNCs collaborating withIndian companies bring to the tablenew products, latest technology,higher investments, quality systemsand the knowledge of regulatoryprocesses. On their part, Indiancompanies provide local marketknowledge, cost advantageand local scientific talent. Suchalliances have the potential to bringsignificant benefits to both partiesand add value to society as a whole.Such partnerships bring in newdrugs and therapies to the marketand increase patient’s awarenessabout diseases and wider treatmentchoices available.Success driversPwC’s survey of opinion leadersin the Indian pharma industryrevealed that issues related toquality, management control,corporate governance, valuations,cultural issues and understanding Success Driverslocal regulations were crucial forany form of collaboration.12 PwC - CII
  13. 13. 1. Importance of quality bound to look at India as a low- 2. Transaction-related drivers cost manufacturing destinationAs a result of increasing alliances In addition to quality related issues, as well as a strategic partnerand the growing importance of attention needs to be focussed on for specific operations. The keyIndian pharma globally, prominent the following determinants too. consideration for such MNCs is toIndian pharma companies have These need to be discussed and choose a partner after conductingcome under the scanner of the US resolved to the satisfaction of both a thorough investigation and withFood and Drug Administration the parties involved in the A&P: due diligence. While financial(USFDA) for varying degree of • Management control diligence is a standard and anquality issues. integral part of all deals and • Corporate governanceIn India, USFDA audits and pre- alliances, the pharma industryapproval inspections typically focus needs a more in-depth operational • Expectations of valuationon the following: approach prior to selecting a • Cultural differences• Management roles, partner. • Local regulations responsibilities and training of Aspects to focus on include the M&A along with A&P have a personnel operating in USFDA- following: major role to play in changing approved facilities • Historical review of internal and the dynamics of the industry and• Filed application integrity with external regulatory audit data taking it to the next level of growth. specific attention to records, • Extent to which audit findings A&P are likely to be more popular, manufacturing systems and have been remediated as they are mutually beneficial laboratory test results • Mechanisms put in place to both stakeholders. It can• Monitoring of impurities in APIs help Indian companies scale the to ensure implementation and drug products innovation curve, while at the same of adequate corrective and• Stability studies and preventive actions time helping to increase the drug investigation of out-of- pipeline curve for global players. • Regulations in place to ensure India’s low-cost manufacturing specification (OOS) incidents sustainability of quality system capabilities will also help pharma• Safety and integrity of the improvements MNCs meet the increasing global supply chain demand of generics. • Overall review of quality systemsWhile the impact of this regulatory implemented To ensure successful partnerships,crisis on alliances formed cannot issues such as quality, valuations, Companies often require domainbe muted, the more critical issue is management control, corporate specialists to understand theits impact on future alliances and governance and cultural true nature of the above issues. Aon the overall image of the Indian differences need to be identified, thorough operational diligence canpharma industry. discussed and resolved through help understand the appropriateGiven the mounting internal and measures that can be implemented an in-depth financial, tax andexternal pressures on pricing and to mitigate any risks associated operational diligence.healthcare costs, MNCs are still with quality. No one size will fit all and companies will hav eto choose and implement the path that best meet their strategic objectives. 13
  14. 14. Bringing cost efficienciesWith increasing pressure on the Elements of cost reduction launching several improvementglobal healthcare industry to cut programmes to control these costs. Like any other industry,costs, pharma companies will While the sourcing teams focus on pharmaceutical cost has severalhave to look at different avenues getting materials at a competitive direct and indirect costs:to achieve it. Efficient operations, landed cost, many leading APImanagement of the supply chainand transfer pricing are key areaswhere cost efficiencies can beachieved.OperationsimprovementPharmaceutical companiescan achieve year-on-year costreduction in their overall spendingby rigorously identifying andeliminating wastes in theirmanufacturing and businessprocesses.Today, for many companies,manufacturing costs, as a fractionof overall costs, is