Game Plans for POst-GATT Era

List of abbrevations 383

List of Abbreviations

APEC Asia Pacific Economic Cooperation

ANDA Abbreviated New Drug Applications

ASEAN Association of South East Asian Nations

CCMB Centre for Cellular and Molecular Biology

CDRI Central Drug Research Institute

cGMP Current Good Manufacturing Practices

CSIR Council of Scientific and Industrial Research

DCI Drug Controller of India

DOE Design of Experiments

DPCO Drug Price Control Order

DRF Dr. Reddy’s Research Foundation

DRL Dr. Reddy’s Laboratories

EMR Exclusive Marketing Rights

ERP Enterprise Resource Planning

EVA Economic Value Added

FDA Federal Drug Administration

FDI Foreign Direct Investment

GATS General Agreement on Trade Related Services

GATT General Agreement on Trade and Tariffs

H M O Health Maintenance Organisation

H M R Holchst Marrion Roussel

HPB Health Protection Branch

ICMR Indian Council for Medical Research

IDMA Indian Drug Manfacturers’ Association

IICT Indian Institute of Chemical Technology

384 Game plans for post-GATT era

IND Investigative New Drug

INDA Investigative New Drug Application

IPR Intellectual Property Rights

JV Joint Venture

M C A Medicine Control Agency

M C C Medicine Control Council

M C O Managed Care Organisation

MVA Market Value Added

NAFTA North American Free Trade Agreement

NCE New Chemical Entity

NCL National Chemical Laboratories

NDDS Novel Drug Delivery Systems

NM E New Molecular Entity

NPIL Nicholas Piramal India Limited

OPPI Organisation of Pharmaceutical Producers of India

PBM Pharmacy Benefit Management

R & D Research and Development

ROCE Return on Capital Employed

TGA Therapeutic Goods Administration

T Q M Total Quality Management

TRIMS Trade Related Investment Measures

TRIPS Trade Related Intellectual Property Rights

UNIDO United Nations Industrial Development Organisation

W H O World Health Organisation

W T O World Trade Organisation

GAME PLANSfor POST-GATT ERAAction Agenda of Indian Pharmaceutical Industry

GAME PLANSfor POST-GATT ERAAction Agenda of Indian Pharmaceutical Industry

S. V. R. SUBBA RAO

© 1999 Panther Publishers Private Limited

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vii

Introduction

Ten. Nine. Eight. Seven. Six. Yes, six years are exactly what India has got before itcompletely sheds its most protective armour – the Indian Patents Act of 1970 andembraces product patents conforming to international standards of intellectual propertyprotection. The countdown began five years ago when India signed the GATTagreement.

Economic, industrial and corporate soothsayers are busy ever since in predictingeither a doomsday or sunny days for the Indian pharmaceutical industry. For once,there is no safe middle path in their predictions.

Radically Altered Environment

The changeover from process patents to product patents will be quite radical. Likedinosaurs threatened by cataclysmic changes, companies often find it impossible tocope with a radically altered environment. The tell-tale signs are already there for thediscerning observer to see. As many as ten companies have been either merged oracquired by predators on the prowl. In addition, many bread-winning brands ofcompanies like Gufic, Natco, SOL, Pfimex and Dolphin and others have changedhands.

Impact of GATT

While it is difficult to predict the exact impact of GATT on the Indian pharmaceuticalindustry, based on the experiences of other developed countries who have accordedproduct patents over the past two decades, experts opine that:

1. Proliferation of the drug companies would be checked. The number of companieswould dwindle.

2. Some of the more efficiently run companies that are not able to reach the criticalmass would be acquisition targets for the newly entering MNCs or large Indiancompanies that are on an expansion spree.

3. Other smaller companies with good manufacturing facilities and practices would

viii

become contract manufacturers for the large, aggressive marketing companies.

4. New product introductions would be reduced to a trickle. New products underpatent can be introduced only under specific licensing arrangements.

Game Plans for post-GATT Era

Game plans for post-GATT Era: Action agenda of Indian pharmaceutical industryaims to capture the essence of strategic intent and content of twelve leading Indiancompanies which are preparing to stay competitive even in the coming product patentregime of 2005 and beyond.

Multinational drug companies operating in India have not been considered for thisstudy even though they are a part of the Indian pharmaceutical industry. The productpatent regime will provide a level playing field for the industry. Consequently it hasthe potential to reward multinationals at the expense of Indian firms. Multinationalshave the experience, resources and capabilities to succeed in the product patent regime.They have to just make up their minds and adapt to the local markets. They do notneed the kind of rigorous work out which their Indian counterparts do just to survivein the post-GATT scenario.

It is theoretically possible for MNCs to seize the opportunity afforded by increasedpatent protection and to wipe out local competition. However, this is a grosslyexaggerated apprehension although their consolidation is inevitable.

Liberalisation Process

The government’s efforts to liberalise the industrial and economic environment since1991 include:

1.Treating MNCs as equal to Indian companies.

2. Automatic approval for 51 per cent foreign equity proposals.

3. Automatic approval for foreign technology agreements.

4. Delicensing of most bulk drugs.

5. Provision of higher rate of return for companies undertaking production frombasic stages.

WTO Requirements

In the light of the transition period allowed as per Uruguay round of GATT resolution,it was inevitable that less developed countries would delay implementation of newpatent laws in order to allow local manufacturers some breathing time to reorientthemselves. After 2005, however delays will no longer be permissible; India will haveto comply with the following requirements of TRIPS as per GATT resolution:

ix

1. Recognition of product patents

2. Exclusive marketing rights for new products from 2000 to 2005

3. 20 year patent life from the date of filing

4. Shifting of the burden of proof to the alleged infringer

5. The extension of protection to include imported materials and products

Advantage India!

All these changes will make the Indian pharmaceutical industry a level playing field.Neither the MNC sector nor the domestic sector will have any automatic advantages,although MNCs will have some more advantages than they had in the ‘process patentraj’ as a result of the removal of earlier restrictions. At the same time the opportunitiesfor Indian drug companies can be quite considerable. Consider these for example:

1. The market for off-patent branded generics will remain far bigger than for patenteddrugs in India even in 2015.

2. Even in the highly industrialised world where almost the entire patentable researchis taking place currently, more prescriptions are written for off-patent drugs thanfor patented drugs due to ever-increasing stringency of cost containment strategiesand measures on health care expenditure by respective governments.

3. The generic drug industry, therefore , will continue to have a strong growth. it isestimated to reach $ 21 billion by 2005 from $ 14.7 billion in 1997 based on salesof the top ten countries. It is estimated that over the next ten years, on an averageover $ 35 billion per year in branded drugs will be going off-patent opening thegates to competition from generics.

The Indian pharma industry over the years has developed world-class processdevelopment skills. When you couple this with low labour, capital and research costsyou have winning combination to open the gates of world generic markets. That iswhat every Indian pharma major is working at.

Action Agenda of Indian Pharma Industry

The captains of the Indian pharmaceutical industry, who have founded and are headingsome of these leading Indian pharma companies firmly believe that India can become,under the product patent regime, a centre of global importance and prominence inpharmaceutical production and research and thereby enhance its position in the worldeconomy.

The game plans of their companies reflect this spirit, optimism and confidence. Theten essential strategic elements of these winning game plans are discussed in ten separate

x

chapters. These are:

1. Strategic vision

2. Reaching the critical mass

3. The marketing mindset

4. Upgrading technology

5. Focussing on research

6. Integrating strategically

7. Internationalising the business

8. Attracting alliances

9. Intellectual capital

10. Operational excellence

The strategies of these twelve companies provide invaluable lessons for the discerningreader, whether he is an executive who is shaping the future of his company, or ananalyst studying and measuring the corporate performance or a management studentin pursuit of understanding how companies achieve sustainable superior performance.

Pharmaceutical industry: A global perspective 1

Executive Summary

The world pharmaceutical industry is highly imbalanced.Just three regions: North America, Western Europe andJapan inhabited by less than 15 per cent of the worldpopulation account for over 80 per cent of the globalpharmaceutical market in value terms.

This great divide – the ‘haves’ and the ‘have-nots’ ofthe pharmaceutical markets can be classified into twobroad categories. Single-source and multi-source productmarkets. Single-source markets are those where there isstrong protection for Intellectual Property Rights (IPRs).These markets have the world’s largest fully integrateddrug companies that have contributed significantly tothe progress of modern medicine through huge R&D efforts.During the patency of a product only the discoverer hasa right to produce it. Hence all new products patentedare available only from a single source.

Multi-source markets as the name indicates are thosewhere there is little or no protection for IPRs. Thesemarkets have a number of ‘innovative and imitative’ drugfirms, which produce branded generic formulations, genericformulations of patented drugs (through innovative processtechnology skills) and off-patent imitative drugs for

1PHARMACEUTICAL INDUSTRY:A GLOBAL PERSPECTIVE


domestic use as well as for export to developing markets,which have very weak or no IPR protection.

The developed markets are not immune to cost pressures.They have been under severe pressure, from their governmentsand consuming public to contain health care costs. Theyhave reacted in different ways to cut costs like mergers;downsizing and more focused research (leading to marginallyimproved products rather than breakthrough products).Increasingly many of these firms are switching to an out-sourcing strategy in manufacturing, research and evenmarketing effort. The developed countries have beenexerting considerable pressure on the developing nationsfor introducing a stronger protection to IPRs and to putan end to the copying culture.


The health care industry worldwide is undergoing a radical change.Under pressure from cost containment programs in virtually everymarket, the pharmaceutical industry has been forced to act, or ratherreact.

Companies in the West, which account for almost two-thirds of theworld pharma market have reacted to the new tougher times in avariety of ways. Many have slashed costs by cutting staff. Some havedivested unrelated businesses outside their core competencies. The moreprivileged blue chip companies have joined the scramble for mergerpartners or take-over targets. The once gentlemanly industry, in whichhostile deals were virtually unknown, has turned vicious. What are themain reasons for these cataclysmic changes? Consider these:

The world’s leading pharmaceutical companies in the West had beenachieving 15 to 20 per cent increases in profits each year during muchof the 1980s. However, in the 1990s, their profits have been dwindlingdue to the open revolt of the people over the high cost of medicines.

In the US, health maintenance organisations (HMOs), which arelike private national health plans and pharmacy benefit managers(PBMs), who buy drugs in bulk and distribute them mostly throughthe mail to members of their programs have been driving hardbargains. Result? Sharply reduced profit margins.

In Europe too, state health plans have also demanded and receivedprice reductions. In 1993, after Germany passed health care reform,the government spent 20 per cent less on drugs than in the yearbefore.

1PHARMACEUTICAL INDUSTRY: A GLOBAL PERSPECTIVE


Furthermore, many of the products that fueled the strong growthof the 1980s are reaching the end of the patent protection. Whenpatents expire, generic brands rush in with low cost substitutes thatmay cost a mere tenth of the original. For example Upjohn’s xanax,an anxiolytic went off-patent in 1993 and sales dropped from $ 624million to $ 343 million within a year.

In addition, pharmaceutical companies in recent years have not beencoming up with new drugs to replace the high profit drugs going off-patent. Instead of producing breakthrough drugs to treat ailments suchas AIDs, cancer and alzheimer’s disease, they have been turning outmore drugs that copy products already on the market. These are meremolecular manipulations and patentable innovations resulting inproducts with no significant therapeutic advantages. How else can youexplain the development of so many fluro-quinolones, ace-inhibitors,SSRI agents etc?

The panacea of the moment is merger – the hope that bigger can bebetter. The new companies (post-merger), take the best of both firmsand slash costs, mainly by cutting staff. Until pharmaceutical companiescome up with breakthrough research products, they have to find othermeans for earnings and growth. One method is through mergers andacquisitions. In the past four years, drug companies put together over$ 80 billion worth of major mergers or acquisitions (Table 1.1).

All these mergers will perhaps make pharmaceuticals the mostinternational amongst major industries. The top ten drug companiesin 1995 included five US, two British, one Swiss, one German, andone Swedish–American.

The clear implication of all these mergers and acquisitions is thatconsolidation within the industry has only just begun. Theinternationally known consultancy firm, Baring Securities suggests thatwithin five years, the top ten pharmaceutical companies will controlover 60 per cent of the world’s pharmaceutical market. The underlyingmotivation for this consolidation is not market share per se, but costreduction.

The key criteria to be successful and competitive in the pharmaceuticalindustry are to have geographical reach, a strong product portfolio, acritical mass for R&D and financial strength.


The new giants are hoping to get many of their new products frombiotech boutiques that have sprung up in the past decade particularlyin the US. Bigger drug companies have been making deals withresearch-intensive firms to get marketing rights to the drugs they aredeveloping. Drug manufacturers in 1994 alone invested a whopping$ 1.3 billion in 152 alliances.

Pharmaceutical Market – A Global Map

Over 80 per cent of the world’s population lives in developing countries,yet their share of the global output is a mere 18 per cent. As a group,these countries still have a long way to go before they are fully integratedwith the world economy.

The three largest markets: North America, Europe and Japan representover 80 per cent of world pharmaceutical market while they accountfor a mere 13 per cent of the world population (Table 1.2).

Table 1.1

Company Year $ Billion

1. Glaxo acquires Wellcome 1995 14.3

2. Bristol Myers acquires Squibb 1989 12.1

3. American Home Products acquires American Cyanamid 1994 9.6

4. Beecham merges with SmithKline 1989 7.9

5. Hoechst Acquires Marion Merrel Dow 1995 7.1

6. Merck acquires Medco 1993 6.6

7. Upjohn merges with Pharmacia 1995 6.8

8. Dow acquires 65% of Marion labs 1989 6.2

9. Roche acquires Syntex 1994 5.3

10. Eastman Kodak acquires Sterling Drugs 1988 5.3

Top pharmaceutical company deals


Although the industry itself only began to assume importance after thesecond world war, several of world’s major pharmaceutical companiescan trace their lineage back to the nineteenth century. Roughly 60countries now produce at least $ 100 million worth of pharmaceuticalseach year. On a per capita basis, world consumption rose from $ 17 in1975 to $ 29 in 1990.

The bulk of the world’s pharmaceuticals are manufactured in a veryfew industrialised countries. The pattern of drug consumption is muchthe same: over three-quarters of all medicines are sold in industrialised countries.

Pharmaceuticals have clearly acquired an international character, butthe industry is still not a global one, in the same sense as textiles, foodprocessing or even steel.

The contrasts are equally great when the attention turns from countriesto firms. Less than 50 multinationals account for almost three-fourthsof world’s production and exports each year.

The top ten pharmaceutical companies in the world accounted for$ 71.2 billion in 1994 (Table 1.3).

The largest among these in 1994 was Glaxo Wellcome. The company’srevenues in 1994 were $ 12 billion, an amount exceeding the entirepharmaceutical production of Latin America, Africa, India and China inthat year.

Table 1.2Population and pharmaceutical production

Country/Region Share of Share ofproduction population

North America 30.9 4

Europe 30.4 7

Japan 20.9 2

Total 82.2 13

Rest Of The World 17.8 87


The variety of products, which the industry produces, is anotherimportant feature. About 20,000 products are sold in large marketslike the United States and Japan. The number of products marketedin large developing countries like Brazil, India, China, South Koreaand Mexico are over 10,000. Such a degree of product proliferationdepends not only on product characteristics, but also on channels andmethods of distribution, aspects of national policy and the promotionalcampaigns.

Not surprisingly, therefore, several products are available in eachcountry to treat a particular ailment. However, not all are of equalimportance. A single product may account for as much as a quarter oftotal sales in that segment.

Usually, the five largest suppliers may account for two-thirds or moreof the domestic market. For certain diseases, the same productsdominate markets throughout the world.

Table 1.3

Top pharmaceutical companies — 1994 sales reflecting 1995 mergers

Company Country $ Billion

1. Glaxo Wellcome UK 12.0

2. Merck USA 9.0

3. Hoechst Marion Roussel Germany 8.1

4. American Home Products USA 7.5

5. Bristol Myers Squibb USA 7.2

6. Roche Holding Switzerland 6.0

7. Pfizer USA 5.9

8. Smith Kline Beecham UK 5.5

9. Pharmacia Upjohn Sweden/USA 5.0

10. Eli Lilly USA 5.0

Total 71.2


These characteristics, though few, suffice to attest to the industry’sdiversity and to suggest generalisations about important issues like publicpolicy, corporate strategy and cost structures etc. The manufacturers inthe pharmaceutical industry can be broadly classified into threecategories:

1. Large, integrated corporations

2. Innovative companies

3. Imitative firms

Integrated Corporations

The integrated corporations are multinationals distinguishable inseveral ways. Firstly, they are exceptionally large; with annual sales ofover $1 billion. Secondly, they place particularly high emphasis onproduct development, generating the New Molecular Entities (NMEs).Thirdly, these firms adhere to several well-defined methods ofoperation. They secure patents for their inventions at a global level.They market and distribute their products in a number of countriesthrough subsidiaries or licensees. They purchase intermediate inputsonly from approved vendors. They market their products under brandnames and compete predominantly in the private market.

Innovative Companies

Innovative companies are easily distinguished from integratedcompanies. Annual sales of these companies are comparatively modestranging between $ 50 to 300 million. They may be capable of developingand discovering NMEs . Their revenues are not sufficient to fund themassive research and development activity that drug discovery programsrequire. Their resources are not adequate to market and distributetheir products even if they are able to develop an NME. The innovativefirms, therefore, usually resort to licensing arrangements to markettheir products abroad. Innovative firms also enter in to joint ventureagreements for clinical research and product registration of theirpromising new product candidates with specialised developmentalresearch companies or with other innovative and even integratedcompanies in other countries. Such strategies to overcome resource


constraints are becoming increasingly common. Consider for examplethe recent agreement between Dr. Reddy’s Laboratories, an innovativefirm from India and the integrated Danish firm Novo Nordisk fortaking the NMEs developed by Dr. Reddy’s Laboratories throughclinical research to product registration and marketing in certaindeveloped markets.

Innovative firms typically produce and market branded versions ofpatent-expired drugs in developing countries. The lack of significantresearch or distribution facilities does not mean that the innovativefirms are excluded from foreign markets. Many are significant exporters,either selling drugs through their own channels or throughinternational trading houses on the open markets. The logicalprogression for an innovative firm in the corporate or industrialevolution cycle is to become an integrated corporation. The moreprogressive innovative firms particularly in developing countries areincreasingly advocating stronger protection for IPR.

Imitative Companies

Imitative companies are small in size and are usually family-ownedenterprises. As they lack in-house research and developmentalcapabilities, they utilise technological and scientific knowledge developedby others to manufacture their products. The drugs they produce arepatent-expired and they compete in the highly price sensitive markets.They often focus on specific regions and on highly price sensitivesegments like institutional and tender business.

New Breed of Research Firms

There is a new group of firms emerging in the early 1990s consisting ofsmall and medium-sized companies engaged in research-intensiveactivities. They are founded in order to exploit a single or smallernumber of patents for the development of unique drug.

The most important of these firms are engaged in genetic engineering.The drugs they produce are not usually NMEs, since they are generallyidentical, or very similar to substances, which occur naturally in thebody. The best known of these firms are Biogen, Biotech and Genetech.All were founded at an early stage of product development as joint


ventures between academic centres, venture capital entrepreneurs andintegrated companies. Such firms typically incur operational losses atthe early stages of operations since their research expenditures exceedrevenues earned from royalties. A 1989 study of the ten leading mediumsized research companies indicated an average of $ 50 million inoperating revenues and research expenditure of 55 per cent.

These modern biotechnology firms may launch patented products athome and conclude licensing arrangements for overseas markets. Mostbecome acquisition targets once their particular product is establishedin major markets. As a result, many are now becoming more closelyintegrated with the mainstream integrated pharmaceutical firms. Drugmanufacturers in 1994 alone invested $ 1.3 billion in 152 alliances.

CROs

Another, much smaller sub-set consists of firms such as Alza, Elan andTheratech, which specialise in the development of new therapeuticsystems providing controlled-release oral and transdermalpharmaceutical preparations for new and established drugs. There aresome other firms, which offer products and services on a contractualbasis. These firms may specialise in the synthesis of new compounds,in-vivo studies, clinical trials, product registration and so on.

Demographic Effects

Pharmaceutical markets are being reshaped by two types ofdemographic trends – rates of population growth and changes in theage structure. Most countries fall clearly into either of two groups,depending on the overall demographic pattern. In one group arecountries where the total population is constant or declining, whilethe median age is rising. In another group are countries experiencinga rapid increase in population although the median age is low and notincreasing. Consider these facts:

Population of many industrial countries is stagnating or is declining.Consequently, the aging process will be quite rapid in these countries.One-sixth of all Germans will be over 65 by the year 2000 and by2010 half the country’s population will be 50 years old. Thepopulation of Canada, Italy and Japan are younger but aging rapidly.


Aging process will be the fastest in a number of developing countries.While the share of the elderly and those over 45 will not risesignificantly, the absolute numbers will soon exceed the totals formost industrialised nations. For example, by 2010 the number ofChinese over 65 will be as large as that in Western Europe in theyear 2000.

In some of the developing countries like Kenya, Nigeria and Zairethe median age in 2010 will be less than half of the average inindustrialised countries; In some cases the average age would be below20 years.

Implications of Changing Demographics

These demographic trends are altering important features of drugmarkets. The frequency of drug consumption is rising most rapidly inmarkets where the population is aging. At the same time the patternof consumption is changing. Chronic and degenerative diseases areprevalent after the age of 50 and are dominant among those over 60years. The markets for medicines to treat these diseases are thereforegrowing.

The effects are different in the developing countries, where thepopulation is young and increasing. Young people are subject to acuteor infectious ailments. The need for drugs is particularly great amongthose under five years of age, to sustain vaccination programs againstchildhood diseases, prevention and treatment of vitamin and mineraldeficiencies and treatment of cough and cold associated with infections.The unfavorable economic and social conditions, which prevail in manydeveloping countries in turn result in poor hygiene and sanitation,increasing the need for such drugs in this age group.

These demographic shifts are already changing the way governmentsinfluence the pattern of consumption. Over three-fourths of all drugspurchased in most developing countries are obtained through privaterather than public channels. The increasing populations in thesecountries are unlikely to reverse this trend of inadequate systems ofpublic support for health care in the foreseeable future. Regulators inindustrialised countries too, are searching for ways to contain the costsof public health care and have chosen to focus on cost-effective


reimbursement programs. The reasons for this decision are political aswell as economic.

This regulatory regime in industrialised countries will definitely slowthe growth of consumption, though the long-term effects may not beas severe as drug companies fear. Health authorities will have to searchfor significant savings in other areas of their budgets because spendingon drugs accounts for only 5 to 15 per cent of the health careexpenditure in industrialised countries. Eventually, the industry couldeven see its share of public health care spending rise, although thetotal amounts allocated for reimbursement programs will decline. Thiswould be due to a stringent reduction in hospitalisation, with itsattendant high costs, and a preference for out-patient drug therapies,which are far cheaper.

How will these demographic trends and changing policies affect globalmarkets? The general consensus is that the demand for drugs will growrapidly. The share of the developing countries in the world marketcould also rise. This is due to the significant increases in populations ofthe developing countries. The second reason is the possibility ofdeceleration of sales in industrialised countries due to increasing genericsubstitutions, as governments are scaling back the reimbursementprograms. While saying this, the graying of the population inindustrialised nations with higher buying capacities would be acounterbalancing factor, tending to retain the market share of thefirst world.

Demographics and Drug Consumption

The drug consumption among the elderly on the contrary is muchlower in developing countries as their income levels are much lower.The frequency of drug consumption among the elderly, therefore, issubstantially lower in developing countries as compared to developedcountries.

Per capita sales of pharmaceuticals rose steadily from 1975 to 1984 inboth industrialised countries and developing countries alike. Since then,however, the increment has been disproportionately higher in theindustrialised world. Developing countries accounted for about 20 to23 per cent of world sales in each year during 1975–84. Their share,


however, has steadily fallen in later years and by 1990, less than 15 percent of all pharmaceuticals were sold in developing countries.Developed countries accounted for the lion’s share of 85 per cent.

It is important to note that population increases, however rapid, do notby themselves lead to a substantial growth in pharmaceutical markets.Other factors such as income growth, higher priority for health care bygovernments, literacy levels and consequent awareness and importanceattached to personal health are probably more important determinants.

GATT and World Pharmaceutical Industry

Firms in industrialised countries, particularly in the US, increasinglydepend on exports of R&D intensive products. Arguably, they wouldtherefore benefit from strong IPR. Bringing intellectual property issuesinto GATT also provides a potentially powerful enforcementmechanism. Current enforcement practices like restriction of marketaccess for countries, which do not have strong IPR protection, couldbe deemed to be ineffective.

In a study of the impact of pharmaceutical patent infringement inMexico, Argentina, Brazil and India, it was estimated thatpharmaceutical firms worldwide have lost perhaps $ 167 million to$ 1.5 billion annually in royalty payments due to them, due to theabsence of product patents for drugs in those countries.

When you consider the ever strengthening imperatives for costcontainment by governments and the increasing competition due togenericisation of drug production in industrialised countries, particularlyin the US, it is easier to understand why the research-basedpharmaceutical industry is mounting pressure constantly to see thatGATT comes into force. Consider these for example:

According to US government estimates, the research-basedpharmaceutical industry loses about $ 5 billion each year to patentpirates.

180 of the top 200 pharmaceutical products had come out of patentsto face generic competition between 1983 and 1990.

More than 40 billion worth of pharmaceuticals will come out of patent


by 2005. The impending generic competition will bring to beartremendous pressure on revenues and margins.

The research-based pharmaceutical industry in the US will be benefitedby implementation of GATT. The uniform patent life of 20 years fromthe date of filing will ensure an additional patent protection to the 98new drugs introduced between 1976–81. New drugs introduced in 1978will have an additional patent protection of 2.2 years and 4.2 years inthe case of 1980 introductions. The average expected increase in patentlife as a result of GATT implementation would be around 3 years.With this, the major adverse impacts on R&D returns would beobviated.

Generic Explosion in the USA

The US market for generics is by far the largest. It was valued at$ 6.5 billion in 1997 and accounted for over 35 per cent by volumeand 12 per cent by value.

A wide range of drugs is coming off-patent now and most of thesedrugs are of interest to the generic manufacturers. The extent andattraction of the generic market can be gauged when even thediscoverers of these products are showing eagerness to join the genericsbandwagon before generic manufacturers file their Abbreviated NewDrug Applications (ANDAs).

Health care cost-containment is another reason. The whole issue ofpricing has played a major role. HMOs, Managed Care Organisations(MCOs) and PBMs are mainly responsible for this acceleration of thealready changing trends of prescription changes from branded to genericdrugs.

In the past, under the health care insurance system, the user paid thefees and got the reimbursement from the insurer. There was no majorincentive for health care deliverers, such as physicians and hospitals, tokeep health care costs down.

Under the capitated system of health care, however, this is changingrather rapidly. Managed Care Organisations (MCOs), under the presentsystem typically charge a flat fee, upfront, for each insured person.With a low additional payment, they then provide all treatment. Thus


MCOs have a vital interest in keeping down the use of expensivediagnostic and treatment procedures.

MCOs, in addition are showing a lot of interest in studying and adoptingstrategies to prevent morbidity in the insured persons. Pharmaco-economic studies too are increasingly being employed to examine thecost-effectiveness of pharmaceutical usage vis-à-vis other forms oftreatment. Governments too are encouraging the usage of generics.

As cost pressures become more acute and more block buster productscome off-patent over the next few years, the size of the North Americangeneric market is set to expand sharply. Here is how some companiesare preparing to meet the challenges of the future:

Novopharm, the leading generic company from Canada, is buildinga $ 38 million manufacturing plant to meet the increased demandsexpected from the growth in the US from generics business.

Novopharm has also purchased Canadian over the counter (OTC)company – Wampole, from Rhone Poulenc Rorer, in a further moveto broaden its operations base.

Schering Plough’s generics subsidiary – Warwick, has extended itsdeal with Novopharm for the non-exclusive distribution of the latter’sexisting lines of generic drugs.

Geneva, the generic arm of Novartis has announced the formationof a partnership with American Drug Stores Inc to address importanthealth care issues like improved access to high quality, low-costprescription pharmaceuticals and medical outcomes management.The partnership, to be called ‘Prescription America’, is a PBMcompany, created to exploit Geneva’s broad range of genericpharmaceuticals and American Drug Stores’ 35,000 retail outletsacross the country.

Schein Pharmaceutical, the generic wing of the German drug major– Bayer is actively pursuing a policy of globalisation. It has acquiredmanufacturer/distributor – Triomed in South Africa. Schein sellsto drug store chains, retail pharmacies, managed care organisationsand hospitals. It has an extensive line of products with the intentionto offer purchasers ‘one stop shop’ option. It has in total more than400 ANDAs and a further 50 ANDAs at various stages of


development. Schein has in a recent move, allied with SolvayPharmaceuticals to form a mental health group alliance offering apackage of over 26 psychotherapeutic products and customised diseasemanagement programs to managed care customers.

Some of the leading Indian pharmaceutical companies like Ranbaxy,Lupin, Wockhardt, Dr. Reddy’s Laboratories, Sun Pharma and Ciplahave entered into strategic alliances and are acquiring off-shoremanufacturing bases to exploit the big opportunities that theAmerican generics market has to offer.

The global health care industry is undergoing a period of radical change,due to imposition of price control requirements. The majorpharmaceutical companies are consolidating in order to cut costs andincrease market share of ethical brands, whilst the generics market isexpanding. The recent spate of mergers, acquisitions and genericisationmoves testifies this.

Patent expiry of ethical products results in an extraordinarily rapid fallin market share. Generic competition is both extremely rapid andaggressive in price.

Generics in the European Union

The generics market in the UK is also commodity-based, characterisedby low prices and high volume turnover. The UK retail generics marketwas valued at £ 700 million in 1997 accounting 15 per cent of the totalmarket.

Germany is the largest market for generics at present genericsaccounting for 30 per cent of total market. The governments of Italyand France are adopting a more proactive attitude towards increasinggeneralisation.

According to the European Generics Association (EGA), the Europeanmarket for generics is valued at Ecu 4.5 billion which is equivalent to$ 6 billion and accounts for 15 per cent of the market by volume and10 per cent by value.


Generic Drug Industry Prospects

According to a report by S.C. Warburg, the generic drug industry willcontinue to have a strong growth. The forecast says that growth between1996 and 2005 will be 10 per cent annually reaching $ 21 billion by2005 from the present $ 14.5 billion. At present generics account forhalf of all new prescriptions and over the next ten years, on an average,over $ 35 billion per year in branded drugs will be open to competitionfrom generics.

Changing Scenario

The pharmaceutical companies have to be global in a much toughermarket. Robert C. Holmes, Executive Director for Strategic Planningand Management at Astra Merck, presented a vivid picture of thechanging scenario of the drug industry sometime ago in an interview.

“The drug industry had been a very profitable gentleman’s club. Allcould make money and there was no pressure on prices. The doctorsdetermined the treatment. Then came the health care debate and arevolt against double-digit inflation. The whole industry’s dynamicschanged. It became more competitive. Now the people are veryconscious of costs and the consumer is involved. So to cut costs healthorganisations, for example, look at the 12 ACE inhibitors, whichcontrol blood flow and pressure and may be put just two on theformulary and then negotiate the price of these two with the respectivepharmaceutical companies. In the 1980s all 12 could sell profitably.The market for secondary products is disappearing. You have to bethe first or second to the market. A second generation of somewhatbetter drugs that have fewer side effects but are six times as expensiveas the ACE inhibitors came to market in the 1990s with a muchreduced potential. Until the 1980’s a “me-too” drug could be broughtout at lower risk than the trailblazer with prospects of selling verywell (and with a patent that would last beyond the patent of the firstdrug). Peak-year sales of a late entrant could run into a billion dollars ormore, but today the follow-on drugs best year would not exceed $ 500million.”


A Look into the Crystal Ball

While it is extremely difficult to predict the exact future of the worldpharmaceutical industry, a careful study of the past fifteen years revealsa clear enough picture of what is most likely to happen in the foreseeablefuture. Consider these nine trends:

1. The frenetic pace of change in the pharmaceutical industry worldwidewill continue. The governments in industrialised countries willmaintain the pressure to contain the health care costs. Thepharmaceutical industries in these countries therefore will remainunder severe pressure for margins.

2. The use of generics will increase in these countries, resulting inlower growth rates for pharmaceutical industry. The increasing useof generics will keep the pharmaceutical cake at a reasonably constantsize.

3. The pharmaceutical industry, consequently, will continue to be in aconsolidation mode. There will be more mergers and acquisitions.Pressures on margins, the large number of blockbuster drugs goingoff-patent and inadequate new product pipelines will drive industrytowards even more acquisitions and mergers. The last fourteen yearshave seen as many as 25 mergers and acquisitions worth more than$ 200 billion. Three more are on the cards:

A. German drug major Hoechst Marion and Roussel and RhonePoulene Rorer are likely to merge to create ‘Aventis’, the world’ssecond largest pharmaceutical firm after Merck.

B. Britain’s Zeneca and Sweden’s Astra are likely to unite to becomethe seventh largest pharmaceutical company in the world.

C. Sanofi and Synthelabo-both French drug firms are likely to joinhands to be among the top twenty drug firms in the world.

4. The world pharmaceutical industry is likely to defrag itself consequentto all these mergers and acquisitions. Analysts predict that abouttwelve to fifteen drug firms are likely to control close to two-thirdsof the world pharmaceutical market in the next five to ten years.

5. The present imbalance of 80:20 rule – the control of eighty per centof pharmaceutical market by the industrialised triad is likely tilt infavour of the developing countries. Developing markets, which


currently account for only 20 per cent of the total pharma marketwill increase their share to a third by 2005, growing at 15–19 percent as compared to the average growth rates of 7–8 per cent in theindustrialised markets like the US, Europe and Japan.

6. In the new millennium the protection for intellectual properties willbe much stronger than in the past. Almost all countries with localpharmaceutical industries will join the WTO. Those who do notjoin will find it extremely difficult to survive the competitive pressuresand will not have access to newer drugs.

7. The current biotech revolution will only accelerate and gainmomentum further. The research pipeline of biotech companieswill be very deep with an unprecedented promise to treat, hithertodifficult-to-treat diseases. The Genomics is another area, which willhave a profound impact on the bio-pharmaceutical industry. It mayeventually provide remedies for diseases like Parkinsons,Alzheimer’s, cancer, AIDs and other infectious diseases. RobertThong, pharmaceuticals industry consultant with RenaissanceWorldwide, compares the current situation to the revolution ininformation technology 15 years ago, which saw a raft of computergiants swept aside by the new and faster kids on the block. He says,

“There is a chance for the Microsofts and Netscapes of thepharmaceutical industry to emerge, but we don’t know who theyare yet!”

8. In addition to mergers and acquisitions, strategic alliances too willbe on the increase, particularly in the area of biotechnology andgenomic research. Scientists will be able to identify the precisemolecular defect responsible for the disease state. They will also beable to develop the magic (molecular) bullet to set the defect rightwith great precision. These target-specific drug delivery systems willbe the engineering marvels of our times. Companies that do nothave these capabilities will naturally source the technology that willbe needed for their own products to deliver what they promise.

9. Inspite of the dramatic new medical advances and theunprecedented progress, that the Human Genomic Project maymake, the rich and poor divide will remain. These advances maynot be available to the third world. Those, who need them themost, may not be able to afford them even in the next fifty years.


as a leader in the region. The initial successes of Indian pharmacompanies like Dr. Reddy’s and Ranbaxy should provide bothinspiration and confidence to other Indian companies and to thegovernment as to what a strong IPR can do for India.

GATT – A third world perspective 35

Executive Summary

Two major reasons why developing countries join GATT: Oneis the hope and belief that improved market access wouldspur the economic growth. The other is that they reallydo not have a choice.

The gains to developing countries as a result of GATTindeed relates to export market prospects in terms ofimproved access and the provision of an ‘insurance policy’to future barriers. Most of these gains, however, will befelt in the long term as many of the WTO reforms havegradual phase - in periods and economies need time toadjust.

Developing countries are fast becoming a major force inthe world trade for manufactured goods. The share ofdeveloping countries in the world manufacturing exportsrose from less than 10 per cent in 1970 to around 26 percent in 1992. As compared to this, their imports ofmanufactured goods rose from 5.5 per cent to 17.2 percent during the same period.

The positive impact of GATT in pharmaceutical industrieswill be felt in very few developing countries like China,India, South Korea and Brazil. Pharmaceutical industryis virtually non-existent in more than 60 third world

3GATT – A THIRD WORLDPERSPECTIVE


countries. About 90 developing countries have very limitedmanufacturing infrastructure to produce off-patent genericformulations.

Many of the third world countries will have to contendeven in the new millenium, with off-patent genericformulations and alternative medicines. The fruits ofthe new drug revolution in the fields of biotechnology,genomics and highly sophisticated target-specific drugdelivery systems will be out of reach for the third worldcountries.

But then, there is more to GATT than pharmaceuticals. Thethird world countries need to improve their overall economicgrowth. Improving market access for their produce iscrucial. There is also a warning or caution for those whodo not integrate themselves with the world economy. Thedanger of marginalisation.

Countries that do not make any effort or fail to berelevant could be bypassed, marginalised and relegatedto the periphery for decades to come.


The seven-year Uruguay round of GATT world trade talks wasconcluded in April 1994 with the signing of an agreement at Marrakech.Developing countries – 118 of them have played a very important rolein trying to establish a common fame work for global free trade. Theyhave agreed to reverse their preferences for protectionism. They seemto have overcome their distrust in new areas such as trade in servicesand intellectual property rights.

The key reason for the interest of developing countries was the realisationthat liberalisation would spur economic growth. Improved foreignmarket access for their exports is the major reason for deciding onfurther liberalisation of their economies. It is almost a Hobson’s choice!

Developing countries are fast becoming a major force in world trade formanufactured goods. Their share in the world manufacturing exportsrose from less than 10 per cent in 1970 to around 26 per cent in 1992.At the same time, developing countries also increased their imports ofmanufactured goods from 5.5 per cent in 1970 to 17.2 per cent in 1991.

The main results of the Uruguay round negotiations are:

1. Reduced tariff and non-tariff barriers and expanded GATT disciplineto cover agriculture, textiles and clothing.

2. Reform of existing GATT rules, most notably those on safeguardsand on subsidies.

3. Countervailing duties.

4. Extension of multilateral rules to the “new” areas of trade in services

3 GATT – A THIRD WORLDPERSPECTIVE


within the frame-work of the General Agreement of Trade in Services(GATS) and Agreement on Trade-Related Investment Measures(TRIMS) and Trade-Related Intellectual Property Rights (TRIPS).

5. Institutional reforms relating to the settlement of trade disputes(understanding on rules and procedures governing the settlementof disputes) and the functioning of the GATT system (trade policyreview mechanism).

For the most part, the new rules take effect immediately. However,there are important transition periods for developing countries.Liberalised market access will generally be phased out over a 10-yearperiod.

Effects of GATT on Developing Countries

The GATT 1994 agreement and the new WTO will serve to helpdeveloping countries seeking to move in the direction of more openmarkets and less government intervention. Assistance will come in theform of:

Lower tariff rates

Removal of non-tariff barriers

Fewer subsidies

Better investment practices

Stronger protection for intellectual property rights

One measure of the gains to developing countries relates export marketprospects, which are: first, further improvement in their access tomarkets of developed countries, and secondly, the provision of an“insurance policy” against future barriers to those markets.

Elimination of Non-tariff Barriers

Non-tariff barriers encompass a whole array of measures, includingvoluntary export restraints, orderly market arrangements, tariff quotas,surcharges, variable levies, prohibitions, licensing, import monitoring,anti-dumping and countervailing actions, price controls and the measuresinvoked under the multi-fiber agreements.


Voluntary Export Restraints

When imports affect local producers, GATT members, especiallydeveloped countries, looked for protection by enforcing voluntaryexports’ restraints. The exporting country, would, in turn generally waiveits GATT rights by consenting, under duress to limit its exports to thedistressed market. The GATT 1994 agreement stipulates that governmentnegotiated voluntary export restraints should be eliminated within fouryears of the establishment of WTO.

Anti-dumping Actions

Anti-dumping actions have increasingly become the cutting edge ofrestrictive trade policies. Though GATT’s anti-dumping rules havetightened, they still leave national authorities considerable leeway totreat unfairly, with the possible outcome of a slow-down in the growthof imports. Some observers have found that the Uruguay round failedto deal adequately with the increasing use of anti-dumping measures toharass legitimate trade. As important players in the world export markets,it is necessary for developing countries to devise a more rational methodof calculating dumping margin and better multi-lateral surveillance ofanti-dumping investigations.

Fewer Subsidies

Subsidies are now classified as:

Red Category: ProhibitedNon-agricultural export subsidies and subsidiescontingent on domestic content requirement.

Yellow Category: Certain low levels of assistance to cover operatinglosses, allowing unprofitable firms to stayin business instead of retrenching. These canbe challenged if they harm the trading interestsof other countries.

Green Category: Regional aid, environmental infrastructure andR&D – if they are provided within limits. How-ever, even these can be challenged, if they haveserious adverse effects on the trade interests ofother WTO member states.