considerablyhigher. Therefore, it is quite logicalto start with a cost reductionexercise in manufacturing. Currently, pharma companies are players are undertaking initiatives taking a hard look at various cost to improve batch yields and the elements and are coming up with consumption of critical input various innovative ways to reduce materials. them. Project teams use the DMAIC Material cost: Around, 60 to methodology to understand the 70%23 of pharma manufacturing reasons behind yield loss and cost is influenced by raw materials. implement an action plan towards Therefore, controlling material improvement. Today, companies costs is one of the most important set year-on-year targets for areas that companies need to focus improvements in yield, which in on. Leading pharma companies are turn get converted to the budgeted14 PwC - CII
  15. 15. yield numbers in the next financial Most companies struggle with the Energy: The pharma industryyear. This acts as a financial control question as to what is the right uses a variety of utility equipment,for ensuring sustenance. manning number. The industry including boilers, air compressors,API companies use various levers defines manning for each function chillers, brine units, air handlingand also fundamentally question based on certain thumbrules units (AHU), vacuum pumps,the type and quantity of solvents (like ‘x’ chemists per HPLC, ‘y’ DG sets, etc. These machines userequired in the process. Companies scientists per project, etc.), that electricity, coal and furnace oil ashave in several instances been able make it difficult to identify the right sources of energy, all expensiveto improve the recovery of solvents number. Moreover, the industry and subject to active cost reductionby identifying and addressing the is also struggling with increased exercises.source of loss. Some companies requirement for casual labour. A Savings in operating these unitshave also adopted a better solvent majority of the pharma companies primarily result from ensuringmanagement process and have have started to think in terms of efficiency of these machines andbeen able to eliminate a few defining manning norms. From a preventing wastage. Companiessolvents, either by adopting an shop-floor viewpoint, the more the typically look at generation,alternate solvent or by an alternate number of people on the shop-floor, consumption and distributionmanufacturing process.Similar the greater are the chances of error efficiencies.efforts are initiated by formulations and mix-ups. Benchmarking key performanceplayers in terms of improving These questions exist for all levels parameters, such as efficiency,their rolled throughput yields. of staffing: power consumption per unitCompanies are looking at various • Managerial generated, etc, of utilityfactors including breakages, • Operative machines can give insights intopowder losses, etc to improve • Casual corrective actions required. Utilityyields. They are also effectively requirements are very specific toembracing various concepts of the process and companies can dolean to eliminate wastes in their Leading companies are well to link utility consumptionprocesses. controlling cost by defining with production planning toManpower cost: Like others, manning norms. In PwC’s own optimise consumption and reduce experience, a correct manningthe pharma industry also faces wastage. PwC’s experience exercise involves the following:challenges such as an average suggests that energy costs can15%24 growth in salaries and an • Activity driver based work be dramatically reduced byapproximate 20%25 attrition rate load analysis synchronising planning andat operative and executive level. • Shared services and resource averaging out peak loads throughThis puts pressure on manpower analysis proper scheduling.costs, as the costs of recruitment • Span of control studies Most organisations today carry outconstantly increase. • Process improvement for work rigorous energy audits and takeTherefore, controlling manpower simplification several steps including replacementcost is becoming an important of old energy-guzzling equipmentagenda item for the top with new state-of-the-art energy-management. On an average, the efficient equipment. Companiespharma industry spends around 7 are adapting themselves to greento 10% on manpower costs. This is technologies to save energy costs.slightly higher as compared to theoverall average. 15
  16. 16. This also contributes towards be cost-effective, while at the same Levers for cost reductionsustainability. time adhering to delivery dates, Companies do implementPacking costs: Packing costs are enhancing equipment utilisation manufacturing cost reductiontypically higher for formulations and identifying optimum manning programmes using levers suchas compared to API. Packing costs norms. as process improvements, sharedcan be reduced by at least 10%26 Cost of manufacturing decisions: services, standardisation, firstby reducing packing rejections and Cost of manufacturing decisions principle costing, efficiencyby value-engineering the packing work primarily at the strategic improvement, etc.design. Companies use several and tactical domain, where the Each of these levers needs to befactors for reducing packaging cost. companies take decisions on the addressed along two dimensions,These include strip dimensions, following:number of colours used, packingmaterial thickness, optimal fitment Strategic • Where should the plant be located?of tablets within strips, number • What are the RM and FG transportation costs?of ply, shipper sizes, etc. PwC’s • What is the technology and infrastructure such as reactors, layout,experience suggests that while material handling systems, etc. to be utilised?primary packaging is a function • What is the planned capacity utilisation of the plant?of stability, companies do well by Tactical • What should be the batch sizes to operate?addressing elements of dimensionand wastages in primary packing. • How much should be the inventory in process? • What is the production planning philosophy to be used?However, packing designs generally • Which are the products or intermediates to make or buy?have a long gestation period as theyare subject to customer approval.Hence, the benefits of these Planned versus actual capacity strategic and operational. Decisionsnormally accrue over multiple years. utilisation will have an impact for strategic cost reduction willAnalysing costs: Quality costs (QC) on product costing in terms of have a long- to medium-termin most organisations were not apportioning fixed costs over the impact. However, the complexitytracked and it is only recently that quantity produced. Planning during will be high. In operational costorganisations have started looking the project phase ensures minimum reduction, the impact will be forinto this. time and cost overruns. This the immediate or medium-term butToday, organisations have gone reduces the cost of setting up the relatively less complex.beyond the scope of production project. The cost of these decisions Many progressive companies useand have tried to implement cost is high, and so is the impact they lean management as a concept tocontainment in quality control have in the medium to long term. identify and eliminate wastes infunctions by reducing cost of Companies need to evaluate the process, thereby resulting inanalysis. Companies use factors their make-buy decisions additional throughput and bettersuch as material substitution, more rigorously on the back of service levels at a lower cost.optimising quantities drawn for contribution earned. Appropriate Companies have realised 10 tosample analysis, reduced testing, technology selection, plant location 15%27 reduction in overall costsstandardising makes of chemicals and layout and production planning and improvement in bottom-lineacross sites, clubbing samples to influence cost of production. savings by implementing structured cost reduction programmes.16 PwC - CII
  17. 17. The Indian scenario distribution reach in domestic centric metrics, they are also markets. With these challenges, the focussing on delivering customerRiding on the back of 12 to 13%28 Indian pharma industry is seriously value at lower costs.year-on-year growth, the Indian evaluating the ways and means to The survey reveals that companiespharma industry is going through a reduce operation costs. are targeting improved servicevery interesting phase. It is rapidlyachieving a distinctive position The recently concluded lean levels but at competitive costs.in the global pharma space with implementation in the pharma It is clear that the Indian scenariogenerics, Contract Research and industry survey conducted by the is a peculiar one and deliveringManufacturing Services (CRAMS) Organisation of Pharmaceutical service and cost competitivenessand clinical trials. Also as foreign Producers of India (OPPI) and PwC need to go hand-in-hand. ToMNCs fight for a share of the revealed some interesting evolving achieve sustainable improvementmarket, the fragmented domestic trends. Almost all participants programmes, companies need tomarket is poised for consolidation. cited improving service levels to execute holistic programmes. TheIn this scenario of increased the customer as one of their prime journey is difficult, but the rewardscompetition, companies will try to business needs, while reducing cost are fast and considerable.differentiate on the basis of speed- and improving profitability came ato-market, cost competitiveness, close second. So, while companiesquality, customer orientation and today are focussing on customer- 17