Gains for Developing Countries

Most of the gains from the GATT agreement to developing countrieswill only be felt in the long term. There are two reasons for this.

A. Many of the WTO reforms have gradual phase-in periods.

B. Economies need time to adjust.

The new WTO, however, will bring both static and dynamic gains inthe near future as well.

Static Gains

Static gains result from less distortion to production and consumption,and a consequent reallocation of resources. A GATT study on staticgains suggests that when it is fully implemented (Uruguay round), globaltrade will increase by $ 750 billion (in 1992 dollars) or by about 12 percent over the level that otherwise would exist in the year 2005. If exportsof developing countries benefit in proportion to their trade inmanufactured goods, their export gains would total about $ 200 billion.

Larger export and import gains should induce static income gains, on aglobal basis, of about $ 250 billion per year (in 1992 dollars) after 10years. The developing country share of this gain is probably a quarter orapproximately $ 60 billion.

Dynamic Gains

Dynamic gains arise from stronger competition within economies,higher investment rates, greater efficiency and thus faster growth. Thedynamic gains, while harder to measure, are likely to be more importantthan the static gains.

Regional Trade Agreements – Blocs or Blockades?

Despite increasing efforts to liberalise the global trading system, theworld is seeing the emergence of a number of trading blocs centreedon Europe, North America, South America and the Asia-Pacific regions.An increasing number of regional arrangements have been concludedin recent years, with 33 arrangements notified to GATT between 1990and 1994. Prominent among these are:


1. NAFTA: North American Free Trade Agreement between USA,Canada and Mexico. A major beneficiary of NAFTA is thedeveloping country Mexico. The potential benefits to Mexico ofjoining are many, including stable and secure access to the UnitedStates market.

2. MERCOSUR: Mercado Common Del Sur. Established in 1991,this agreement involving Argentina, Brazil, Paraguay and Uruguayis now perceived as the most important customs union in the LatinAmerican region. This is free trade zone affecting 90 per cent ofcommodities among the member countries. A common externaltariff applies to trade with countries outside MERCOSUR.

3. European Union: The integration agreement of European countriescover a wider area and go much deeper, beyond the promotion ofintra-region trade and the erection of common trade barriers througha customs union, moving towards the complete integration ofregional markets through the free flow of factors of production andharmonisation of monetary, fiscal, industrial, trade and competitionpolicies.

4. ANDEAN: This agreement involves Bolivia, Colombia, Ecuador,Peru and Venezuela.

5. ASEAN: Formed on 8th August 1967, the Association of SouthEast Asian Nations comprises of Singapore, Malaysia, Taiwan,Philippines, Indonesia, and Thailand. Brunei joined in 1884 andVietnam in 1995. Cambodia, Laos and Papua New Guinea have anobserver status. The purpose of this association is to accelerateeconomic growth and social progress. AFTA (ASEAN Free TradeArea) was set up in 1991 with the aim of creating a common marketin 15 years.

6. APEC: Asia Pacific Economic Cooperation group was founded inNovember 1989, with an aim of establishing a free trade zone by2020. The member countries are Australia, Brunei, Canada,Indonesia, Malaysia, Chile, China, Hong Kong, Mexico, Japan,New Zealand, Papua New Guinea, South Korea, Singapore,Philippines, Taiwan, Thailand, USA.


GATT and Pharmaceutical Industry in the Third World

The pharmaceutical industry in developing countries accounts for lessthan a fifth of world production. The size of firms and pattern of productspecialisation, therefore, differ significantly from those in industrialisedcountries. Most firms are small in size and produce branded generic orgeneric formulations of patent-expired drugs. Many of these firms dependon imports for bulk drugs. Only a few firms in countries like Argentina,Brazil, Mexico, Puerto Rico, Republic of Korea, China, Turkey, Indiaproduce bulk drugs and intermediates.

More than sixty countries in the third world do not have anypharmaceutical industry. About ninety countries produce only genericformulations mostly of drugs mentioned in WHO’s list of essentialdrugs.

Many of the third world countries depend upon various types of aidand foreign assistance for their medical supplies. More often, the aidtakes the form of credit lines which are a direct gift of pharmaceuticalsor tied to purchases from suppliers in the donor country. Essentialdrugs are usually obtained by competition through open tenders.

IPR and Pharmaceutical Industry

While many industries rely on patents to earn returns on their researchand development programs, Patents are especially important inpharmaceuticals, chemicals and machinery. Huge resources are put atrisk in the pharmaceutical industry to discover or invent a new drug.Over 90 per cent of all new drugs have been invented in countrieswhere there are strong patent protection for products as well as processes.

There is much evidence to suggest that weak intellectual propertyprotection act as a disincentive to innovation. Brazilian survey clearlysuggests that lack of intellectual property protection discouragesInnovation. US survey evidence (Mansfield, 1986), suggests thatprotection stimulates innovation.

The opportunity horizon for the progressive drug companies in somedeveloping countries like India, China and Brazil is indeed very wide.Indian and Chinese companies are low cost producers. A number ofleading companies in both countries have steadily upgraded their


technological competence and developed the science of processinnovation into a fine art. India along with China among thedeveloping nations has reached a stage where they can be globallycompetitive in the bulk drug and intermediate business. Intellectualproperty protection in Brazil too has been very weak. It is only recentlythat the country has started work on amending its patent laws.

As soon as China has amended its patent laws and accepted the pipelineprotection from 1986 retrospectively, it has been able to attractsubstantial Foreign Direct Investment (FDI). India has yet to amend itspatent laws, but promised that it would recognize product patentseffective 2005, after the completion of the transition period.

Brazil has not been able to develop its process development skills anywherecomparable to China and India, even though, the country has beenrapidly industrialising. The industry’s cost structure in Brazil is higherthan that of India and China and therefore less competitive. There is alot of international pressure on Brazil to recognise the product patentsearlier.

The benefits of the new revolution that is sweeping the worldpharmaceutical industry in general and particulary in the areas ofbiotechnology and genomics will not be available to the third worldcountries in the foreseeable future. They will be unaffordable. The thirdworld countries should make a determined move towards overalleconomic, social and tehnological progress. They can achieve this onlywhen they integrate with the rest of the world . They cannot achievethis in isolation.

Dr. Gamani Corea, the former Director General of UNCTAD, whilestressing the role of science and technology in the internationaldevelopment strategy had expressed a note of warning:

“It is being said that although the world is getting more integratedand inter-dependence is spreading, although financial markets areconverging, there is also a possible trend in the other direction. Apossible danger is that these very processes can lead to marginalisationof the countries of the South. The developing countries instead ofbeing drawn into the vortex of the world economy could remain,and continue to remain, increasingly on the periphery. In fact, peopleare already saying that in the world of tomorrow, the division would


be not only between those who know and those who do not know,but also between the useful and the less useful, both nationally andinternationally. Countries that are not useful in the global economy,countries that do not make any effort or fail to be relevant, could bebypassed, marginalised and relegated to the periphery for decades tocome.”

Life after GATT in Indian pharmaceutical industry 45

Executive Summary

What will be the impact of introduction of product patentson Indian pharmaceutical industry, which has growndramatically in the ‘process-patent Raj?’ Will it be adoomsday or sunset scenario as painted by the Indian DrugManufacturers Association (IDMA)? Or will it be a sunrisescenario with a wide opportunity horizon as projected byOrganisation of Pharmaceutical Producers of India (OPPI),industry experts and some of the Indian drug majors?

Some leading Indian pharmaceutical companies share theoptimism of the Sunrise scenario and they have beenagressively planning to meet the challenges of the post-GATT scenario. They see a wide opportunity horizon forthe Indian pharmaceutical industry as India integrateswith the world economy by introducing product patents.There are at least seven big opportunities to be exploitedin the coming product patent era. Here is the rainbow onthe opportunity horizon:

1.Marketing of branded generics in the domestic market.

2.Marketing of bulk actives and drug intermediates inthe highly industrialised and regulated markets.

4LIFE AFTER GATT IN INDIANPHARMACEUTICAL INDUSTRY


3. Marketing of branded generics in countries with littleor no IPR protection

4. Marketing of generic formulations of off-patent drugsin regulated markets with strong IPR protection

5. Opportunities for custom synthesis of newly patentedmolecules

6. Branded generic formulations of off-patent,yet singlesource drugs that are difficult to copy

7. Contract research opportunities

And then in the not so distant future, there could evenbe opportunities to licence out the molecules developedby Indian pharmaceutical companies. Dr.Reddy’s havealready shown the way. Ranbaxy is about to do it. Wockhardthas developed the lead compounds and is scouting forinternational partners for further development andcommercialisation. While it may take five to seven yearsor more for all these things to materialise, these earlysuccesses should instil confidence and the ‘Can Do’ spiritamong other Indian drug companies.


The Indian pharmaceutical industry is one of the most closelyregulated industrial sectors in India. The government not only controlsprices of formulations and bulk drugs but even controls the profitabilityof pharmaceutical companies.

The industry is characterised by a high degree of proliferation. Over16,000 pharma units produce bulk drugs, intermediates andformulations. Many of these units are low-cost single product firmsservicing regional markets with low technology bulk drugs and genericformulations. They have very small market shares. The top 250companies account for over 80 per cent of pharmaceutical production.

The industry produces over 456 bulk drugs, 525 intermediates and 60,000formulations and has been a net exporter for over seven years now.

Life Before GATT

The Indian pharmaceutical industry has developed significantly sincethe early 1970s. Prior to this, multinational companies dominated theindustry with their superior technological base (mostly import-dependent) and marketing strengths. They had a strong control onthe availability and prices of drugs, with the result that drug prices inIndia were considerably higher than they are now and in fact werecomparable to prices in the developed world.

DPCO 1969 (Drug Price Control Order) was the first step taken by thegovernment towards encouraging self-reliance in drug technology andavailability. DPCO established retail ceiling prices for certain drugs.

4LIFE AFTER GATT IN INDIANPHARMACEUTICAL INDUSTRY


Indian companies that manufactured these drugs were, however,exempted from price control for as long as five years.

The second major step towards increasing self-reliance in the drugindustry was the introduction of the Indian Patents Act of 1970. Thishas resulted in fundamental structural changes within the industry.The act recognised only process patents and not product patents. Thisallowed companies to copy a drug using different process routes withoutpayment of royalty or license fees to originators.

Indian pharma companies with lower labour and operational costs wereable, for the first time, to manufacture international drugs (discoveredelsewhere in the world) and sell them cheaper than the MNCs could.Multinationals had to adhere to international patent regulations andwere restricted to their own proprietary drugs.

Multinationals, for almost 25 years, have largely steered clear of theIndian market (with the exception of a few companies like Glaxo,Hoechst etc.,). As drug prices were fixed at levels that were at timesabout 4 per cent of prices in developed markets, multinationals stoppedintroducing their new products and stopped selling products that werepriced too low. As a result, MNCs accounted for 30 per cent of themarket in 1998, down from 80 per cent in 1970. At the top ten level,the shares of MNCs and Indian sector are more are less evenly balanced(Table 4.1).

Life after GATT – Two Scenarios

What will life after GATT be for the Indian pharmaceutical industry?Will it be better or worse off? Can Indian companies continue theirgrowth path, the way they did during the “process patent only” periodof the 1970s and after? Or will the multinationals rule the roost in thenew product patent regime after 2005? How many companies are goingto survive the advent of GATT?

Dr. Heinz Redwood, in his study on ‘New Horizons in India – Theconsequences of Product Patents in India’ presents the expectations,predictions and predilections of life after GATT in the Indianpharmaceutical industry in two mutually contradictory scenarios of thefuture – ‘Sunset and Sunrise’:


Table 4.1Top ten companies: MNCs Vs Indian

Rank Company Sales Marketshare

1 Glaxo Wellcome 657.3 6.8

2 Hoechst Marion Roussel 325.5 3.4

3 Knoll Pharmaceuticals 230.6 2.4

4 Pfizer 211.6 2.2

5 Novartis 204.1 2.1

6 SmithKline Beecham 171.6 1.8

7 E Merck 152.7 1.6

8 Parke Davis 151.4 1.6

9 John Wyeth 129.9 1.3

10 Rhone Poulenc Rorer 110.1 1.1

Total 2344.8 24.7

Rank Company Sales Marketshare

1 Ranbaxy 511.9 5.4

2 Cipla 400.7 4.7

3 Torrent Pharma 231.9 2.4

4 Lupin Labs 231.2 2.4

5 Alembic 230.9 2.4

6 Piramal Group 215.8 2.2

7 Cadila–Zydus 194.7 2.0

8 Cadila Pharma 168.7 1.7

9 Aristo Pharma 165.5 1.7

10 Ambalal Sarabhai 158.7 1.6

Total 2509.1 25.9

Source: Data derived from the Retail Store Audit of ORG-MARG, September,1998

Indian sector

MNCs


Sunset Scenario

Many of the Indian owned pharmaceutical companies which are groupedunder the IDMA ( Indian Drug Manufacturer’s Association), supportedby many politicians and consumer activists, present a ‘Sunset Scenario’.They oppose product patents and think that it will spell the doom ofthe Indian pharmaceutical industry.

Under this scenario, there will be a drug price explosion as soon asproduct patents are recognised. Imports will soar. Exports will dry up.The Indian-owned pharmaceutical companies will be largely wiped outby multinational patent power with its accompanying exclusivity ofmarketing. There will be a reversal of fortunes from being a net exporterto an import-dependent industry.

Sunrise Scenario

By contrast, the members of the Organisation of PharmaceuticalProducers of India (OPPI), who include all research-based multinationaldrug companies operating in India and a number of progressive,forward-looking Indian pharmaceutical companies present anoptimistic ‘Sunrise’ scenario. They are supported by a significant numberof independent experts and observers.

The ‘Sunrise’ scenario projects the impact of full patent protection asa galvanising force for pharmaceutical industry in India. It foresees:

A fundamental change of attitude towards India on the part ofmultinationals, with a renewed willingness to invest and conduct R&Dlocally after decades of clamping down on Indian commitments.

Increased collaboration between multinationals and Indian companiesin the development and marketing of patented drugs.

The transition of the more advanced Indian companies from a drugcopying culture to a research-based strategy with its own aspirationsto eventual multinational status.

The advocates of both scenarios are striving to enlist the most importantplayer in the political triangle – the Indian government – on theirside. The proponents of the ‘Sunset scenario’ appeal to the governmentto maintain status quo of the Indian Patents Act of the 1970. The


advocates of the ‘Sunrise scenario’ on the contrary plead that thegovernment can ensure a bright future for the Indian pharmaceuticalindustry only by implementing TRIPS with dedication anddetermination.

Whether a strong IPR for pharmaceutical industry results in a ‘Sunset’or a ‘Sunrise’ is not pre-ordained. It is largely in the hands of thosewho shape events – namely, the Indian pharmaceutical companies,multinational groups and the Indian regulatory authorities.

If the government decides to promote a strong and research-basedpharmaceutical industry in India, then water- tight patent protectionis a must. The second pre-requisite is some degree of relaxation of itssevere controls and introduction of new measures for raising theprofitability levels to encourage risk-taking research.

Taking the sum of pre-tax profit and R&D expenditure as an indicatorof ‘available revenue’, the level in Indian drug firms (as a percentageof sales) is about one-third of that in Japan, and one-fifth that of theglobal pharmaceutical level. The Indian figure is not adequate forinvestment in innovative R&D.

Not a Knockout Bout!

Indian companies will not be knocked out by patent protection, if theyadapt their corporate strategy to it. Multinational companies too, ontheir part will not find bonanza conditions on their Indian doorstep.At the same time, reasonable opportunities are arising in India at atime when a severe squeeze in profits is being suffered due to costcontainment strategies and policy reviews in Europe and NorthAmerica. Collaboration, rather than confrontation, will ensure successfor both. A number of strategic alliances are already taking place betweenthe more progressive Indian companies and multinationals to exploitthe market opportunities in a mutually beneficial manner.

India already possesses the necessary technological infrastructure andscientific talent for original pharmaceutical R&D. It is not scientificgenius that is in short supply, but cash flow. The Indian government,therefore, can encourage both Indian and foreign industry by changingthe ground rules sufficiently to provide the necessary incentive forinvestment in pharmaceutical innovation and research under patent


protection. Only then, it can convert the barriers of inadequate cashflow for research and innovation and create gateways.

Generics – The Big Opportunity in the post–GATT Era

The market for off-patented generic formulations in the US alone isexpected to be more than $ 30 billion by the year 2005. That is roughlyabout ten times the present size of the Indian pharmaceutical market.Table 4.2 presents the details of as many as 64 major drugs that wouldgo off-patent between now and 2005. Typically, the US imports nearly80 per cent of its generic drugs. Given the proven track record of theIndian pharmaceutical industry in bulk actives and drug intermediates,it is reasonable to assume that at least ten per cent of the emergingbusiness could be served by Indian pharma companies. That wouldmean a whopping $ 3 billion. The European Union too would offersimilar opportunities for generic formulations in the near future, asmore and more governments in Europe are encouraging the use ofgeneric drugs in order to contain health care costs.

Large Window of Opportunity

The US generics market, which has so far been catered to largely byItalian and Spanish companies, is set to open even further aftertightening of European Patent laws with the adoption of SupplementaryProtection Certificate (SPC). In the past, companies were allowed toproduce patented drugs on a small or pilot scale, in order to generatesamples for the regulatory authorities. The samples now have to besubmitted four years before the drgus go off-patent, and so the adoptionof the SPC in effect chokes the US market for the new generics off,for Erupean producers. Italy will have to stop production of these bulkgenerics by 1997, and Spain, a smaller producer, by 2002. Europeaccounts for 80 per cent of US bulk generic sale of and Italy aloneaccounts for 80 per cent of this. There are only two major independentUS producers of bulk generics, Gaines Inc. and Wyckoff ChemicalCompany Inc. They account for only 10 per cent of US generic sales.

Once the European supplies dry up, there is a large window ofopportunity available for Indian drug companies to enter. The Indiancompanies have many advantages over their counterparts in other


Table 4.2

Patent expiration on leading global drugs, 1996–2005

Brand name Category Marketer 1994 Year ofworldwide patent expiration

sales$ mil

1. Sandimmune Immunosuppressive Sandoz 1,038 1996

2. Lupron Anti-cancer Tap Pharma 393 1996

3. Diprivan Anaesthetic Zeneca 382 1996

4. Claforan Anti-infective HMR 363 1996

5. Zovirax Anti-viral Glaxo 1,729 1997WellCome

6. Paxil Anti-depressant SKB 511 1997

7. Timoptic Glaucoma treatment Merck&Co 395 1997

8. Trental Peripheral vasodilator HMR 361 1997

9. Taxol Anti-cancer BMS 340 1997

10. Toradol Analgesic Roche 335 1997

11. Zoladex Anti-cancer Zeneca 311 1997

12. Lodine Anti-arthritic Wyeth-Ayerest 261 1997

13. Claritin Anti-histaminic Schering Plc 505 1998

14. Lovenox Anti-thrombotic RPR 214 1998

15. Mevacor Cholesterol reducer Merck&Co 1,345 1999

16. Prvachol Cholesterol reducer BMS 645 1999

17. Beclovent Anti-asthmatic Glaxo 552 1999Wellcome

18. Fortaz Anti-infective Glaxo 473 1999Wellcome

19. Versed Anaesthetic Roche 380 1999

20. Cardura Anti-hypertensive Pfizer 313 1999

21. Unasyn Anti-infective Pfizer 290 1999


22. Buspar Anxiolytic BMS 285 1999

23. Vanceril Corticosteroid Schering Plough 271 1999

24. Klonopin Anti-convulsant Roche 250 1999

25. Accupril Anti-hypertensive Warner Lambert 228 1999

26. Vasotec Anti-Hypertensive Merck & Co 2,185 2000

27. Augumentin Anti-infective SKB 1,126 2000

28. Rocephin Anti-infective Roche 930 2000

29. Pepcid Anti-ulcerant Merck & Co 820 2000

30. Humulin Anti-diabetic Eli Lilly 665 2000

31. Ceftin Anti-infective Glaxo Wellcome 546 2000

32. Relafen Anti-arthritic SKB 392 2000

33. Hytrin Anti-hypertensive Abbott 350 2000

34. Estraderm Estrogen replacement Novartis 314 2000

35. Intal Anti-asthmatic Fisions 308 2000

36. Prozac Anti-depressant Eli Lilly 1,665 2001

37. Zocor Cholesterol reducer Merck &Co 1,255 2001

38. Zestril Anti-hypertensive Zeneca 765 2001

39. Prinvil Anti-hypertensive Merck &Co 340 2001

40. Eulexin Anti-cancer Schering Plough 231 2001

41. Zantac Anti-ulcerant Glaxo Wellcome 3,663 2002

42. Zoloft Anti-depressant Pfizer 718 2002

43. Novadex Anti-cancer Zeneca 540 2002

44. Primaxin Anti-infective Merck &Co 515 2002

45. Axid Anti-ulcerant Eli Lilly 487 2002

46. Intron BRM Schering Plough 426 2002

47. Accutane Anti-acne Roche 310 2002

48. Duricef Anti-infective BMS 280 2002

49. Norvasc Anti-hypertensive Pfizer 768 2003

50. Diflucan Anti-fungal Pfizer 721 2003

51. Biaxin Anti-infective Abbott 600 2003


developing countries. They have a proven track record in processdevelopment skills and a number of manufacturing facilities that areapproved by US FDA. The game plans of some of the Indian drugcompanies like Ranbaxy, DR. Reddy’s Labs, Lupin, Wockhardt, SunPharma and Cipla clearly indicate their focused approach to exploitthe generic opportunities in North America and Europe.

The strategies adopted by these companies to exploit opportunities inthe rapidly expanding markets for off-patent generics in North Americaand Europe are twofold. Firstly, some companies are creating beach-heads in these difficult-to-enter markets through acquisitions of smallgeneric and over-the-counter companies and US FDA approvedmanufacturing facilities. Ranbaxy, Wockhardt, Lupin and Sun Pharmahave already entered these markets this way, with Ranbaxy leading thepack.

The second strategic approach of Indian companies to enter andconquer foreign shores is by teaming with local partners to gain faster

52. Ortho-Novum Oral contraceptive Ortho-McNeil 500 2003

53. Cipro Anti-infective Miles Inc. 1,300 2004

54. Epogen Hematopoietic Amgen 721 2004

55. Procrit Hematopoietic Ortho Biotec 600 2004

56. Engerix-B Hepatitis-B vaccine SKB 583 2004

57. Paraplatin Anti-cancer BMS 270 2004

58. Prilosec Anti-cancer Merck &Co 850 2005

59. Zofran Anti-emetic Glaxo Wellcome 506 2005

60. Retrovir Anti-viral Glaxo Wellcome 474 2005

61. Transderm-Nitro Anti-anginal Novartis 357 2005

62. Activase Clot dissoving agent Genetech 281 2005

63. Lamisil Anti-fungal Novartis 236 2005

64. Zithromax Anti-infective Pfizer 206 2005

Source: ORG – MARG’s ‘ Milestones – Book of Papers’, Client conference, Mumbai, 1998 andOrange Book


access to markets and to share the high costs of product development,registration and marketing. Cipla has formed a strategic alliance withGeneva Pharma of the US and Novapharm of Canada for marketingits generic formulations in North America. Lupin has chosen MerckGenerics as its partner for marketing its generic versions of sterile dosageforms of cephalosporin molecules that would go off-patent soon.Nicholas Piramal too has formed a joint venture with Swiss-basedSiegfried Pharma to penetrate the generics markets in European Unionand North America.

Four Opportunities for MNCs

Having signed GATT, India will have to conform to worldwide patentstandards by 2005. During the phase-in period, it will have to provideMNCs with exclusive marketing rights and provide a ‘mail box’provision that allows them to file patent applications now forconsideration once the product patents come into force.

The Indian pharmaceutical market is likely to grow rapidly. Volumeswill increase as healthcare spending rises and health coverage improvesfrom the current 33 per cent of the population. Prices too will continueto rise although the government will be reluctant to let them soar.The industry has been lobbying for gradual but complete decontrol sothat it can be internationally competitive.

The rate of growth, however, will depend on the extent of decontrol,health care coverage, overall economic growth and opening of thehealth care insurance sector.

Mckinsey, one of the top international management consultancyfirms specialising in strategic issues, identified four opportunity areasfor MNCs to exploit in India in the post-GATT era. Its mainrecommendations are:

1. The domestic market: MNCs operating in India need to be aggressivein tapping into the rapidly growing Indian drug industry. They mayhave to make some strategic and operational changes to expandmarket share rapidly. They have to be marketing oriented. Theyneed to reconsider the product mix strategies depending on whatthe market needs rather than offering just what their parent company


produces. Glaxo is already following an India-specific strategy. Itsacquisition of Biddle Sawyer is a market-specific one. Pfizer has beenadopting a different pricing strategy for some of its new molecules.MNCs need to consolidate their presence in key therapeutic segmentsthat are rapidly growing and expand market share.

2. Sourcing of bulk actives and intermediates: Indian bulk drug industryhas progressed very rapidly over the years with over 800manufacturers, some of whom have world class developmental andmanufacturing skills in organic synthesis and process re-engineeringtechnology. Furthermore, low infrastructural and manufacturingcosts make it an attractive sourcing base for bulk actives andintermediates. MNCs can source all their requirements of theirmature, off-patent bulk actives and intermediates, which are undercost pressure in their home countries.

3. Sourcing of formulations for export to developing countries: MNCscan use India as a sourcing base and export off-patent genericformulations to developing nations cost-effectively.

4. Out-sourcing research: India has the largest English speaking scientifictalent in the world with over 200 universities and 2000 researchinstitutes. MNCs which can tap into the rich scientific base of Indiacan out-source part of their research and collaborate with Indianinstitutes. The low cost-structure of research in India can help MNCsto meet the challenges of ever increasing cost containment pressuresin their home markets. HMR for example, with in months of sellingits established research centre in India to Nicholas Piramal has goneinto a collaborative arrangement in the research area with NicholasPiramal itself.

McKinsey’s Prescription to Indian Drug Firms

McKinsey has a prescription for growth to its clients in the Indianpharmaceutical industry too:

A. Consolidate market penetration.

B. Achieve higher levels of productivity.

C. Stick to the knitting – stay more focused on core businesses.


D. Expand related businesses by making separate subsidies to ensureoperational freedom.

E. Enter into strategic alliances or collaborations to create internationaland global presence.

That may sound like a generic prescription to companies operating ina “branded generic market” that will evolve into a “branded market”in the coming product patent regime. Very often, the broad strategyor ‘what to do’ is known. The Business Press accelerates the process ofthis knowledge and insights of strategic moves by publishing the successstories of leading players in all industries. Success, however, increasinglydepends on knowing ‘how to do it’ and ‘on how effective one is indoing it’.

Opportunity Horizon

The opportunity horizon for the progressive Indian drug companies isindeed very wide. Indian companies are low cost producers. Considerthese opportunities on the horizon for Indian companies:

1. Marketing of branded generic formulations in home country.

2. Marketing of bulk actives and intermediates in home country inaddition to captive consumption.

3. Marketing of branded generic formulations in countries with littleor no intellectual property protection.

4. Marketing of bulk actives of off-patented drugs in highly regulatedmarkets with strong intellectual property protection.

5. Marketing generic formulations of off-patented drugs in regulatedmarkets with strong IPR protection.

6. Marketing branded generic formulations of difficult-to-make, off-patent-yet single-source drugs in regulated markets with strong IPR.

7. Marketing formulations of patented drugs through licensingarrangements in home country and select international markets.

8. Custom synthesis for bulk active substances of patented and off-patent drugs under secrecy agreements with multinational firms.


9. Contract research arrangements with multinational companies, whoare on the look out for outsourcing some steps of research.

10. Developing New Chemical Entities (NCEs) through indigenousdrug discovery programs.

Future Positive!

The wide opportunity horizon by itself should convince the scepticsabout the opportunities in the product patent regime. The future forIndian pharmaceutical industry can be very optimistic for the positiveminded. Consider these facts for example:

India’s process developmental skills are very well known by now.The technological capabilities too are evident from the fact that Indiaexports pharmaceutical substances, drug intermediates and dosageforms of off-patent drugs not only to the developing and third worldcountries with little or no IPR protection, but to the highly regulatedfirst world countries as well. There are more than thirtymanufacturing facilities in India today, which are approved by theUS FDA.

In less than three years after launching the ‘drug discovery programs’,two companies – DR. Reddy’s Labs and Ranbaxy have developedand filed international patents for new chemical entities. They havecompleted pre-clinical research and are entering the clinical researchphase. DR. Reddy’s have even licensed their molecule to the Danishdrug major, Novo Nordisk. Wockhardt too has identified leadcompounds in the anti-infective segment and is looking for aninternational partner to take these through further development,registration and to commercialization worldwide. Other companieslike Lupin, Torrent, Sun Pharma and Zydus group are gearing up tolaunch their respective drug discovery programs.

With a large pool of scientific talent comparable to the best in theworld, huge manufacturing infrastructure and process developmentskills that are world class, Indian pharmaceutical industry is on thethreshold of emerging as a leader among the developing countriesin pharmaceuticals. A strong protection of IPR would only facilitateand accelerate this process.


The process of change in the coming product patent regime in Indiawill be a gradual one. It will start in 2005 and strech beyond 2015.Only by 2015, will we have a patent regime that is in conformity withthe industrialised world.

The market for off-patent branded generics will remain far biggerthan for patented drugs even in 2015. Even in the highlyindustrialised world, where almost the entire patentable research istaking place currently, more prescriptions are written for off-patentproducts than for patented drugs. In the UK for example,prescriptions for off-patent drugs are around 60 per cent. In Germanythey are around 53 per cent and even in the US, as many as 45 percent of the prescriptions are written for off-patent drugs. In India, itis estimated that prescriptions for off-patent drugs would accountfor over 80 per cent even in 2015. The growth in value terms, howeverwill be higher, because even if ten per cent of the prescription businessis switched over to research based products (which are usually pricedten times more than the current alternative treatment norms), itwould mean higher growth in value terms over the ten year period.The industry, therefore, would witness faster growth rates becauseof increased consumption and because some higher-priced drugs willenter the prescription market.

The transition time or preparation time in real terms for adopting,adapting and adjusting to the changing marketing environment isconsiderable. The beginning, of course has to be made now. It is nottoo late. There is no more room for complacency and the complacent.

The MNCs will not have a field day either, though their growthrates would start climbing from 2002 onwards as some of the leadingmultinational pharmaceutical companies have already started anIndia-specific strategy. They will also introduce new products to defendtheir therapeutic segments aggressively. Some of them wouldintroduce new molecules through their newly formed 100 per centsubsidiaries to realize higher prices. However, since patented drugswill not have more than 20 per cent share even in the next ten tofifteen years, the market need not necessarily be tilted in favor ofmultinationals. Companies, whether Indian or multinational, haveto compete aggressively for improving their slice of the cake. Noautomatic advantage for any sector.


In the coming product patent regime, the market place will be alevel playing field. A level playing field on which only players of acertain level will be successful. There are qualifying criteria for entryas well as for victory. For those who are well prepared to compete itwould be a level playing field. And for the Rip Van Winkles of theIndian pharmaceutical industry, who are just out of their long deepslumber, it could be a minefield.

Game plans for post-GATT era: The Indian example 63

Executive Summary

As the D-Day for shedding the most protective armour of‘process-only’ patents (Indian Patents Act 1970), theIndian pharmaceutical industry has been reacting in anumber of ways. Mergers, acquisitions of companies, brands,manufacturing facilities and even R&D centers, strategicalliances, stepping up R&D, restructuring and downsizingare the ways in which some of the leading Indian drugcompanies are responding to the impending change thatproduct patents introduction would bring in.

A careful analysis would reveal a common thread, acarefully crafted strategy behind the actions and responsesof some twelve to fifteen leading Indian pharmaceuticalcompanies. One can identify ten essential elements thatare common from the game plans of these determined players.The ten essential elements of their winning strategiesare:

1. Strategic vision

5GAME PLANS FOR POST-GATT ERA:THE INDIAN EXAMPLE



3. Marketing mindset

4. Upgrading technology

5. Focusing on research

6. Integrating strategically

7. Internationalising the business

8. Attracting alliances




The Indian pharmaceutical industry today is probably in its mostchallenging phase ever. On the one hand it is poised for massive growthfrom the present Rs. 150 billion to a whopping Rs. 270 billion in thenext three to four years. On the other hand, it is about to shed its mostprotective armor (Indian Patents Act, 1970) due to the impendingapplication of GATT provisions and the consequent product patentprotection and stronger IPR regime. Although there is provision fortransition period, it all depends on how companies can effectively utilisethis ‘breathing period’ to energise themselves and prepare for meetingthe future challenges that the changing pharma market in India has instore.

Change – rapid change – can be seen in the Indian pharma market, beit in industry structure, strategic approaches or tactical moves. In factchange is already quite palpable.

Yesterday’s mighty companies are yielding their hard earned marketshares to the once-fledging companies which show initiative in the emerg-ing speciality segments.

A careful look into the high profile initiatives that have been launchedby some of the more aggressive companies reveals a shrewd strategy oforganising their marketing operations around specific therapeutic segments.

The marketing-mix too, has been undergoing rapid changes. Some ofthe fastest growing companies are those who have reinvented themarketing-mix through fresh tactical approaches like reaching a largecustomer base through scientific seminars, symposia, sponsorship of

5GAME PLANS FOR POST-GATT ERA:THE INDIAN EXAMPLE


medical conferences and scientific information services that are notessentially product-related etc.

Competition in the Indian pharmaceutical industry has always beensevere. Consider this equation of competition – 16,000 companies,each fighting for a share of Rs. 165 billion pie by the year 2000. Thegoing for the Indian drug industry can only be tougher in the post-GATT era.

It is difficult to predict at this point of time the precise impact of GATTon the Indian pharma industry. Based on the experiences of otherdeveloped countries that have accorded product patent protection overthe past two decades, experts opine that:

Proliferation of companies would be checked. The number ofcompanies would dwindle.

Some of the more efficiently run smaller companies would beacquisition targets for the newly entering MNCs or large Indiancompanies on an expansion spree.

Smaller companies with good manufacturing facilities would docontract manufacturing for the more aggressive, larger marketingcompanies.

New product introductions would be reduced and restricted to newproducts under licensing arrangements.

Like dinosaurs threatened by cataclysmic changes, companies oftenfind it impossible to cope with a radically altered environment. It isonly the fittest that survive. To seize the opportunity in any changingscenario, four broad principles are important:

1. An understanding of how competition for the future is different.

2. A process for finding and gaining insight into tomorrow’scompetition.

3. An ability to energise the company top-to-bottom for what may be along and arduous journey towards the future.

4. The capacity to outrun competitors and get to the future withouttaking undue risks.

Companies, therefore, need to raise their antennae higher to spot,


track and monitor the signals of change. Like in war, in business tooforewarned is forearmed!

The challenges faced by the Indian drug industry are at two levels.One is at the functional level of marketing which essentially revolvesaround the improvement of operational efficiency and effectiveness.The other is at the organisational level. Marketing is not to be viewedin the relatively narrow functional level but in a much broader per-spective encompassing the whole organisation. This holistic view ofmarketing has been emphasised by management practitioners as wellas by theoreticians. Consider these for example:

“There is only one valid definition of business purpose: to create andkeep a satisfied customer. It is the customer who determines what thebusiness is. Because its purpose is to create a customer, any businessenterprise has two – only two – basic functions: marketing and innova-tion. Marketing is the whole business seen from the point of view of itsfinal result, that is, from the customer’s point of view”. (Drucker)

“Marketing is too important to be left to marketing people”. (Managersof General Electric)

Marketing therefore is not a mission for the marketing managers alone,while the rest of the organisation goes about its business as before. It isthe responsibility of the whole management of the company to see thebusiness from the customer’s view point. The key questions for thesenior management towards meeting the future challenges are:

Is our action agenda mostly offensive or defensive? Are we devoting too much energy to preserving the past and notenough to creating the future?

What percentage of our improvement efforts (quality, customer ser-vice, innovation, operational excellence) focuses merely on catchingup with our competitors?

Catching up is necessary, but it is not going to turn an also-ran into aleader. Defending today’s leadership is no substitute for providingtomorrow’s leadership, and market leadership today certainly does notequal market leadership tomorrow. This requires clear, well-definedanswers for these key questions. Consider these questions that GaryHamel and C.K. Prahlad have suggested in their insightful article in


the Harvard Business Review on competing for the future:

Today’s Questions

Which customers are you serving today? What channels do you use to reach customers today? What is the basis for your competitive advantage today? Where do your margins come from today? In what product/markets do you participate today?

Tomorrow’s Questions

Which customers will you be serving in the future? What channels will you use to reach customers in the future? What will be the basis for your competitive advantage in the future? Where will your margins come from in the future? In what product/markets will you participate in the future?Some Indian drug companies have started asking these questions aboutthe future and have been gearing up to meet the challenges involved.A careful analysis of the high-profile initiatives taken by some aggressiveIndian pharma companies like Ranbaxy, Dr. Reddy’s, Lupin, Cipla,Torrent, Wockhardt, NPIL and Sun Pharma suggests that there is apattern which emerges from their game plans. There is a commonthread that runs through their carefully woven strategies. There maybe some differences in the relative importance given to various strate-gic elements. Here is a broad outline of their action agenda for effec-tively competing in the post-GATT era.

1. Strategic Vision

A vision is merely an idea or an image of a more desirable future for theorganisation, but the strategic vision is an idea that, in effect, jump-starts the future by calling forth the skills, talents and resources tomake it happen. A strategic vision essentially does four things:

1. It attracts commitment and energises people across the organisation.


2. It creates meaning in employees’ lives.

3. It establishes a standard of excellence.

4. It bridges the present and future.

2. Reaching the Critical Mass

It is essential for any company to reach a critical mass in terms of size toeffectively generate and leverage resources. In the new economic order,where entry barriers are slowly dissolving, the level and intensity ofcompetition are bound to increase significantly. Unless a companyachieves a critical mass in terms of sales and profits, a dominant posi-tion in select key markets, it would not be able to compete effectivelyand make strategic investments required for future growth.

3. Marketing Mindset

Achieving a dominant position in a therapeutic segment requires a fo-cused marketing strategy like careful selection of product-mix in termsof both width and depth, superior customer service programs, target-specific communication strategies in relevant therapeutic and prescribersegments. Above all, one needs a strong customer-orientation.

4. Upgrading Technology

Upgrading technology is a must not only for growth, but is vital evenfor survival in the rapidly changing pharmaceutical industry in India.Upgradation of manufacturing facilities to international regulatorystandards like US FDA, UK MCA (Medicine Control Agency), andCanadian HPB (Health Protection Bureau) are essential prerequisitesto export pharmaceutical substances and formulations to these countries.

5. Focusing on Research

The pharmaceutical industry is highly research-intensive. Processdevelopment is an area where Indian companies have excelled over theyears and have brought the country a net-exporter status. The R&Dinvestment currently is a tiny 1.5 percent on average by Indian pharmacompanies as compared to the 12–18 percent by multinational


companies abroad. As the product patent protection era is ushered in,the introduction of newer drugs by Indian industry will be reduced to atrickle.

While basic research (considering the cost of developing a new mol-ecule is over US $ 250 million) is unaffordable in India, increased R&Deffort is a must even to assimilate transfer of technology and to pursueapplied research. Some of the more progressive Indian pharma compa-nies have taken the initiative and are stepping up their R&D effort.Companies like Ranbaxy, Dr. Reddy’s, Wockhardt, Lupin, Cipla andSun have started allocating significant resources to research effort.

6. Integrating Strategically

Strategic integration – be it backward integration to manufacture phar-maceutical substances by a manufacturer of formulations or a forwardintegration to manufacture formulations by a manufacturer of pharma-ceutical raw materials – offers a distinct competitive advantage. Controlon input costs, continuous supply, quality and even unique customerperceptions are some of the important advantages that strategic integra-tion offers.

7. Internationalising the Business

The importance of earning valuable foreign exchange in today’s busi-ness can never be over emphasised. Large markets and remunerativeprices are the major motivating factors that drive companies towardsexport performance. Leading Indian drug companies, which have gaineda strong foothold in international markets for their bulk actives, areslowly shifting their emphasis to more value added formulation exports.Some others like Ranbaxy, Sun, Dr. Reddy’s, Wockhardt, Lupin, Tor-rent etc., have started registering their branded generic formulationsand are marketing them in South East Asia, Africa, CIS and othercountries.

8. Attracting Alliances

Collaborate to compete seems to be the new stratagem in the internationalbusiness arena. In a research-intensive sector like the pharma industry,more and more strategic alliances are being formed every day. To pool


resources and to compete cost effectively by optimisation, alliances areimportant. They are also powerful sources of synergy. Ranbaxy forexample, has entered into multilevel strategic alliance with Eli Lilly andLupin with Merck Generics. Access to markets, products and technologyare some of the important advantages of strategic alliances. NicholasPiramal has entered into as many as 17 strategic alliances with variousMNCs at the last count. Zydus has formed 13 alliances including jointventures.