  18. 18. Supply chain The nature of distribution such Analysis of the reasons behind as fragmented channel, channel the failure of the supply chainefficiencies power of stockists, limited in meeting challenges of marketAs Indian companies look forward visibility and push-based supply growth points to a variety ofto market growth on one side and also acts as a tipping point for practices within the Indianthe need to reduce costs on the overhauling the supply chain. pharma industry. These need toother, an agile, customised and be addressed if efforts to create ancost-efficient supply chain is of Key concern areas agile, responsive, customised andparamount importance. Companies Some of the key concern areas cost-effective supply chain are toin many industries have taken with the supply chain include be met.pruning shears to their supply the following: • Pharma supply chains operatechains to support profitable growth. • High logistics cost ranging from 4.72 to 6.22% of sales on a pure push: Salvage net isUntil recently, pharmaceutical as against 0.5% in the US and the cost incurred by a pharmacompanies did not embrace this 2% in Europe.29 company due to expiry andtrend. However, the industry can no breakages of products in thelonger afford a laissez faire position • Ineffective control over market or at other storageon the operation of their supply channel inventory: 46 days locations. This is created duechains. for a pharmaceutical company to the multiplying effect of as against 26 days for an inefficiencies in the supply chain.Why focus on the supply FMCG company.30 Some of the key reasons behindchain this include the following: • Low ARPUs per stockist andThe contributors to growth retailer • Push-based supply to depots,of the Indian pharma market stockists and retailers • Porous supply chainsuch as increasing disposable facilitating easy entry of • Misalignment between salesincomes, greater health insurance counterfeits and supply chain organisationpenetration and a gradual shiftin disease profile pose several • Sub-optimal penetration of on timing (start and end) ofquestions on the existing supply the rural market promotionschain configuration: • Inadequate access to • Budget-driven forecast leading• Is the existing supply chain secondary and tertiary to forecast bias, mismatched capable of supporting market sales information critical to planning horizon on account of creation (e.g. a supply chain that planning processes sales visibility and supply lead supports reach and coverage in times the growing peri-urban markets, • Inadequate infrastructure to support compliance to CGMP • Sub-optimisation at each stage cold chain for biotech, etc)? in the distribution chain of supply chain impacting• Is there a need to tailor the inventory velocity supply chain across markets • Inventory imbalance across stock (Tier I, Tier II and rural) and points disease profiles to support varied approaches in terms of products, • Lack of visibility on products pricing and sales coverage? nearing expiry18 PwC - CII
  19. 19. • Inefficient warehousing • Homogenous supply chain processes related to storage, catering to varying customer Goods and services tax handling and retrieval needs: A homogenous (GST)• Batch size economics in supply chain operating on transportation, manufacturing a standardised lead time As seen in our previous report, and procurement restrains pharma companies India Pharma Inc: Capitalising on from effectively capitalising India’s growth potential, GST is aPwC believes that effective comprehensive value-added tax on all business opportunities.synchronisation between the (VAT) on the supply of goods or The lead time required by the services. The GST will bring with itsupply chain function and other customer varies across product opportunities to realise efficienciesorganisational functions like sales and markets. The figure below and related challenges.and marketing, finance and IT can illustrates an example of howlead to a reduction in salvage net. The pharma industry (including lead time expectations vary FMCG)is significantly affected by across products and markets. GST, since it disadvantages the Pharma companies will have classic manner of concentrated to tailor their supply chain manufacturing and disaggregated distribution across a national level strategy after understanding the C&FA/warehousing mechanism. requirements along the cost and responsiveness frontiers. At present, the biggest challenge for a pharma distribution company is the movement of goods across India,Lead time in number of days to cater to the need of each state and thus save the CST payable otherwise on such inter- state movement. Also, several entities set up warehouses in attractive locations like Daman as the CST rate at such locations was previously lower than the rates prevalent in other states. This logistical challenge and the added cost of compliance will Number of days become a focal point of attention, post GST. The distribution team needs to re- ascertain the warehousing locations from a commercial and logistic point of view rather than from a pure tax-saving perspective. Reduction in such warehouses will reduce the cost of distribution. It is important for the pharma sector to understand the implications and challenges arising out of GST and to ensure that the business model and supply chains are re-engineered to maximise benefits. 19