9. Intellectual Capital

Technology upgradation, and R&D effort are highly investment inten-sive. They require huge outlays of capital. International operations too,require large up front investments for product registration and market-ing thrust. A company that is profit making, with an impressive trackrecord, clearly defined and well crafted strategy and a high degree oftransparency in its transactions can attract huge investments from thecapital markets. In the final analysis, the key determinant of effective-ness or success is a healthy bottom line. This can be achieved only by asystematic approach to all aspects of business and uncompromisingstandards in operations across the board. Generating surplus is essen-tial and only companies with high profitability can invest strategicallyfor future growth. What can generate substantial surplus other thanintellectual capital in the new knowledge era that is changing the waybusiness are run world over? Companies need to focus on building anddeveloping a strong base of intellectual capital. It is no longer a matterof choice. It is rather mandatory!

10. Operational Excellence

Since a core competence is most decidedly a source of competitive ad-vantage, a company must invest considerable amount of time, effortand resources in building a portfolio of core competencies. There arefive important steps involved in building core competencies:

1. Identifying existing core competencies.

2. Establishing a core competence acquisition agenda.

3. Building core competencies.


4. Deploying core competencies.

5. Protecting and defending core competence leadership.

These are the essential elements of the winning game plans diligentlycrafted by those Indian pharma companies which have understood thefull implications of the post-GATT scenario.

All of them are gearing up to meet the challenges which will emergeand will have to be faced. While the game plans are easily understoodand appear deceptively simple (since the model is available), transform-ing and translating these into an action plans is very difficult. It takesone hundred per cent commitment, determination and total supportfrom the top management to make it happen!

Strategic vision 73

Executive Summary

Strategic vision, simply stated, is the ability to visualisethe future before it arrives. There is no more powerfulengine driving an organisation towards excellence andlong range success than an attractive, worthwhile andachievable vision of the future widely shared. C.K. Prahladand Gary Hamel, in their highly influential book on‘Competing for the Future’ suggest that one needs tobuild the best possible assumption base about the futureand develop prescience to proactively shape the industryevolution.

Ranbaxy certainly has developed this ‘prescience’ to seethe future before it arrives. Its strategic vision todaycould become a role model for many aspiring pharmaceuticalcompanies not only in India but in many developing countriesas well. Consider for example the evolution of its strategicvision over the years. From a branded generic manufacturerand marketer in the domestic market to become a verticallyintegrated international generic company and onwards toa research based international pharmaceutical company.

Dr. Parvinder Singh, the chairman of the companycommunicates the direction of the company and the progress

6STRATEGIC VISION


it is making every month to all the employees. The company’svision therefore is widely shared across the organisation.

Dr. K. Anji Reddy, the chairman of DRL is another visionary.He dreamt of putting India on the bulk drug map of theworld in the late eighties. Having achieved that, he hasagain dreamt in the nineties of placing India on the drugdiscovery map of the world. He has done it again andentered into a historical agreement for licencing theNCEs developed by his research foundation DRF to theDanish drug major Novo Nordisk.

Deshbandhu Gupta, the chairman of Lupin is determined tomake his Lupin a billion-dollar company by 2003. AjayPiramal wants Nicholas Piramal to move up to be among thetop three in the Indian drug industry. Dilip Shanghviplans to make his Sun Pharma one of the three mostrespected pharma companies from India.

It is the vision that drives every one of their game plansand tactical maneuvers. To paraphrase a time-tested adage:Have vision, will succeed!

Strategic vision 75

There is no more powerful engine driving an organisation towardsexcellence and long-range success than an attractive, worthwhile andachievable vision of the future widely shared.

An international study of twenty five “important tools” such as customersurveys, pay-for-performance, total quality management and re-engineering showed that managers used mission statements more thanany other tool!

Vision plays an important role not only in the start-up phase but alsoin an organisation’s entire life. Vision is a sign-post pointing the wayfor all who need to understand what the organisation is and where itintends to go. Sooner or later, the time will come where an organisationneeds re-direction or perhaps a complete transformation, and thenthe first step should always be a new vision, a wake up call to everyoneinvolved with the organisation that fundamental change is needed and ison the way.

More and more top executives seek strategic input from the lower rungsof the corporate ladder, and find that broader participation helps translatevision into reality. Participation is important in strategic setting, becauseunless the strategy is ‘owned’, vision will not become ‘action’. The keyto strategic success, therefore, is to gain broad commitment throughparticipation in the strategic process. This does not mean that strategyshould be an exercise in Athenian democracy. It does not meanmanagement by consensus.

Whatever model for formulating and implementing strategy yourorganisation employs, the strategic process offers great opportunitiesfor participation. Strategic process provides a common road map for

6 STRATEGIC VISION


participation, which becomes increasingly important as the organisationgrows bigger and more complex with a number of strategic businessunits spread across a number of locations.

Strategic process is essentially a sequence of logical steps for collectingand analysing information and drawing inferences. It is very importantto have a clear idea of the various roles people play in the strategicprocess right from managing director on down the line.

Organisations that are successful in implementing strategy haveredefined the role of middle managers to include significant strategicresponsibility. Although middle managers have different responsibilitiesand roles in implementing strategy, one connecting thread is the sharedresponsibility for effectively communicating strategy to subordinates.Furthermore, it is essential that people feel they are contributing tothe vision. Another important strategic role for middle managementinvolves them in setting the vision for their own units. Ideally, strategyshould cascade down through the organisational hierarchy.

No doubt, broadening involvement adds complexity to the strategicprocess. But creating and living by a vision is a social act. A vision thatdoes not touch every employee’s head, heart and hands remains an ideain waiting. For vision to come alive, participation is needed.

Five Elements for Success

Companies that have achieved uncommon success in creating andtransforming vision into a reality posess five common elements, whichare crucial for success.

1. A common strategic language: Strategic language means a commonvocabulary of expression that every one across the organisationunderstands. One way to achieve this is to have an agreed uponstrategic process.

2. A simple and specific strategy: Strategy should be simple and specificenough to be carried around in everyone’s head and not in a threering binder. Any strategy entombed in a thick, three ring binder willnever rise from the dead.

3. Managed participation: Managed participation involves clearly definingroles and creating opportunities for managers and other key

Strategic vision 77

contributors opportunities to participate in the strategic process.That is why many companies are creating cross-functional taskforces tostimulate creativity and commitment to resolve key strategic concerns.

4. Motivated work force: Motivated work force keeps vision an ongoingvital, vibrant influence. The management has to provide enthusiasmand motivational climate so that, managers across the organisationwant to get involved. Participation should not come as a commandperformance.

5. Chief Executive’s role: The involvement of chief executive is themost crucial success factor. Without his personal involvement andencouragement in every step along the strategic continuum fromthe creation of strategic vision to action planning, vision will notbecome a reality.

When all these five key elements for success, are present, participationenergises vision. It tests and refines strategic inferences and conclusionsand is essential for translating and transforming vision into action.

Corporate mission statements – sometimes called value statements,vision statements, credos or principles – are the operational, ethical andfinancial guiding lights of companies. They are not simply mottos orslogans; they articulate goals, aspirations, dreams, behaviour, cultureand strategies of companies more than any other document.

The mission or vision statements of successful, exciting and powerfulcompanies, are not just concepts or philosophies or mere intentionsthat are nice to have. They have true values and clear, well thoughtout ideas that help them meet, exceed the corporate financial, socialand emotional goals. They also stake out a ‘right way to do’, in caseof any dilemma or crisis. They are truly the road maps for the high road.

That is perhaps why managers, in an international study conductedsometime ago, covering twenty-five “corporate tools” such as customersurveys, pay-for-performance, total quality management and re-engineering ,used mission statements more than any other tool.Managers like mission statements because they make a differencebetween success and failure.

A mission or vision statement is to a company what the constitution isto a nation. It is an excellent, much revered and often imitated set of


values. It has worthy goals and aspirations. Some times you reach them.Some times you don’t. But you always try because it is the right thing to do.

Here are some examples of vision and mission statements articulated bysome of the leading Indian pharmaceutical companies. Neither all ofthem are official vision or mission statements. Nor are they widelycommunicated and shared across their companies. All of them however,have concepts, gameplans, strategies, goals or dreams straight out of thehorses’ mouths – all of them are either statements made by theirrespective CEOs in interviews to the business press or in corporateadvertisements, brochures and annual reports.

Some of them are in the form of specific corporate goals in the shortand medium term. Some goals are even for the long term. Others arevalue statements, principles and game plans. All of them clearlycommunicate what the company is or does or what it intends to do.They all are declarations of their strategic intents. Consider these:

Ranbaxy

Ranbaxy has clearly been the intellectual leader of the Indianpharmaceutical industry. What seperates Ranbaxy from the rest of theindustry is its ability to spot change and assess its impact quickly.

When the Indian drug industry was viewing exports as a necessary evil(to get import licenses), Ranbaxy thought otherwise. It considered ex-ports as an opportunity as early as the 1970s. Since drug prices arehigher in overseas markets, exports offer an opportunity for higherprice realisations for the price controlled Indian drug industry.

Again in 1992, when the entire Indian industry was raged against theDunkel draft, which advocated a strong product patent regime, Ranbaxyaccepted the new era as an evolution that every company had to beready for. The logic was simple. You cannot be a global player by followingone set of rules in your home country and another in the developedmarkets.

As early as 1992, Dr. Parvinder Singh, the chairman of Ranbaxy hadarticulated the company’s vision to be a research based internationalpharmaceutical company with a turnover of $ 1 billion by 2003. Heknows that highly successful companies use their mission statements

Strategic vision 79

to ‘gather the troops’ and effect a new corporate culture and behaviour.He is probably the only chief executive in the Indian pharmaceuticalindustry, who communicates through the monthly missives, ‘from theCEO’s desk’ – directly with each employee highlighting the objectivesof the organisation as well as his concerns. The highlights of Ranbaxy’sstrategic vision and mission are:

1. To become a research-based international pharmaceutical company.

2. To achieve a sales turnover of $ 1 billion by 2003.

3. To achieve a minimum 0.5 per cent share of the market within fiveyears of entry.

4. To focus on building 25 global brands in all markets including India.

5. To be among the top three international generic companies in theworld by 2015.

Dr. Reddy’s Labs

Dr. K. Anji Reddy is a visionary. He dreamt of putting India on thebulk drug map of the world in the early eighties by reverse engineeringpatented molecules. Having achieved that, in the early nineties he dreamtonce again. This time it is about putting India on the drug discoverymap of the world. He succeeded again when Dr. Reddy’s Laboratoriesbecame the first-ever Indian drug company to license a NCE to amultinational. The company has changed its focus at the right time toformulations and never looked back ever since. The company’s missionclearly indicates its research bias:

1. To be a research-based international drug company.

2. To bring new molecules into the country at a price the commonman could afford.

3. To put India on the drug discovery map of the world.

Cipla

Technology and marketing are core competencies of Cipla. Cipla hasbuilt an enviable manufacturing infrastructure in the Indianpharmaceutical industry. Its process development skills too are


among the industry’s best. Its strategic vision amplifies its values andobjectives:

A. To achieve technological leadership in the domestic market.

B. To achieve quality not to just meet the regulatory requirements butto meet the ultimate requirement of quality – the requirements ofthe customer and the market place.

C. To exploit the opportunity that the liberalized environment has giventhe Indian companies by using the technological strengths to expandoverseas.

D. To set up at least one production base in each region and thenleverage these bases through technical tie-ups and franchisingagreements. Initially all these tie-ups or joint ventures willmanufacture and market only formulations. Once theseinternational markets take shape, the ventures will move into themanufacture of bulk drugs through backward integration. Cipla willprovide the required technology.

E. To achieve over one third of turnover through exports by the year2000.

Lupin

Lupin’s strategy can be described in one word – Focus. The companyfocused first on the anti-tubercular market in India, which accountsfor half of the T B cases in the world. It has integrated backward andgone whole hog to become a leading anti-TB player in the world. Thenext area of focus for Lupin has been the huge $ 10 billion worldcephalosporin market, in which a number of major molecules are goingoff-patent in the next few years. The company has become a fullyintegrated cephalosporin player to become competitive. It has madestrategic acquisitions and alliances to ride the first wave of genericcephalosporins in the US and Europe. Lupin has set itself a veryambitious goal of achieving $ 1 billion in sales by 2003. It has upgradedtechnologically to a world class level and has been focusing on researchto become a vertically integrated international generic company. Thesalient features of its strategic vision and mission are:

1. To upgrade technology to world class level.

Strategic vision 81

2. To build process and product development capabilities that areinternationally competitive.

3. To globalise the business and become a major player in the genericsmarket.

Lupin has a three-tier plan to achieve this:

A. In the first stage the company identifies drugs with difficultchemistry and high technological barriers that are shortly goingoff-patent.

B. The strategy is to pre-empt competition in catching the generic‘first wave’.

C. It then uses its research and technological strength to developnon-infringing processes for those drugs.

D. The second stage is to build large capacities so as to achieve costcompetitiveness.

E. The third is to attack the global market with the product and addvalue through strategic alliances.

Wockhardt

Habil F. Korakhiwala, chairman of Wockhardt believes that speed isnecessary for staying ahead, which is what competition is all about. Hehas certainly ensured this, for Wockhardt has always been ahead of theindustry in terms of profitability. He has steadfastly built Wockhardtinto one of the Indian drug majors, which is ready to compete in thepost-GATT era. His strategy has been a classical one. The company hasregained its focus by pulling out of unrelated diversifications into realestate and put a hold on its hospital and diagnostic businesses at thesuggestion of McKinsey, the leading international consultancy firmspecialising in strategic issues. It is also one of the biggest spenders onR&D in India. Wockhardt is bang on target on its key strategic objectives.

A. To achieve Rs. 10 billion in sales by the year 2000.

B. To reach a critical mass through acquisition and organic growth. Setaside Rs. 2 billion for acquiring pharmaceutical brands andcompanies.


C. To progressively increase investment in R&D, build infrastructureand create a competent research team that is capable of enteringdrug discovery program. The immediate focus areas for researchare:

Novel drug delivery systems

Biotechnology products

New drug discovery

Investing 4–5 per cent of sales on R&D

D. To give a new thrust to globalisation of business by:

Setting up joint ventures

Entering generic markets in the US and Europe throughacquisitions

E. To pursue brand building aggressively in the home market to achievethe coveted 5th position in the industry.

F. To pursue a low cost and command a high premium strategy forproducts.

G. To introduce hepatitis-B vaccine by 1999.

Nicholas Piramal

Six acquisitions and seventeen strategic alliances in 10 years. That shoulddescribe the strategic vision of Nicholas Piramal. The company believesin having a large number of products in its portfolio instead of dependingon a few strong brands. It would like to grow by individual companieswhile others grow by individual products. The company has recentlyfilled an important gap in its overall strategy – focus on research anddevelopment – through its acquisition of the Hoechst Research Centreat Mumbai. Nicholas Piramal is the only Indian pharmaceutical companywhich is planning to be a leading player in the counter drug market inaddition to the prescription drug market. It has also very big plans toset up clinical research facilities in India.

1. To be among the top three health care companies in India by theyear 2000.

Strategic vision 83

2. To achieve this through strategic acquisitions and take-overs.

3. To stay focused on main stream products and diversify into nichemarkets through strategic alliances and joint ventures with peoplewho are leaders in their fields.

4. To increase exports by entering the market for generic formulationsfor off-patented products abroad.

5. To upgrade manufacturing facilities to international standards.

6. To be a major player in the domestic market for OTC pharmaceuticals.

Torrent

Torrent has been the first Indian pharmaceutical company to exploitthe opportunities in speciality therapeutic segments like psychiatry,cardiology and gastroenterology. It has become a trendsetter and a rolemodel to other companies like Sun Pharma and Intas. Many otherpharma companies are now focusing on these speciality segments.Torrent now has embarked on a massive business diversificationprogram into unrelated areas like power generation and manufacturingof cables etc. The company has, however, regained its focus and isplanning aggressively to build up its pharma business to become a majorplayer. It has also built a state-of-the-art research and developmentfacility and launched its drug discovery program and has met with anearly success in developing a NCE in cardiovascular area. Torrentdescribes itself as ‘the great Indian tomorrow.’ The company’s strategicobjectives are:

A. To reach the leadership position.

B. To become the most integrated pharma company in India.

C. Focus on exports.

D. Step up research and development activity and launch drug discoveryprogram.

E. To gain access to new products, technologies and markets throughstrategic alliances.


Zydus–Cadila Health Care

Pankaj Patel, the managing director of the Zydus–Cadila Health Carehas clearly articulated the goal of his company in his vision statement:

“Our goal is to become one of the top three Indian pharma companies,become a regional player in five to seven years and a global playerby 2020.”

The strategic vision of the Zydus group is to create a PerformingOrganisation through:

A. Increasing market share

B. Internationalisation of business

C. Technology transfer and upgradation

D. Human resource development and

E. Cost leadership

The building blocks for these are the 3 E’s, namely – Enrich, Empowerand Excel.

The salient features of Zydus’s action plan are:

A. Focus on drugs which are growing fast.

B. Strengthen the product portfolio with niche products.

C. Enter into strategic alliances to co-market new molecules in India.

D. Enhance research capabilities by entering into joint ventures withinternational and national research institutes and companies engagedin research.

Sun Pharma

Right from inception Sun Pharma has chosen the path of least resistance.It has focused on speciality segments. The company firmly believes thatthe road less travelled need not necessarily be long. Mergers andacquisitions have been the major growth drivers for Sun Pharma. Tosustain growth, the company has created six strategic business units,which will focus on different therapeutic and prescriber segments. SunPharma has also concentrated on exporting bulk actives of specialitydrugs and marketing of branded generics in international markets.

Strategic vision 85

Here are the highlights of Sun’s strategic vision:

1. To be among the top 5 pharmaceutical companies in India by 2005.

2. Focus on low volume, high value speciality drugs.

3. Use a dedicated field force for each speciality segment.

4. Maintain a first-mover advantage by quickly introducing newformulations by reverse engineering new drug molecules.

5. Accelerate growth through mergers and acquisitions.

6. Look for small pharma outfits that have expertise in high valuespeciality drugs.

7. Focus on exports.

Ipca

What are the three most important areas of focus at Ipca? Backwardintegration in bulk drugs. Brand building in marketing of formulations.Export thrust. These three areas have helped Ipca reach a critical massof Rs. 3.3 billion in fiscal 1998. The company has embarked on a majorproduct diversification plan. It is expanding its therapeutic coveragewith a massive new product launch plan: about ten new introductionsper year. It has already introduced ten new products in 1998 and isplanning for ten more in 1999. Here are the strategic objectives of thecompany:

1. To achieve a sales turnover of Rs. 3.3 billion in 1998–99.

2. To extend the therapeutic coverage through aggressive new productintroduction.

3. To grow at a minimum rate of 20 per cent per annum.

4. To concentrate on exports of bulk actives and drug intermediates todeveloped markets.

5. To target developing markets in South East Asia, Africa, MiddleEast and the CIS for formulation exports.

6. To optimise the capacity utilisation through contract manufacturing,approved by international regulatory authorities for select overseascompanies at its facilities.


Kopran

Kopran in a bid to enhance its presence in domestic as well asinternational markets has started a massive restructuring exercise. It isalso forging a series of tie-ups with leading players to sharpen focus onthe value added formulation business.

Kopran will spin off its semi-synthetic penicillin business into a separatecompany called Kopran Drugs Limited.

The company is also hiving off its research division as a separate profitcenter called Kopran Research Labs.

Kopran is recasting itself by forming three SBUs. These strategicbusiness units will operate in different therapeutic areas like respiratoryproducts, speciality molecules and the general marketing division,marketing the remaining products. Kopran will expand their fieldforce to 750 by end 1998.

To boost its exports of bulk drugs, drug intermediates and off -patentgeneric formulations in regulated markets like the US and Europe,Kopran has entered into a number of strategic alliances.

Orchid

Orchid has started as a 100 per cent export-oriented bulk drugmanufacturer with focus on cephalosporins. It has built a world classmanufacturing facility and been exporting its bulk actives to majorinternational world markets including US and Europe. Having reacheda turnover of Rs. 2.4 billion in the fiscal 1997 with exports of bulkactives and drug intermediates, the company is planning a majorexpansion program in bulk drugs and is integrating forward intoformulations. The essence of its strategic vision is:

1. To become the most integrated Cephalosporin producer in theworld.

2. To achieve cost leadership.

3. To diversify into all the six basic process technologies.

4. Product strategy with an eye on patent protection trends.

5. To create world class manufacturing facilities.

Strategic vision 87

Impact of Vision Statements

Vision or mission statements describing what a company is doing andwhat it stands for can have a stabilising and reassuring effect onemployees and investors. Mission statements usually have two parts.The first part is declaration of the company’s strategic intent. Thesecond part describes the enablers. They tell everyone how the missionor vision will be accomplished, and what values and principles thecompany and its employees will use to guide them day to day into thefuture.

Five Basic Rules

There are five basic rules for writing an effective vision and missionstatement:

1. Keep the mission statement simple. Not necessarily short, but simple.

2. Involve all the key contributors in preparing the mission statementInvolvement helps to get people on board. It gets them excited asthey have a stake in its fulfilment. Allow companywide involvement.

3. Always ensure that the wording and tone reflect the company’spersonality or what the company would like to be.

4. Exposure and reach are vital. Share the mission statement in asmany creative ways as possible. Keep it in front of people constantly.

5. Above all, live by the mission statement. Use it as guiding light.Judge employees by how well they adhere to its tenets. Managementmust say it and live it.

Vision 2020

What is the ultimate goal of a generic manufacturer in a developingcountry like India? Ask these companies, they all would say in unision:to become a research-based international pharmaceutical company. Thatis what at least ten of these companies are planning or preparingthemselves to become. The journey or the transition, or perhaps themetamorphosis from a generic manufacturer to a research-basedinternational pharmaceutical company is tough and arduous to say theleast. The evolutionary process (Table 6.1) would take anything between


20 to 25 years provided one works towards this goal with unflinchingdetermination. It can take a minimum period of ten years for a genericmanufacturer to graduate into a branded generic company and to aninternational generic company with the right investment and the rightcapabilities. From an international generic company to a research-basedinternational pharmaceutical company it could take anywhere betweenten to fifteen years provided the right combination of competencies,capabilities, strategies and investments is there.

The strategic vision of all these companies indicate that they are pursuingthe strategic path of transforming their organisations from their currentbranded generic or international generic company stages to ultimately

Table 6.1

Evolution of a research-based pharmaceutical company

Stage Evolution Focus

1 Generic manufacturer Investment in brand building

2 Branded Generic Backward integration into bulk actives anddrug intermediatesUpgradation of technology to internat stan-dards and international regulatory approvalsFormulation development capabilities

3 International Generic Stepping up investment in R&Dcompany Strategic company alliances

4 Research based interna- Innovative researchtional pharmaceuticalcompany

Strategic vision 89

becoming research based pharmaceutical companies. Ranbaxy,Dr. Reddy’s Labs, Lupin, Wockhardt, Nicholas Piramal, Torrent, SunPharma and Zydus are chasing this goal. Ranbaxy is way ahead of thepack. It has already become the ninth generic company in the world.Its international presence too is significantly higher than that of anyother drug company in India. The key elements of the strategic visionof all these companies are:

A. Reaching a critical mass to generate investible surplus.

B. Upgrading technology to a world class level.

C. To become a vertically integrated player to achieve control on costs,quality and strategy.

D. Export thrust and international marketing capabilities.

E. Stepping up of investment in R&D.

When the strategic approaches are similar, what seperates the winnersand the “also-rans” is superior levels of competence, sheer will to winthe race, stamina to sustain and, above all, executional capabilites totranslate vision into reality!

Reaching the critical mass 91

Executive Summary

Critical mass is the market share, which a firm mustobtain in order to become fully competitive on price andcost. To be fully competitive, a firm must achieve criticalmass in all key functional areas like marketing andmanufacturing infrastructures, technology base, researchand developmental capabilities. It is also important toattain the critical mass within a reasonable span oftime, the faster the better. Time overruns lead to costoverruns and create strong pressures, resulting even inthe abandonment of the venture itself.

What is critical to the whole business of critical massis making a realistic estimate of the critical massitself. The critical mass, for example, for aninternational generic company is a sales turnover of$300 million. This explains probably why some of theleading Indian pharmaceutical companies are chasing anobjective of Rs. 10 billion in sales by the turn of thecentury. The critical mass for a research basedpharmaceutical company is over $ 1 billion. Ranbaxy andLupin are aiming to achieve $ 1 billion by 2003.

At the same time, a number of firms sought to enter theIndian pharma industry, apparently without having

7REACHING THE CRITICAL MASS


anticipated the very high start-up costs and the verylarge development and marketing service costs. Natco’sfailure to anticipate these and reach the critical massquickly has forced it to put its most profitableformulations business on the block. Orchid, on the otherhand, reached the critical mass in real quick time and isplanning to integrate vertically to become even morecompetitive. Its success depends on whether it can attainthe critical mass quickly enough in the fiercely competitiveformulations business as it had in the cephalosporinsbulk actives.

Companies who are hell-bent on reaching the criticalmass in time are turning themselves into predators. Theyare pursuing a very aggressive strategy of acquiringcompanies, manufacturing facilities, brands and evenresearch centers. The new rule to reach the critical massis simply this: If it takes time to create and you haveno time, buy it!


First, for a company to be successful in the pharmaceutical industry,it has to reach or acquire a critical mass and scale in those core thera-peutic areas where it intends to focus.

Secondly, it has to have a broad production line that includes a rangeof products and services that can really deliver health care solutions.

Thirdly, to be successful, firms must effectively access and servecustomers.

Fourthly, cost competitiveness is going to be very critical in today’senvironment of cost-containment.

The next is to have highly customer-driven processes, so that they arestructured to succeed. Decision-making must be market driven, so thatyou can make decisions much more quickly and you can make thosedecisions in the context of a strategy and knowing where you are go-ing.

What is Critical Mass?

Simply stated, critical mass is an amount necessary or sufficient to havea significant effect or to achieve a result.

While it is difficult to determine precisely the critical mass for Indiandrug companies, based on international experience, it is possible toarrive at a ball park figure. The critical mass, for example, to becomean integrated international generic company would be around $ 300million in annual sales. It is only at this volume that the company cansustain the costs and investments required for being competitive and

7REACHING THE CRITICAL MASS


competent in international generic markets. The critical mass for aresearch-based international pharmaceutical company would be muchhigher – over $ 1 billion in annual sales, since the costs and invest-ments needed would be significantly more.

That is why the more determined Indian drug companies have beenchasing a turnover of Rs. 10 billion by the year 2003. Ranbaxy andLupin have made their intentions clear. They are chasing an objectiveof reaching $ 1 billion in annual sales by 2003. It is difficult to achievethese objectives through organic growth alone. Companies like NicolasPiramal, Wockhardt, Ranbaxy, Sun and Lupin, therefore, have beenpursuing the acquisition route rather aggressively.

Acquisition Route

Mergers and acquisitions have promoted growth for over a century inthe West, most of all in corporate America. It is clear that mergers andacquisitions have become a staple of the world pharmaceutical indus-try. The many transactions that have been concluded in the last fiveyears amply testify to this.

The Indian drug industry too seems to have been caught by the acqui-sition and merger bug. Piramal, Ranbaxy, Sun, Wockhardt and Dr.Reddy’s have been on the prowl and account for almost all the drugindustry mergers and acquisitions (companies as well as brands), in In-dia during the last three years.

History shows that acquisitions are one of the surest ways of accom-plishing ambitious corporate growth targets with acceptable returns.

Buying a business can be favorably compared with expanding an exist-ing line of products, starting up an entirely new venture or enteringinto a halfway arrangement such as a joint venture, passive investmentor marketing alliance. Compared with these alternatives, buying anestablished business can be a preferable development strategy for fourkey reasons:

1. Less risk. Established businesses that are acquired have a developedcustomer base, a verifiable financial track record and a demonstratedproduct line. The prospective acquisition has long ago passed themost risky phase of corporate life, the start-up.


2. Infrastructure for growth. The acquired company’s plant, tech-nology, reputation and employee base provide the buyer with areadymade infrastructure. The potential for growth is significantlyenhanced if the buyer uses this infrastructure more effectively thanthe original owner.

3. Conservation of capital investment. Most extensions of existingproduct lines require significant operating capital beyond an initialinvestment. In contrast, as a stand-alone investment, manyacquisitions produce income and positive cash flow immediately.Financing corporate growth can be easier via acquisition itself aspredictably, contributing funds to pay debt service and to provideshareholder returns, respectively.

4. Control. Alternatives to an acquisition – joint ventures, passiveequity investments in third parties and marketing/distributionalliances – require less capital, but offer reduced control. Thepotential acquirer’s return on its investment would depend onsomeone outside its own corporate organisation.

Reaching the Critical Mass

Companies, in order to achieve success, have to reach critical mass inall key areas of their business. A pharmaceutical company, for example,has to achieve the critical mass in market share, sales turnover, techno-logical and manufacturing infrastructure, research and developmentalcapabilities etc. Some of the leading Indian pharma companies likeRanbaxy, Dr. Reddy’s Laboratories, Nicholas Piramal, Lupin, Wockhardtand Sun Pharma are pulling out all stops to reach the critical mass.

The basic strategic approaches which are being adopted by all thesecompanies to reach critical mass are somewhat similar in nature. Theseare:

1. Extending therapeutic coverage: Companies need to extend theslice of their served markets. They need to enter the new therapeuticareas and new customer segments to increase market share.

2. Aggressive new product planning and introduction: The rate andsuccess of new product introduction is crucial to improve, consolidateand defend one’s market position in a given therapeutic segment.


3. Market coverage: Entry and penetration of new geographicalmarkets is vital for improving the overall sales of the company.Many of these successful companies very ambitiously chase exporttargets.

4. Building and upgrading technological and manufacturinginfrastructure: If you want to compete in international markets orwith international players in your own market, you need to deliverworld class products and services. Upgradation of technology is amust.

5. Research and Developmental capabilities: It is also important tocreate and upgrade research and developmental capabilities fortransforming from an imitative culture to an innovative one.

Winning Moves

There are at least 12 to 15 pharma companies that are preparing vig-orously to compete in the post-GATT era. Their corporate workoutsare indeed very rigorous. Their strategic approach is to reach the criti-cal mass in all key functional areas that are crucial for success in theproduct patent regime. All these successful companies have been fol-lowing four broad strategic routes. These strategic highways are:

A. Mergers and acquisitions: The fastest way to reach the critical massis of course the M&A route. Mergers and acquisitions provide in-stant access to products, markets and technology. The sudden flurryof mergers and acquisitions across the industry and across bordersclearly indicates the rush companies are in, to achieve the criticalmass.

B. Strategic alliances: Another route that is brisk enough, if not as fastas mergers and acquisitions to reach the critical mass is throughstrategic alliances. The alliance route too, helps gain a faster accessto products, markets and technology. In the case of acquisitionsyou own them and, in the case of alliances, you share them. Nowonder that there is a dramatic increase in the number of alliancesforged by Indian companies of late, now that the product patentera is a reality.

C. New products:New products are the lifeblood of any business. All


these twelve companies have been pursuing very aggressive new prod-uct introduction strategies. They account for a fifth of all new prod-ucts introduced in the Indian pharmaceutical industry during 1998.Between them they have introduced 128 new products, which ac-count for a quarter of the industry’s new product sales during theyear.

D. Expansion strategies: Business expansion into new markets, whetherthey are new therapeutic segments or new geographical markets, isvital not only for growth but is essential even for survival. Andbusiness expansion strategies, by definition, require structural ad-justments and changes to manage complexities of growth and diver-sification. Re-engineering of business processes and evenorganisational structures, therefore become necessary. These com-panies have been quick to adopt a dynamic approach towards struc-turing their operations.

Ranbaxy

Ranbaxy has a very clear idea of the critical mass it wants to reachto become a research-based international pharmaceutical company;$ 1 billion by 2003. The company has been aggressively pursuing astrategy of internationationalising its business and consolidation of itsdomestic market position. It has worked out a detailed plan till 2003for achieving the $ 1 billion target. Mergers and acquisitions are animportant element of its growth strategy.

Consider these facts:

A. Mergers and acquisitions: Ranbaxy has taken over Croslands Re-search Laboratories through a merger in 1996. By this, Ranbaxygained an instant access to the fast growing therapeutic segmentsof dermatalogicals and orthopaedics. It has also added a turnoverof Rs. 760 million to its sales and 0.6 per cent share of the Indianpharmaceutical market through this merger. Furthermore, theproduct-mix acquired has higher gross margins.

The company has picked up a 30 per cent stake in Hyderabad-basedVorin Laboratories, a manufacturer of ciprofloxacin and norfloxacinbulk actives and drug intermediates. This has given the company


control on these bulk drugs, which are very important to Ranbaxy as itenjoys the leadership position in these two molecules.

Ranbaxy needed something more to boost its market share in thedomestic market and consolidate its position. It therefore acquiredGufic’s prescription business comprising the leading amoxycillinbrand ‘Mox’ (sales over Rs. 300 million) and other anti-bacterialand dermatological brands in 1997. This acquisition has consolidatedRanbaxy’s leadership position in the largest therapeutic segmentof antibiotics in the Indian pharma industry and has reinforced itsdermatological portfolio with the ‘Zole’ range from Gufic.

In September 1996, Ranbaxy acquired Ohm Laboratories, the NewJersey-based manufacturer of OTC formulations. This has giventhe company a faster access to the rapidly growing and lucrative NorthAmerican generics market, which is a very important priority forRanbaxy.

The market for off-patent generic formulations is also growingin Europe. Ranbaxy acquired Rima Pharmaceuticals of Ireland, inNovember, 1996 to exploit marketing opportunities in theEuropean Union, the second largest market for pharmaceuticalsin the world.

Not satiated with these acquisitions, Ranbaxy is looking formore. This time it is looking for brand acquisitions. It is not keenon plants and labour as it has got them in plenty. The company hasset up an internal M&A cell, which has identified 15–20 brands foracquisition worldwide. The company has also set aside a whopping$ 150 million to fund these acquisitions.

Ranbaxy is also planning to enter Brazil and France through theacquisition route.

B. Strategic Alliances: The North American generic market is the highestpriority for Ranbaxy. It is next only to the Indian market in termsof importance. To gain a faster access to this rather tough-to-entermarket, Ranbaxy has chosen the alliance route. The company hasalready entered into two marketing alliances in North America. Toconsolidate its position in the domestic market, the company isplanning to tie-up with some small domestic companies for marketingsome of its low volume products.


C. New Product introductions: Ranbaxy has introduced as manyas eighteen new products during 1998, which have contributed aboutRs. 100 million. These new introductions extend the therapeuticcoverage in cardiology, neuropsychiatry and anti-infective segments.

D. Expansion strategies: Ranbaxy has always been highly strategicin restructuring its operations and re-engineering its businessprocesses. Its management structure is quite unique – with the worlddivided into four geographical regions, each headed by a regionaldirector. In the domestic market it has created six independentmarketing divisions to achieve a marketing focus even as it isundertaking a major product diversification strategy to extend itstherapeutic coverage.

Dr. Reddy’s Laboratories

The metamorphosis of Dr. Reddy’s Labs from a bulk drug company,known for its copying skills, to an innovative drug firm is a result ofclear thinking, strategic vision, unflinching determination and carefulbusiness planning. The company has been dextrously planning toachieve a sustained growth to generate the investible surplus necessaryfor building world class research and developmental capabilities.Dr. Anji Reddy is emphatic when he says that future growth will reston the foundation of research, which will be fueled by the formula-tions business. The bulk drug business will play an important supportiverole.

A. Mergers and acquisitions: The company chose the brand acquisitionroute rather than that of acquiring companies. Its logic is that whenyou acquire companies, you are likely to inherit the field force anddistribution net work, with a different value system and workculture. The integration of these may create problems for companieswith adequate manufacturing and marketing infrastructure, leadingto redundancies and mismatches. Hence the focus is on brandacquisitions.

DRL’s first brand acquisitions were the Hyderabad-basedSOL Pharma’s Riflux and Clamp in 1996. These acquisitions fillthe gap in the company’s product portfolio and reinforce thecompany’s position in gastro-intestinal and anti-infective segments.


Close on the heels of this is the acquisition of Becelac from PfimexLaboratories, which is an essential co-prescription brand. Morerecently in 1998, the company acquired five brands from theCalcutta-based Dolphin Laboratories. The company expects toachieve a turnover of Rs. 200 million from these acquisitions infiscal 1999.

B. Strategic alliances: The most important strategic alliances of the com-pany are research-based and therefore are significantly different fromthe rest of the industry. Its alliance with the Danish drug major –Novo Nordisk is at once pathbreaking and torchbearing.

Pathbreaking, because it is the first of its kind, wherein anIndian drug company has licenced its NCE to a multinational forconsideration of upfront milestone payments, undertaking furtherdevelopment through the clinical phases of research and productregistration and marketing after the drug is approved in interna-tional markets. Torchbearing, because it has already become a sortof role model in the effort to contain the huge and almostunaffordable costs of drug discovery to other aspirants in theIndian drug industry, who have launched their own drug discoveryprograms.

In addition, DRL group has formed strategic alliances of the nor-mal kind, to gain access to the North American generic marketthrough its group company – Cheminor Drugs. Cheminor Drugshas formed an alliance with Schein Pharma and PRI in the US.

DRL has also formed an equity-based marketing joint venture inBrazil with a local company to access the Latin American market. Itis about to finalise a joint venture in China with a local partner,involving manufacturing and marketing. The company has alreadya joint venture – Reddy-Biomed in Moscow – covering the CISmarkets.

C. New Product introductions: DRL has introduced five new productsduring 1998, which have contributed Rs.12.3 million in sales.

D. Expansion strategies: While the trend in the industry is to createtherapeutic and prescriber segment-specific marketing divisions,DRL has followed a different strategy. It has merged two existingmarketing divisions – Stangen and Genesis to achieve greater


customer coverage. The company’s 560 strong field force has achievedan enviable reach, covering customers across different prescribersegments. The company has achieved the distinction of the fastestgrowing pharmaceutical company among the industry’s top thirtysince the merger of its divisions.

Cipla

Cipla’s technological strength is widely acknowledged both in Indiaand abroad. The company, over the years, has built an enviablemanufacturing structure. Three of its manufacturing plants havebeen approved by all major international regulatory authorities. Itsproduct portfolio too, is both wide and deep, covering varioustherapeutic and prescriber segments. The company, naturally is notkeen on acquisitions.

The process of internationalisation began only a few years ago at Cipla.It has made rapid progress within these three years. It has formed sevenstrategic alliances with overseas partners, essentially to gain marketaccess. The basic structure of all these alliances is that Cipla providestechnology and products and the alliance partners abroad providemarketing support and distribution net work. Some of these alliancescould culminate in full-fledged joint ventures involving local manufac-turing, once they make the required progress.

Cipla’s game plan is to have at least one manufacturing facility in eachof the major geographical regions.

Cipla has been a very aggressive player in terms of new productintroductions. In fact, it has been one of the first-movers in almost allits new product introductions. That explains the large product portfolioit has and the kind of customer franchise it enjoys. It has introduced 25new products in 1988, which have contributed Rs. 53.6 million in sales.

Cipla has two maketing divisions – Cipla and Protec – for promotingits products across different prescriber segments in India.

Lupin

Lupin, like Ranbaxy is chasing a critical mass of $ 1 billion by 2003. Itspriorities too are the rapidly expanding generic markets in the US and


Europe. All its moves in domestic as well as international markets arecentered round gaining as quick an access as possible to new markets,products, facilities and technologies.

A. Mergers and Acquisitions: The acquisition bug has bitten Lupinrather recently. It has acquired Eli Lilly’s cephalosporin plant inPuerto Rico, essentially to cut short the time-to-market and gain afirst-mover advantage in the soon-to-go off-patent cephalosporinsin the US. As a part of its internationalisation of business, Lupin islooking for some more acquisitions in the US, Europe and China.It has set aside $ 10 million to fund these acquisitions.

B. Strategic alliances: Lupin is determined, rather hell-bent on makingit big in the generic markets in North America and Europe. All itsalliances – with Merck Generics, PRI, Fujisawa and the more recentjoint venture with MOVA – are aimed at achieving synergies betweenLupin’s integrated manufacturing capabilities and the marketingsavvy of overseas partners.

C. New Product introductions: Lupin has been planning to extend itstherapeutic coverage from anti-TB drugs and cephalosporins to othersegments. The company has introduced eight new products in 1998,which have contributed Rs. 22.5 million in sales. It is planning tointroduce 25 new molecules in the next three years.

D. Expansion strategies: Lupin has one of the largest medical detail-ing forces in the country – over 840 people – to promote thecompany’s products. It has two marketing divisions and one speci-ality division to increase the strength and flexibility of productpromotion. Currently the focus is on cardiology and critical care. Thegeneral division focuses on anti-TB drugs and antibacterials and otherproducts. The company has also started a natural products division.

Wockhardt

Wockhardt has a clear focus. It is a determined player in the fiercelycompetitive Indian pharmaceutical industry. Determined to become avertically integrated international pharmaceutical company. The com-pany has been using a judicious blend of acquisitions and alliances toreach the objective.