  20. 20. • Sourcing from a perspective All these factors lead to significant Mitigating fraud in the Indian of aligning demand to supply value erosion. To participate in pharma supply chain often overlooked: Production future growth, the pharma supply chain will need to focus on the The worldwide scale of plans at pharma companies are following dimensions: pharmaceutical operations is governed by the availability of creating supply chains that are raw materials rather than being • Channel management extensive and globally dispersed. aligned to customer demand. • Supply chain planning This introduces heavy reliance The lack of a diversified supplier on third parties and increases the network constrains the pharma • Supplier relationship risk of fraud. In particular, India’s company from aligning demand • Outsourcing supply chain uses a fragmented and supply, thereby creating • Security and compliance distribution network depicted in inefficiencies in the supply chain. the chart below: • ITSource: Overview of the Indian Pharmaceutical Market (2010) published by Datamonitor20 PwC - CII
  21. 21. A typical organisation loses 5% of the general tenets of good supply TP environment in Indiaits annual revenue to fraud. When chain management. They need to Introduced in 2001, Indian TPapplied to the estimated 2010 size establish a culture that supports regulations are broadly modelledof the Indian pharma market, this control efforts and whistleblowing in line with global practicesfigure translates to a potential total with clear, ethical guidelines. They including TP guidelines issued byfraud loss of more than US$ 600 need to build loyalty within the the Organisation for Economicmillion. Managing risks and fraud organisation, give employees the Cooperation and Developmentis therefore a key area of concern confidence to do the right things (OECD).31 Indian revenuefor Indian and global pharma and identify clear conditions for authorities have so far completedcompanies. those who commit fraud. six rounds of audit and have madeFortune 500 pharma companies an astronomical adjustment ofhave established whistleblowing Managing transfer about Rs 54,999 crore.reporting mechanisms which pricing (TP)allow employees to raise concerns Introduction of the conceptand seek guidance. They have of “Transfer Pricing (‘TP’)” Prominent TPalso initiated the concept of anti-retaliation protection to ensure is a measure adopted by the challenges faced governments to ensure the by Indian pharmathat all employees can safely protection of the tax base of theirreport potential violations. respective countries. TP refers to companies:These companies are developing the basis adopted by a company • Comparison of import pricerobust compliance programmes while transacting with its group of original API with price ofbased on their ‘dipstick generic API companies such that the sameassessment’ of business conducted reflect pricing and conditions • Comparison of the exportby subsidiaries or affiliates in similar to those adopted in price of the product(s) with itsBrazil, Russia, India, China (BRIC) transactions undertaken between price in the domestic marketand east European countries. Such third parties. • Benchmarking clinical trialprogrammes are being rolled out support services provider with In current times, where pharma clinical research organizationsworldwide to ensure consistency in companies are espousing austerity (CROs) and thereby expectingcompliance globally with specific measures on several counts higher mark-upsfocus on entities that were rated to remain cost-competitive,unsatisfactory in the dipstick • Expectation of higher mark- it is important for companies ups for contract R&D servicesassessment. to understand TP issues and providedTo identify processes vulnerable to prepare an upfront defence so asfraud, companies are conducting • Seeking justification or to mitigate future litigation. TP commercial rationale foran enterprise-wide assessment of principles will also aid phama the payment of royalty orexisting fraud risks on a pro-active companies to effectively plan their management fee by the Indianbasis. This assessment considers business operations. taxpayer andrisks involved and the potential This chapter digs deeper into the • Alleging creation of marketingschemes to circumvent existing overview of the current Indian TP intangibles due to thecontrol activities. promotional spends incurred environment, key TP challenges forSo, to avoid fraud and risk, the pharma industry and planning by the Indian taxpayercompanies need to adopt many of opportunities using TP principles. 21