A. Mergers and acquisitions: Wockhardt acquired in December 1995,the Chennai-based R R Medi Pharma, a manufacturer of intrave-nous fluids. This strategic acquisition has helped Wockhardt in moreways than one. Firstly, it helped the company cut its cost of trans-portation of intravenous fluids in the southern region. Secondly, ithas given the company an instant access to the market in the South.Thirdly, it has expanded its manufacturing capacities. This is nowrechristened as Wockhardt Health Care. Wockhardt acquiredMerind through a merger in 1997. This has pushed Wockhardtinto the top ten of the Indian pharmaceutical industry by adding0.8 per cent market share. It has also helped consolidate its posi-tion as a vertically integrated player. Wockhardt, with this merger,has become one of the major manufacturers of vitamin B12 in theworld. This merger has also given the company an immediate mar-ket access to the rapidly growing Diagnostics business.

In addition, Wockhardt has made two strategic acquisitions abroad.It has acquired two generic companies – Accumed in the US andWallis Laboratories in the UK. With these, Wockhardt has createdbeachheads in the two most important regions North America andEurope – to exploit opportunities in the fastest growing and mostlucrative generic markets in the world.

Wockhardt has set aside Rs. 2 billion to fund its acquisitions. Nearlyhalf of it has been used to acquire Merind.

B. Strategic alliances: The strategic alliances that Wockhardt formedare synergistic with its acquisitions. The basic purpose of all thesealliances and acquisitions is to mutually reinforce its strategies ofincreasing market share, extending therapeutic coverage andgaining access to new products, new markets and new technologies.The alliances, whether they are formed in the domestic or overseasmarkets, should meet these objectives. Its two alliances with Japanesecompanies strengthen its product portfolio in two of its importantsegments – wound care and pain management. Its alliance withRhein Biotech involves technical know-how in the emerging fieldof biopharmaceuticals. Or consider for instance, its two strategicalliances with Ferrings in Europe and the more recent one with theNorth American generic firm, Sidmak Inc. Both these alliances are


to gain access to the generic markets in the highly industrialised andhighly regulated markets in the West.

C. New Product introductions: Wockhardt launched nineteen newproducts during 1998, which have contributed about Rs. 79.5million in sales during the launch year. Wockhardt is planning tolaunch five novel drug delivery formulations in fiscal 1999. It alsohas a pipeline of 15 new drugs and several line extensions forlaunching between 1999–2002. Furthermore, it has developedprocesses for three new bulk drugs with six more are in the pipelinefor 1999–2002.

D. Expansion strategies: Wockhardt has three marketing divisions toretain focus on customer and therapeutic segments as it has a verylarge product portfolio: Wockhardt Pharmaceutical division, Motherand Child-Care and Critical Care. In addition, it has a veterinarydivision for marketing its products for animal health care.

Nicholas Piramal

Acquisitions and alliances drive Nicholas Piramal’s business strategy.Ajay Pirmal entered the pharmaceutical industry through the acquisi-tion route. He acquired Nicholas Laboratories in 1988 and grabbedevery opportunity that came along. He stormed in to the top-ten leaguein Indian drug industry in ten years – entirely through acquisitions.

A. Mergers and acquisitions: Five acquisitions in ten years (1988–1998) to reach a critical mass of Rs. 5.42 billion. Acquired the In-dian subsidiary of Roche in 1993 and increased market share by 0.6per cent. Took over Sumitra Pharmaceuticals, the Rs.600 millionbulk drug manufacturer in 1995 to achieve backward integration.Acquired the Indian subsidiary of Boerhinger Mannheim in 1996and increased market share instantly by 0.5 per cent. These acqui-sitions have given the group an increased market share, extendedtherapeutic coverage to more profitable speciality segments likecardiology, neuro-psychiatry, oncology, haematology etc. The ac-quisition of Boerhinger Mannheim has given access to (and theleadership position), virtually overnight, the new rapidly growingdiagnostics business overnight. The group has acquired what has


been missing in its strategy till now – a research and developmentfacility – from Hoechst India in 1998. This acquisition takes Nicho-las Piramal one more step towards becoming a fully integrated phar-maceutical company. Nicholas Piramal’s acquisition log-book wouldread like this:

Company Year of acquisition

Nicholas 1988Roche 1993Sumitra Pharma 1995Boerhinger Mannheim 1996Hoechest’s R&D Centre 1998

B. Strategic alliances: Nicholas Piramal has also been working to builda manufacturing infrastructure that is comparable to the best inthe world, even while acquiring companies with the insatiable ap-petite of a predator. The company has been planning these movesessentially to become an attractive suitor for an alliance. And anattractive if not irresistible suitor, it has certainly become. How elsecan you explain seventeen alliances in five years? Sales from alli-ances currently account for a third of the company’s total sales.Nicholas Piramal is planning to achieve half of its total sales fromalliances within two years from now.

C. New product introductions: All these alliances and acquisitionsgive the company an enviable access to new products. NicholasPiramal, after acquiring Roche has introduced sixteen specialityproducts of Roche in India. The company has also got the right offirst refusal for marketing in India for all new products developedby Boerhinger Mannheim. The seventeen alliances, covering a widerange of therapeutic segments in both prescription and over-the-counter drug categories, offer a tremendous scope for introducingnew products. New product access in the product patent regime,once it is implemented in India by 2005, is the main reason for thealliance-driven strategy behind Nicholas Piramal’s grand plan. Thecompany has introduced five new products in 1998.

D. Expansion strategies: Nicholas Piramal has consolidated all itsacquisitions and structured its marketing operations around four


divisions – Multi-speciality division, Extra-care division, Diagnosticsdivision and the Biotech division. The divisions provide a focusedapproach with a disease management orientation. The divisionsare focused on market leadership in selected areas. The size of thecombined field force is one of the largest in the industry. The jointventure with the OTC major Reckitt Colman India has led to theformation of a separate company.

Torrent

Torrent has been following for years a very aggressive new productintroduction strategy. It has a number of ‘first launches’ to its credit ina number of therapeutic segments. It has expanded its field force toover 800 to expand its customer coverage. It is planning to add 200more.

The company has entered the anti-infective segment in a big way andhas introduced a number of antibiotics. This is essentially to extend itstherapeutic coverage. The company is also planning a big expansionon the export front. It has already achieved an export turnover of Rs.1.05 billion in fiscal 1998. It is planning to enter major internationalmarkets like Western Europe and China in 1999.

Torrent has also entered into a 50:50 joint venture with the Frenchdrug major Sanofi and started a separate company Sanofi Torrent.

Torrent group is planning to be among the top three in the Indianpharmaceutical industry in the next few years.


Zydus–Cadila Health Care has set its sights high right from day one,when the Cadila split, or restructuring as they would like to call it,became inevitable in 1995. The company set itself the objective of con-solidating its position in the domestic market first and to go global bysetting up joint ventures abroad. The company has set itself a formi-dable goal of reaching Rs. 10 billion by 2000, which means a four-foldgrowth in five years.

A. Mergers and acquisitions: The first step that the Zydus group tookin consolidating the domestic business has been the acquisition of


the ailing Indon Pharmaceutical Works Limited and turning itaround into a performing, specialityfocused company. This hasbeen the only acquisition that the company has made. It believesmore in harnessing alliance power.

B. Strategic alliances: At Zydus, strategic alliances are the primary driversof growth. It has formed as many as thirteen strategic alliances togain access to new products, markets, technology, research anddevelopment. Three of these have been joint ventures, whose scopeinvolves manufacturing, marketing and product development. Thejoint venture partners are KGCC of Republic of Korea (recombinantvaccine for hepatitis-B), BYK Gulden of West Germany (manufactureand marketing of bulk active-Pantoprazole and its formulations),and the German drug major Bayer AG (a separate joint venture tomarket the products of Bayer and Zydus in India).

C. New Product introducions: Zydus has introduced fifteen newproducts in 1998, which have contributed to about Rs. 46.2 millionin sales. The company is planning many more new products invarious speciality segments like cardiology, gastroenterology andcritical care.

D. Expansion strategies: Zydus has re-engineered its managementstructure and business processes to become a performingorganisation. They have introduced the SBU concept to achieve arelentless focus on bottom line. Domestic marketing offormulations is divided into four teams focusing on differentsegments including generics. They have, in addition, created anagrovet division and a cosmetic division. International marketing,Manufacturing and Bulk drugs have been made into three strategicbusiness units.

Sun Pharma

Sun Pharma entered the pharmaceutical industry through the nicheroute of speciality segments fifteen years ago. The speciality segments,which were considered as a ‘path of least resistance’, have now becomea ‘path of most resistance’. They are getting crowded by the day, withmore and more players joining the fray. The highly ambitious Sun, likeits most aggressive peers, has been pursuing all major strategic routes to


move up the ladder in the Indian drug industry and indeed, to becomeone of the integrated international pharmaceutical companies.

A. Mergers and acquisitions: Sun’s acquisition spree started inSeptember 1996, when it acquired a controlling stake in GujaratLyka, the Rs. 520 million manufacturer of bulk actives ofsemisynthetic antibacterials. This has been a part of the grandstrategy of Sun, to become a vertically integrated firm. To expandits capacities for bulk actives, it has also acquired Knoll’s bulk drugmanufacturing facility at Ahmednagar in Maharashtra in 1996.

Further, the company has acquired M J Pharma in January 1997.M J Pharma holds regulatory approvals from the Medicine ControlAgency (MCA) of the UK for all its manufacturing lines, and fromthe US FDA for cephalosporin capsules.

Sun has taken over through a merger towards the end of 1997 theChennai-based TDPL, an integrated pharmaceutical company witha turnover of Rs. 600 million and gained an immediate access tolarge new therapeutic segments such as gynaecology, paediatrics andspeciality segments like oncology and anaesthesiology. It has alsoacquired in the bargain the R&D center of TDPL at Chennai, whichhas considerable process development skills. Having acquired andbuilt a sizeable manufacturing infrastructure Sun has started lookingfor brand acquisitions.

The company has acquired almost the entire basket of theHyderabad-based Natco’s prescription brands to extend its thera-peutic coverage and to consolidate its position in select specialitysegments. The total turnover of the acquired brands in 1998, theyear of acquisition, was around Rs. 520 million. All these acquisi-tions have catapulted Sun in to the top ten of the Indian pharma-ceutical industry (monthly rank of 8 in November 1998 as per ORGRetail chemist audit).

Sun has also gained an immediate entry into the opthalmic seg-ment and an instant customer franchise, when it acquired Vadodara-based Milmet Laboratories, the Rs. 100 million firm specialising inopthalmic preparations.


Sun has also picked up a controlling stake in the Michigan-based Caraco Pharmaceuticals to gain a faster access to theNorth American generic market. Sun-Caraco has already got twogeneric approvals in the US and four more are in the pipeline. Hereare the details of Sun Pharma’s acquisition spree:

Gujarat Lyka 1996

Knoll’s bulk drug facility 1996

M J Pharma 1997

Caraco 1997

TDPL 1997

Natco’s brands 1998

Milmet 1998

B. Strategic alliances: Sun has not yet chosen the alliance-route. Thecompany has only marketing and sourcing arrangement with theSouth Korean drug major – KGCC (Korean Green CrossCorporation) for marketing certain blood products in India.

C. New Product introductions: Sun has been very aggressive in launchingnew products since the beginning. It has introduced eighteen newproducts during 1988, which have contributed about Rs. 51 millionin sales during the launch year.

D. Expansion strategies: Sun has been the first Indian drug firm tocreate and organise its business around stand-alone strategic businessunits dedicated to one or more therapeutic and prescriber segmentsto achieve a sharper marketing focus. This has been one of themajor contributing factors to its success in speciality segments. Todaya number of leading Indian pharma companies follow this strategyof creating speciality-oriented marketing divisions or SBUs. Sunhas further consolidated its structure and created eight strategicbusiness units catering to neuro-psychiatry, cardiology, nephrology,diabetology, gastro-enterology, respiratory disorders, orthopaedics,gynaecology, paediactrics, oncology, anaesthesiology, opthalmology,critical care and ENT.


Ipca

Ipca has a strong presence in the anti-malarial, anti-emetic and cardio-vascular segments. It also has a strong international presence and sup-plies drugs and intermediates to Teva of Israel, Sintofarm of Italy andHoechst Celenase of the US. The company is planning to add to thislist of prestigious clients an even a more prestigious client – Merck ofthe US.

The company has created a new marketing team to step up its newproduct launches and improve its market share. It has introduced morethan 10 products in 1997–98 and is planning to introduce many morehigh-margin products in fiscal 1999. New products are the key driversof growth at Ipca.

Kopran

In the domestic market, Kopran is forming a marketing alliance withthe industry giant – Glaxo, to beef up its formulations business. It isstarting a new strategic business unit – Kresp to market respiratoryproducts. Kopran has in all three strategic business units – Kopran,Kramer and Kresp to market its formulations in the domestic market.

Kopran is restructuring its business operations to achieve a sustainablegrowth and is planning three joint ventures abroad. Two of thesealliances are in the UK; one is with Synpac to boost its bulk actives andformulations of penicillin-based products and the other is with DDSAfor marketing its formulations of off-patent generic drugs in Europe.

Kopran is also taking up a 39 per cent stake in a new pharmaceuticalcompany being set up in Dubai by Dubai Investments, a domesticcompany promoting business opportunities in the United ArabEmirates (UAE). The company will manufacture and market a rangeof life saving drugs including antibiotics, anti-ulcerants andcardiovascular drugs. The company would be the first in the region tomanufacture active ingredients and innovative dosage forms.

Kopran has introduced three new drugs in 1998 and these have con-tributed about Rs. 5.3 million in sales.


Orchid

Orchid has reached a critical mass of Rs. 2.4 million in the fiscal’ 97 asa 100 per cent export oriented bulk drug manufacturer, focusing onlyon cephalosporins till now. The company is undertaking a major prod-uct diversification program in bulk actives by entering into other highvalue bulk drugs and intermediates like anti-virals and next generationcephalosporins.

The company is also planning to integrate forward into value-addedformulations of cephalosporins non-cephalosporins to accelerate itschase for critical mass, to become a vertically integrated internationalpharmaceutical company.

What is Critical?

Companies have taken all the possible strategic routes to reach thecritical mass. They seem to have, literally and figuratively, left no stoneunturned and no path unexplored. They have pursued all winningways like:

A. Mergers

B. Acquisitions of businesses, facilities and brands

C. Strategic alliances including joint ventures

D. Extension of therapeutic coverage

E. Expansion of customer coverage

F. Exploration of new shores

Unless a firm reaches a critical mass of investible surplus, it cannot fuelthe growth strategies. In the final analysis, what is critical to the wholebusiness of critical mass is reaching it!

The marketing mindset 113

Executive Summary

Marketing mindset is viewing the entire business fromthe customers’ point of view. When the sole purpose ofthe whole business is to ‘create’ and ‘keep’ a customer,can marketing be seen as a only a functional area in anorganisation? Peter Drucker emphatically declared that,“There is only one valid definition of business purpose:to create a satisfied customer. It is the customer whodetermines what the business is. Because it is its purposeto create a customer, any enterprise has two – only twobasic functions: Marketing and Innovation”.

Marketing mindset has to become the philosophy of anorganisation. It must permeate throughout theorganiszation. Customers should be able to see, touch,feel, taste and experience the marketing orientation andmindset of an organisation. How can one cultivate themarketing mindset? One possible way is to clearly defineand identify the criteria that determine the marketingmindset and set objectives for each of these. Considerthese criteria for a starter, which can be used asindicators of gauging the marketing mindset:

Market share and growth Brand building capabilities

8 THE MARKETING MINDSET


Focus on therapeutic segments Size of the participated market Product portfolio and product strategies Strategy for key markets including overseas markets Customer franchise and satisfactionEvaluating or taking stock of where the organisationstands against these criteria is an essential first step.Only when you know where you stand, you can plan anddecide where to go and which way to go. As a second step,benchmark the intra and inter-industry best practicesfor each of the criteria.

Marketing, therefore is an organisational responsibilityand should not be viewed as just that of one functionalarea. That is the essence of marketing mindset. Themanagers of General Electric, the world’s largestcorporation said it best: “Marketing is too important afunction to be left to the marketing department alone”.


Pharmaceutical industry the world over is research-led andmarketing-driven. The drug markets can be broadly classified into twocategories – the innovative and the imitative. The innovative marketsare single source product-markets, which are the terra firma of research-based drug companies. The imitative markets are the multi-sourceproduct-markets or branded-generic markets with inadequate protectionfor intellectual property rights. While the competition is very intense ininnovative markets, it is both intensive and extensive in nature in imitativemarkets.

Competition, therefore, is doubly fierce in imitative markets. Whencompetition is fierce it is marketing that calls the shots. We are notreferring to marketing in the narrow functional sense here. Neitherare we undermining the importance of research or technology, whichare the key success factors in the pharmaceutical industry. What weare referring to is the marketing attitude of the organisation as a wholeor the classical marketing concept that pervades the entire company.In other words, we are referring to the extent of customer focus andthe disposition of the company to serve the customer.

Can we measure the marketing mindset of an organisation? Whilemeasurement of attitudes is not possible, one can infer and indeedmeasure the degree of marketing orientation, disposition or even themindset of a company through observable behaviour in the marketplaceand the outcomes. Consider these parameters or criteria for example:

Market share and growth

Brand building capabilities

8THE MARKETING MINDSET


Focus on therapeutic segments

Size of the participated market

Product portfolio and product strategies

Strategy for key markets including overseas markets

Customer franchise

Product Portfolio

One of the most important aspects of value creation inside a corporationis the management of product portfolio. A strongly positioned companyshould have products that are highly capable of generating cash todayand others that show potential and promise for value creation over thenext three to five years. Then, there should be some products andbusinesses that are in embryonic stage today that can be potential winners10–15 years from now.

Companies that have a balance of all the three horizons are well poisedto work towards the maximisation of economic value in a long-termperspective. Consider how some of the leading Indian drug companiesare faring against this marketing mindset backdrop.

Brand Building

Some years ago, the editor of the Journal of Marketing Research askedLarry Light, a prominent advertising research professional, for hisperspective on the future of marketing in the next three decades. Light’sanalysis was at once perceptive, instructive and even prophetic.

“The marketing battle will be a battle of brands – a competition forbrand dominance. Businesses and investors will recognise brands asthe company’s most valuable assets. This is a critical concept. It is avision about how to develop, strengthen, defend and manage a business.It will be more important to own markets than to own factories. Theonly way to own markets is to own market-dominant brands.”

This explains why a number of companies are in a rush to acquirebrands with a strong presence in the market and brands that strengthentheir presence in their therapeutic segments of focus. In retrospect, it


may look simple but it takes time to build brands or businesses but tobuy them, it only requires cash. It has taken a long time for thecompanies to recognise this seemingly simple truth. Brand building,of course, becomes a continuous activity once you acquire brands orbusinesses. Consider the spate of brand acquisitions in recent past inthe Indian pharmaceutical industry:

Ranbaxy acquired Gufic’s leading brands like mox, suprimoxand others to strengthen its pre-eminent position in the anti-infectivesegment.

Dr. Reddy’s Labs have acquired riflux and clamp from StandardOrganics and becelac from Pfimex to reinforce their position in anti-ulcerant and anti-infective segments and to enter the essentialco-prescription segment of vitamin B complex. They have also acquiredfive more brands from Dolphin Laboratories to reinforce theirpresence in anti-infective and gastro-intestinal segments and to enterthe new haemostatic segment.

Nicholas Piramal has acquired a number of leading over-the-counterbrands like strepsils, sweetex, cherana and burnol from Boots anddettol and disprin from Reckitt & Colman through innovative jointventures to establish a strong OTC presence.

Nicholas group has also acquired a number of leading prescriptiondrug brands from Ambalal Sarabhai Enterprises through anothercreative joint venture Sarabhai Piramal.

SmithKline Beecham in India has acquired crocin, the leading OTCanalgesic anti-pyretic brand of Duphar Interfran.

Sun Pharma has acquired a bevy of brands covering a wide range oftherapeutic segments from Natco. The total sales of these acquiredbrands are around Rs. 520 million.

Ranbaxy

Ranbaxy, the largest Indian pharmaceutical company, has moved to thecoveted 2nd position in the domestic formulations market. It has amarket share of 4.9 per cent of the Rs. 106.6 billion large domesticformulation market. The company has achieved this through a strategicrecipe of organic growth, brand acquisitions and a merger.