  22. 22. Key TP issues in the pharmaindustryOwning significant intangibleproperty deployed acrossgeographies) coupled withthe multitude of cross-bordertransactions, Pharmaceuticalindustry has been exposed to someof the most significant TP litigationover the years. From an IndianTP perspective, following are theprominent challenges faced by thePharma companies: Please see theside bar for details.Possible solutions• API prices comparisonGlobally, the comparison oforiginal (branded) API withgeneric API is one of the mostcontentious issues faced bypharma companies. The same hastaken centre stage in the IndianTP context with the Income-TaxAppellate Tribunal (ITAT)32 rulingon the issue in case of UCB33 andSerdia.34 While in the case of UCB,ITAT ruled that original API cannotbe compared with generic, in thecase of Serdia, ITAT upheld thevalidity of such a comparison.These rulings raise the question ifsuch a comparison is valid and ifnot, how the arm’s length nature ofthe imported API (branded) shouldbe established. Instead of focusingon the technical difference (suchas quality, efficacy, potency, etc.)in the two APIs, one can establishthe appropriateness of the marginsearned by the Indian companywith regard to its functional profile22 PwC - CII
  23. 23. (i.e., functions performed, assets The objectives and practicalemployed and risks assumed). implementation of a business restructuring are effectively• High mark-up for support and achieved by the application of facilitation services TP principles i.e., an entity’sA possible defence for the high remuneration is linked to themark-ups anticipated by the function it performs, risks ittax authorities for the support assumes and the assets it employs.services (such as clinical trial While business restructuringsupport, procurement support offer business advantages, suchetc.) provided by Indian taxpayer exercise also pose significantlies in demonstrating the level of risks, including the potentialthe activities performed by the for significant transfer pricingIndian taxpayer and its relative adjustment. Therefore, it iscontribution in the value chain. imperative that any restructuringTo develop a transfer pricing is undertaken after dulydefence, the actual business considering the established TPconduct should be in sync with principles.the underlying characterisationand should be supported by robust The road aheaddocumentation. Going by the trend, the challenge• Business restructuring of audit and the level of disputeBusiness restructuring, involving (from tax authorities) facedcross border redeployment by this industry will increase.of functions, assets and risks Therefore, it is in the best interestis often undertaken by the of pharma companies to adopt apharma companies to streamline more proactive approach to settheir business operations. and monitor their TP policies.Commercial reasons such as They should also maintain robustincreased competition, cost documentation to support theoptimization, elimination of basis for setting these policies.duplicative functions, need for Apart from being viewed ascentralisation, proximity to compliance requirement, TPmarket etc. compel the pharma should be used to optimisecompanies to adopt restructuring. business operations too. GivenBusiness restructuring often the nexus of TP to both tax andresults in achieving significant business, effective coordinationtax optimisation by realigning between an organisation’s tax andthe distribution of profits across business functions is required togeographies. make the best use of TP principles. TP is not about documenting the end result, but about documenting the journey. 23
  24. 24. Newer growth trendsPharma companies will need to issued to each family. One of the RSBY is attracting a slew ofcreate meaningful partnerships cards makes it possible for a worker entrepreneurs to set up hospitalswith organisations in other based in a particular state to move primarily targeted at the ruralindustries like health insurance, to another place and continue to be population. Looking at the trendmedical technology and IT to drive part of the scheme. The premium of private hospitals’ participation,growth. In addition, they will have amount of the scheme is shared by the government wants to introduceto devise strategies to make growth the union and state governments in public-private partnerships,inclusive and sustainable. 75:25 ratio, with a nominal amount wherein the role of the government of Rs 30 being paid annually by will change from that of a providerHealth insurance the beneficiary. Till date, RSBY to that of a payer. has been successfully extended In a recent PwC publicationLess than 15% of the Indian to 23 million poor families in 330 Healthcare Unwired, we have listedpopulation is covered under any districts in 27 Indian states.36 recommendations and specificform of health insurance, including Beneficiaries are free to avail of solutions to improve the reach ofgovernment-supported schemes. healthcare from any empanelled health insurance. Some of theseOnly around 2.2% of the population government or private hospital of measures include creation of ais covered under private health their choice. new business model, reducinginsurance. The awareness of healthinsurance schemes in rural areas is Two private trusts, the IFMR Trust premiums and collection costs,disturbingly low. Health insurance that provides rural finance to 1.7 switching from patient cure tois, however, expected to grow at lakh households and the Manipal preventive care and simplifyinga CAGR of 15% by 2015.35 Given Education and Medical Group policies and regulatory reforms inthe diversity of India’s population covering 80,000 families, were the healthcare and health insuranceand its limited purchasing power, recently given the approval to space. Initiating these measuresinnovative insurance products at participate in the RSBY scheme. The will result in increased penetrationmultiple price points are needed to two trusts together will add nearly and improved coverage of healthtap the market. 2.5 lakh families, a development insurance in India. that promises to alter the delivery ofThe union government rolledout an insurance plan for the healthcare to the poor. Medical technologypoor, Rashtriya Swasthya Bima The government is examining Medical technology plays aYojana (RSBY) which provides the possibility of turning its pivotal role in improving accessmedical cover for families below two important social sector to affordable healthcare services.the poverty line (BPL). It includes programmes--old age pension It also helps early diagnosis ofhospitalisation, out-patient scheme for the BPL and the Aam diseases and creating personalisedtreatment and surgical treatment Aadmi Bima Yojana (AABY) therapies for the Indian population.in select hospitals. The medical targeting the rural landless--intoinsurance provides an annual universal schemes covering the The Indian medical technologycover of Rs 30,000 per household unorganised sector in phases. The industry, which comprises medicaland covers five members of a two schemes will be linked with the equipment, medical implants,family. Plus, transport allowance smartcards given under the RSBY medical disposables and furniture,of up to Rs 1,000 a year is given scheme. If implemented well, is expected to grow from US$ 2.75to BPL families. The scheme is they can help beef up the grossly billion in 2008 to US$ 14 billion37administered through biometric inadequate social security cover in 2020, at a compounded annualsmartcards with two smartcards available to the poor in the country. growth rate of approximately 15%.24 PwC - CII
  25. 25. Post independence, India adopted • Usher further reform in theInnovative an import substitution policy for insurance sector to stimulate the development of indigenous health insurance.initiatives38 industries under the umbrella of a • Set up a venture investment fund• Transasia Biomedicals has strong public sector. The medical developed in-vitro diagnostic to address the lack of early stage technology sector, however, was not venture capital. equipment through its R&D on the list of government priorities. base in Mumbai. • Ensure a level playing field for Also, no pathbreaking effort was• Sushrut Adler Group has made to build domestic capabilities all companies with a distinct developed an external fixator in R&D and manufacturing. The regulatory pathway for medical through its facility in Pune. technology free of ambiguities. seeds of import reliance were thus• Johnson & Johnson has sown in the early years of free India. • Make research a rewarding developed a knee implant The reliance on imports continued in career option. suitable for the Indian market the subsequent years in spite of high as well as a reusable stapler • Reform the medical education import duties and tariffs. Today, 80% for use in surgeries, both at system to include medical amenable price points for the of the medical technology market is technology education with Indian market. through imports. assistance from institutes• Roche Diagnostics has The last few years have seen like National Institute of developed a screening device an increase in the domestic Pharmaceutical Education and for cardio-vascular disease manufacture of medical equipment. Research (NIPER). suitable for use in rural With impetus from the government, settings too. • Evolve medical technology India is finally being recognised as clusters with common facilities• GE Healthcare has developed a manufacturing destination for for the benefit of small a low-cost ECG machine and a sophisticated medical technology. low-cost ultrasound machine entrepreneurs who want to International medical technology for the Indian market. set up companies focusing on companies are also using India medical technology.• Philips Healthcare is using its as a manufacturing base by recent acquisitions in India to either setting up facilities of their • Assist existing manufacturers to develop and launch a low-cost own or by acquiring domestic upgrade their quality systems to cath lab for the Indian market. manufacturers. match international standards. There is also a strong need Medical technology is a of innovation in the medical nascent sector in India and the technology market given its opportunities for innovation-led ground realities. Innovation in growth are immense. Innovation medical technology, however, faces in medical technology requires a challenges that need to be addressed vibrant and participative ecosystem by the government. Some of the comprising patients, medical steps which the government can centres, universities, the industry, take include the following: health insurance companies and the government. All stakeholders • Increase public spending in have to act in concert for the healthcare from 1% of GDP to 3%. sustained growth of the industry and the benefit of patients. 25
  26. 26. Information technology (IT) Many pharma companies have entered into strategic partnerships with Indian IT companies in areas of pharmacokinetic modelling, data management and validation, pharmacovigilance, etc. Pharma IT Objective BMS Accenture Clinical data and document management, pharmacovigilance and scientific writing GSK Tata Clinical data management and clinical Consultancy submission support Services AstraZeneca Cognizant Clinical data management, clinical Technology study set-up for electronic data Services capture, medical coding, adverse event reconciliation Elan Infosys Co-creation engagement model to design and implement research informatics system Eli Lilly HCL Co-innovation hub to accelerate the process of bringing ideas to fruition Source: Industry & PwC Analysis Mobile health Mobile technologies are also finding their way into areas like disease awareness, disease management, patient compliance to drug schedules, etc. Mobility solution provider Pharma application Nokia Diabetes disease management Univercell Medi alert Sproxil Mobile product authentication Source: Industry & PwC Analysis26 PwC - CII
  27. 27. SustainabilityIn recent years, addressing varioussustainability issues has becomeincreasingly important for thepharma industry. Sustainability isabout long-term value creation notonly for businesses but also for allstakeholders such as employees,customers, the industry sector,investors and the communitieswhere the company operates. Key focus areaIndian companies have started on environmentsustainability programmes on the sustainabilitylines of their global counterparts. • Adopting the use ofThey are at various stages in their sustainable packagingjourney on sustainability reporting. initiativesAn analysis of the sustainability • Reducing the use ofreports of these firms identifies potentially hazardous inputsimilar trends as those initiated by materialsglobal majors. They develop CSR • Improving productionprogrammes which focus largely processes to reduceon improving environmental environmental impactsperformance of their operations • Reducing the emissionsand providing better access to to air of Ozone Depletingmedicines. Substances (ODSs) andCompanies are also partnering Volatile Organic Compoundswith suppliers to improve their Increasing energy efficiency in the manufacturing processsustainability performance. Mostother companies have programmes • Reducing the use of coalfocusing on social initiatives to and oil in manufacturing operationsimprove local infrastructure,economic and social conditions, • Implementing theorganising various medical camps, requirements of the EU’sproviding free consultations and REACH legislationtreatments and raising awarenessabout HIV-AIDS.Companies report extensively ontheir initiatives and performance,but do not focus on how to improvetheir communication and the reachof their sustainability programmesin India. 27
  28. 28. ConclusionThe Indian pharma industry is ona major growth trajectory and isexpected to reach US$ 74 billionby 2020. In order to realise thefull potential of the market andtap growing global opportunities,companies operating here willhave to collaborate in a mutuallybeneficial manner.As we move into the next decade,mergers and acquisitions,partnerships and licensing willdrive future growth. MNCs willnot be averse to acquisitions buthigh valuations will make M&Asexpensive in India. Alternativessuch as alliances and partnershipswill actually prove to be moreflexible and value-enhancing in thelong term.MNCs can benefit from the localmarket knowledge of Indiancompanies, the strength of theirsales force and significant costadvantage across drug developmentand the manufacturing process.Global pharma companies havethe capability of bringing in newerproducts, technology, capital andquality leadership. They can helptheir Indian counterparts in theirdesire to ascend the innovationcurve.However, alliances andpartnerships face significantchallenges of quality, valuation,28 PwC - CII