The company has a distinct leadership position in the anti-bacterialsegment which is the largest in the Indian drug market, accounting forabout one-fourth of the total market. The company has built its brandsthrough a well planned, consistent strategy. Today it has 13 brands(Table 8.1) among the top 250 of the industry. These thirteen brandsaccount for about 57 per cent of the company’s total domestic formu-lations’ sales of Rs. 5.26 billion. The company’s marketing orientationis evident from the fact that it is able to manage and build a large anddiverse product portfolio and build many major brands out of them.

The company has launched a fully integrated strategy to build 25 globalbrands of major molecules that are going off-patent, in all its key markets.

Table 8.1Ranbaxy’s leading brands

Brand Rs. Million

1. Cifran 507.4

2. Sporidex 550.1

3. Revital 398.3

4. Mox 385.6

5. Fortwin 201.6

6. Histac 145.6

7. Calmpose 126.1

8. Zanocin 152.5

9. Volini 116.5

10. Keflor 114.8

11. Cifran-CT 108.9

12. Gramogyl 101.6

13. Silvirex 101.0

Source: Data derived from ORG, June, 1998


Dr. Reddy’s Labs

Dr. Reddy’s Labs have chosen to enhance the “customer reach” strategyto build brands. The company has integrated its two marketing divisionsin 1996 to create one large marketing force to increase its customercoverage. It has cut down the redundancies and expanded its customerreach effectively. The company as a result, has shown a phenomenalgrowth rate that is three-and-half times higher than the industry averagefor the past two years. To fuel the growth further, the company has alsofollowed the brand acquisition route. It has acquired two brands fromStandard Organics and one from Pfimex during 1996. The company’srank currently (ORG, June, 1998) is 22nd in the Indian pharmaceuticalindustry. It has a market share of 1.3 per cent. Recently the companyhas acquired five brands from Dolphin Laboratories. These are: styptovit,styptochrome (to enter the haemostatic market), doxt (to reinforce itsposition in the anti-bacterial segment) trichodol (a hepatic stimulant)and styptomet to consolidate its already strong position amonggastroenterologists, physicians and general practitioners.

The company’s marketing orientation becomes obvious when youconsider that the company has, at the right time, shifted its focus tovalue added formulations. It has achieved a strong presence in twospeciality prescribe segments:cardiovascular and gastrointestinal. Thecompany has built a very strong franchise in these two segments. Four

Table 8.2

DRL’s leading brands

Brand Rs. Million

1. Omez 262.0

2. Nise 186.2

3. Stamlo 146.6

4. Enam 124.8



of the company’s brands – omez, stamlo, enam and nise are amongthe industry’s top 250. These contribute to about 51 per cent of thecompany’s total domestic formulations’ sales. Furthermore, the companyhas achieved the 5th position in the cardiovascular segment with only fourbrands and a strong presence in gastro-intestinal segment with only twobrands.

Even in its international operations the company has been focusing onregistering its branded generic formulations in overseas markets andpromoting them either through the company’s sales force or throughdistributors’ sales forces.

Cipla

Cipla has cultivated a very strong marketing mindset over the years.The company is ranked third in the Indian pharmaceutical industrywith a market share of 4.2 per cent. It has a dominant leadership positionin the anti-asthmatic segment and a very strong presence in a numberof therapeutic segments like anti-bacterials and anti-infectives,cardiovascular, anti-helminthic and anti-cancer etc. Cipla’s customerfranchise among all key prescriber segments is extremely high. It isamong the top three companies in terms of number of prescriptionsgenerated by all major speciality prescriber segments.

Cipla as an organisation is a lateral thinker. The company has foundunique first-time solutions for many of the common problems thatwould bog down any ordinary company.

The credit for exploiting the opportunities of a multiple media-mix inpharmaceutical promotion should go to Cipla. It started and developedto a very fine art what the industry refers to as a multi-media approachto marketing. In fact, Cipla is considered to be a benchmark for thisinnovative marketing approach to enhance brand registration, recalland prescription generation. Another first to Cipla’s credit is thedevelopment of a customer database indicating users and non-usersand its validation through special task forces called, “prescription-watchers.” This has helped Cipla considerably in brand building throughprecision marketing.

Cipla has 12 of its brands among the industry’s top 250. These account forabout 53.7 per cent of the company’s total domestic formulations’ sales.


Lupin

If one has to describe Lupin’s strategy in one word, it is “Focus.” Thecompany has had an unwavering focus on the anti-TB segment rightfrom the start. It has achieved, over the years, the distinction of beingthe world leader in its chosen anti-TB segment. Having achieveduncommon success in one segment through focus, the company hasspotted another major segment, oral and sterile cephalosporins. Lupin,here too, is not viewing merely the domestic market. It has set its sightson the world cephalosporin market, in which a number of majormolecules are going off-patent in a few years from now. Since leadershipshould, like charity begin at home, it has focused on the oral

Table 8.3

Cipla’s leading brands

Brand Rs. Million

1. Ciplox 443.5

2. Novamox 398.7

3. Norflox 372.2

4. Novaclox 173.9

5. Asthalin Inhaler 172.8

6. Asthalin 150.4

7. Aerocort 138.2

8. Cefadur 129.9

9. Theo-Asthalin 117.2

10. Ibugesic Plus 110.3

11. Norflox-TZ 107.9

12. Ciplox-TZ 107.1



cephalosporins market in India and has already pushed two of its brandsin this segment – ceff and odaxil – into the top 250 brands of theindustry.

Wockhardt

Marketing has always been a priority at Wockhardt. The company firstfocused on pain management. The company has entered intocardiovasculars, gynaecology and paediatrics and large volume parenterals,anaesthesia and critical care and is planning to enter into enteralnutrition. In its chase for critical mass, the company has followed theM&A (mergers and acquisitions) route. Its acquisition of Merind andTata Pharma has given access to neuro-psychiatry among others.

Wockhardt has moved up to the 9th position in the Indianpharmaceutical industry and has a market share of 2.3 per cent. Five ofits brands, which account for about one-fourth of the company’sdomestic formulations’ sales are among the industry’s top 250.

Table 8.4

Lupin’s leading brands

Brand Rs. Million

1. R Cinex 407.7

2. R Cin 280.5

3. Ceff 225.3

4. AKT-4 216.1

5. Combutol 142.2

6. Odaxi 124.8

7. Optineuron 108.2

8. Hepp 106.4



NPIL

Ajay Piramal has set one objective, when he entered the pharmaceuticalindustry. The Piramal group has to be among the top three in theindustry by the year 2000. He has chosen the route of mergers,acquisitions and joint ventures to reach critical mass. Today, when youadd the domestic formulations’ turnover figures of all Piramal groupcompanies including the joint venture – Sarabhai-Piramal, the group hasachieved 4th position with a market share of 2.7 per cent just behindHMR.

The group has a strong presence in cardiovascular, neuro-psychiatry,nephrology and antacid segments. The group is in the process ofrestructuring operations to achieve a sharper marketing focus and has atotal field force strength of 1600 plus, which makes it one of the largestin the industry. The group’s marketing approach is to apply the diseasemanagement strategy, offering the total package of services – diagnostics,drug therapy options and post-treatment monitoring and care (in chronicdisease areas like diabetes). NPIL is planning to restructure its marketingaround biotech, diagnostic, extra care and multi-specialities. The grouphas five brands among the industry’s top 250. One more brand, polycrolforte is eagerly waiting in the wings to join the top-brand club. Thesefive brands account for 23.3 per cent of the group’s domesticformulations’ sales.

Table 8.5

Wockhardt’s leading brands

Brand Rs. Million

1. Spasmoproxyvon 170.3

2. Wokadine 126.9

3. Zedex 124.7

4. Proxyvon 104.6

5. Decdan 106.2



Torrent

Torrent has entered the Indian pharmaceutical market through a nichestrategy. This has been emulated successfully by other companies likeSun and Intas. Torrent has introduced a number of new drugs for thefirst time in its chosen therapeutic segments – psychiatry, neurologyand cardiology. Torrent has achieved a dominant leadership positionin the cardiovascular segment. It has also achieved leadership positionin the psychiatry segment which is being challenged by its one-timefollower (now a leader in its own right and might), Sun Pharma.Toreach critical mass faster, Torrent has diversified into the fastest growingsegment, anti-bacterials, and introduced a number of products. Thisentry has certainly accelerated the growth of the company, catapultingit to the big league.

Torrent has moved up to the 5th position torrentially. It has a marketshare of 2.4 per cent. Five of its brands are among the Industry’s top250. These five brands contribute 35.2 per cent of the company’sdomestic formulations’ sales.

Table 8.6

NPIL’s leading brands

Brand Rs. Million

1. Paraxin 181.7

2. Bactrim 138.2

3. Genticyn 120.8

4. Valium 109.5

5. Esgipyrin 105.2



Table 8.8

Leading brands of Zydus

Brand Rs. Million

1. Ciprobid 320.7

2. Ocid 228.1

3. Oxalgin-DP 132.2

4. GRD 112.5

5. Depin 108.2

6. Oriprim 101.1



Cadila has been concentrating on brand building activity for quite sometime. Even after the division of Cadila into two corporate entities, thebrand building activity continues. The undivided Cadila had as many as

Table 8.7

Torrent’s leading brands

Brand Rs. Million

1. Quintor 241.0

2. Dilzem 214.4

3. Alprax 190.3

4. Domstal 150.5

5 .Listril 102.3



12 brands among the industry’s top 250, which were divided equallyafter the split. The six top brands of Zydus–Cadila Health Care accountfor about 42 per cent of the company’s domestic formulations’ turnover.

Zydus would have (after the Zydus–Bayer joint venture is operative)four marketing divisions to manage its diverse product portfolios. Inaddition, Zydus is planning to launch another marketing divisionexclusively to promote cardiovascular products. Zydus has already a wideproduct basket for treating various cardiovascular ailments. The ideabehind the creation of different marketing divisions is to sharpen andretain focus at the same time and to extend therapeutic coverage at thecorporate level.

Zydus group is ranked 11th in the Indian pharmaceutical industry witha market share of 2 per cent.

Sun Pharma

Sun Pharma has been a highly marketing oriented company right fromthe beginning. Dilip Shanghvi, the ebullient founder managing directorhad very aptly identified the niche segments – psychiatry, neurologyand cardiology as they had a narrow prescriber base and less competitiveintensity in 1984 ( now they are as crowded as any other segment). Thecompany focused on these segments and introduced many new productsto offer a complete product basket, a sort of precursor to the emergingdisease management approach. The company provided a superior levelof customer service and has maintained the leadership position inpsychiatry and neurology for two years now. In the cardiology segmentit has achieved the 2nd position with the acquisition of Natco’s brands.

Sun’s marketing mindset can be assessed from the fact that it is the firstIndian pharma company to structure its entire marketing operationsaround two or more specific therapeutic segments. It has createddedicated stand-alone strategic business units to serve the universe ofcustomers in these segments. Sun has eight strategic business unitsfocusing on all major therapeutic segments. The underlying philosophyis that when customer segments are getting increasingly specialityoriented, can the marketing companies lag behind? Later, manypharma companies followed suit and are setting up separate businessunits to retain the focus on key segments and yet diversify into newsegments.


Sun’s rate of new product introduction can only be described as prolific.It has introduced as many as 30 new products in all segments duringthe last two years. The company is planning to launch at least twelvemore before the end of this year.

Sun has a market share of 1.6 per cent of the Indian pharmaceuticalindustry and is growing at 28 per cent as compared with the industry’s14 per cent average (ORG, MAT, June, 1998) . With the acquisition ofNatco’s entire prescription brand portfolio, Sun has improved its marketshare virtually over night by 0.5 per cent and moved up into the topten club of Indian pharma industry.

The fact that Sun has only two brands among the industry’s top 250contributing only one-fifth to the company’s total sales belies itsmarketing mindset. In speciality segments, when a company is practisinga disease management approach, share of the therapeutic segment isequally important. Table 8.9 presents details of Sun’s leading brands.

Ipca

Ipca has focused on a few brands consistently over the years. Thecompany’s major strengths have been technology and the ability tointegrate backward successfully to gain control on input costs. This hashelped the company in building a strong presence in bulk drug exports.The company now is focusing on marketing and has started anothermarketing division to promote speciality products– cardiovascularsmainly, as the company has a respectable presence in that segmentalready.

Table 8.9

Sun Pharma’s Leading Brands

Brand Rs. Million

1. Monotrate 147.3

2. Alzolam 109.2



The company’s focus on a few products has paid off handsomely. Today5 of its brands are among the industry’s top 250. These account forover 70 per cent of the company’s domestic sales of formulations.

The company is ranked 26th in the industry with a market share of 1.1per cent.

Kopran

Kopran has only one brand among industry’s top 250 brands – Aten.Aten has a sales volume of Rs. 206.4 million and it accounts for 39.1per cent of the company’s domestic formulation sales.

Orchid

Orchid has started as a 100 per cent export oriented unit formanufacturing and marketing bulk drugs and intermediates. It has veryrecently integrated forward into manufacturing and marketingformulations.

Intangible no more!

Brands are no more considered as intangible assets. “It is better to ownbrands than factories”, thundered Larry Light rather prophetically quite

Table 8.10

IPCA’s Leading Brands

Brand Rs. Million

1. Lariago 299.5

2. Perinorm 183.3

3. Eltocin 141.3

4. Tenolol 126.1

5. Solvin 101.5



sometime ago. Brand acquisitions have become the order of the dayfor speedy, or rather, instant growth. Ranbaxy has set up a whopping $150 million acquisition fund mainly for acquiring brands globally. Thecompany’s stated policy has been brand acquisition rather than companyacquisition. Dr. Reddy’s too, have been on a brand-acquiring spree.Sun Pharma has also made its intentions clear with its recent acquisitionof the entire prescription brand portfolio of Natco. It has adequatemanufacturing infrastructure and what it needs to reach the criticalmass faster is brands. These reinforce its market dominance, facilitateits entry into new therapeutic segments and extend therapeutic coverage.

Brand Building or Segment Leadership?

Brand building or segment leadership is as mindless a question as eggor chick – which comes first? Before getting into the details of both, weneed to first define what brand building is. The top 250 brands out ofthe 60,000 brands, which are being marketed by the Indianpharmaceutical industry account for about 42 per cent of the entireindustry’s formulation sales. One logical way of looking at the brandbuilding capabilities of a company is to compare the number of brandsa company has among the industry’s top 250 and their contribution tothe total sales of the company. If it has more number of products andtheir contribution is equal to or more than the industry average thatcould be indicative of the company’s brand building capabilities.

Companies, which are operating in speciality segments, find it difficultto build big brands. There are two main reasons for this. Firstly, thetotal size of the market in some of the speciality therapeutic segments issmaller than the sales of some of the industry’s top brands. Secondly,companies in speciality segments are forced to introduce a wide rangeof products or different molecules with little or no overall sales benefitsin the same therapeutic category, just to keep up with the Jonesses. In abranded generic market like India, the temptation is to introduce brandsof every single molecule launched by different companies for the samecondition. In research-based pharmaceutical markets like North America,Europe and Japan, the innovator companies defend their respectivemolecules with all their might. Therefore, speciality focused companiesin India defend their therapeutic segments with a range of products


and aim for segment leadership position however small or narrow thesegment may be. Achieving segment leadership is brand building. Sizedoes matter in brand building, but then leadership matters even more.

Sixtyseven of the industry’s 250 brands are from the eleven companiesdiscussed in this chapter. (Orchid, the twelth company, has just enteredthe formulations business.) These 67 brands account for 44.4 per centof the combined domestic formulations’ sales of these companies.Company wise details are given in Table 8.11.

All these companies demonstrate a high degree of marketing acumen.They are fiercely competitive. Each one of these companies either has aleadership position or a major presence in more than one therapeuticsegment. Ranbaxy has an undisputed leadership position in the largesttherapeutic segment – anti-bacterial and antibiotic. Cipla has a leadershipposition in the anti-asthmatic segment and a major presence in a numberof therapeutic segments including anti-bacterials.

Table 8.11

Company No of brands Contribution to among top 250 company’s total

(per cent) sales

1. Ranbaxy 13 57.2

2. Cipla 12 53.2

3. Lupin 8 64.3

4. Zydus 6 41.7

5. Ipca 5 71.2

6. Dr. Reddy’s Labs 5 51.0

7. Torrent 5 35.2

8. Wockhardt 5 25.4

9. Nicholas Piramal 5 23.3

10. Sun Pharma 3 16.5

11. Kopran 1 38.6


Dr. Reddy’s has a major presence in gastro-intestinal and cardiovascularsegments. Ipca is the country’s largest anti-malarial player. Torrent andSun Pharma have a strong speciality focus. Kopran leads the plethoraof atenolol brands in the antihypertensive segment.

The customer coverage strategies and the consequent customerfranchises are naturally based on different marketing approaches. Cipla,Ranbaxy and Dr. Reddy’s, for example, have a very broad coverageacross large prescriber segments, whereas Sun Pharma’s customercoverage has a very sharp focus on a number of speciality-based narrowprescriber segments. Cipla balances these two – broad customer baseand narrow prescriber focus very effectively, though it may sound likean oxymoron. Cipla has achieved the uncommon success of being amongthe top three in a number of prescriber segments.

These companies have also shaped the strategic thinking of the industryitself. The strategy for not just winning in the domestic market, but forpenetrating overseas markets as well. These companies account for allstrategic acquisitions made by Indian drug companies in overseasmarkets. Ranbaxy, Lupin, Wockhardt and Sun Pharma have acquiredgeneric companies in the US and UK for exploiting the rapidly expandingmarkets for off-patent generic formulations in these highly industrialisedmarkets. These companies also account for over eighty per cent ofstrategic alliances to gain faster access to new products, markets, andtechnology and to exploit the off-patent generic markets in the West.

On all criteria which assess the marketing mindset of an organisation(like market share, growth, brand building capabilities, segmentleadership, new product introductions, focused approach, customercoverage strategies, customer franchise among others), these twelvecompanies have demonstrated that they are ready and willing to take onGATT, and they have got what it takes to win in the post-GATT era.

Upgrading technology 133

Executive Summary

Technology drives corporate success worldwide. Even inIndia, it is technology that fueled the growth of thesuccessful companies. Consider the pharmaceutical industryfor example:

The pharmaceutical sector has shown the most dramaticgrowth among all sectors since independence - from a mereRs. 100 million to about Rs. 150 billion in 1998. Twelvecompanies: Ranbaxy, Cipla, Lupin, DRL, Wockhardt, NicholasPiramal, Torrent, Cadila Health Care, Sun Pharma, Kopran,Ipca and Orchid account for over a third of the totalindustry sales. What is the common strategic thread thatruns through all these companies and other successfulcompanies not mentioned here?

Technology. All these companies have been steadilyinvesting in upgrading their technology to world classstandards. Unless your products and services are worldclass, you have no chance of even entering internationalmarkets. The highly industrialised markets like NorthAmerica, Europe and Japan, which account for over 80 per

9UPGRADING TECHNOLOGY


cent of the world pharmaceutical market, have erectedmany entry barriers. Consider these barriers for example:

Indian drug firms can export bulk actives only whenthey have a DMF (Drug Master File) for that particulardrug.

One can have a DMF only when he manufactures the drug ata facility approved by US FDA and the formulator shouldhave his formulation approved by the FDA using the bulkfrom the proposed source.

To market an off-patent generic formulation, one needsto match his formulation like a finger print with theinnovator brand both in terms of dissolution profileand bio-equivalence.

Even the bio-studies need to be conducted at a US FDA-approved laboratory.

Even the NICs (Newly Industrialised Countries) and someof the developing countries have been upgrading theirregulatory requirements to these levels, making entrydifficult.

Technology is the only key to success. Only world classtechnology can convert these barriers into gateways. Themessage is loud and clear. Upgrade technologically or beout-dated. With technology it is ‘Up’ or ‘Out’!


Corporate success worldwide has long been fueled by technology.Wall Street calls these technology-driven companies ‘techies’ and trackstheir success regularly. The pharmaceutical industry is essentiallytechnology intensive and is research driven.

Of all the sectors that have seen growth, the pharmaceutical sectorprobably is the most dramatic. In 1947, the size of the Indianpharmaceutical industry was Rs. 150 million. Today the pharmaceuticalproduction exceeds Rs. 150 billion and exports exceed Rs. 30 billion.Moreover, although it was controlled by multinationals till the end of1960s, today Indian manufacturers of bulk drugs and formulationsdominate the market. There are at least a handful of companies likeRanbaxy, Cipla, Dr. Reddy’s, Lupin, Wockhardt, Sun, Zydus and NPILwhich are planning to become Rs. 10 billion companies by year 2000.Ranbaxy is the most ambitious among these for it is planning to becomea $ 1 billion company by 2003.

There is a common misconception that this fantastic growth has beendue to pirating technology from the West, because the Indian PatentAct of 1970 recognised only process, not product patents. But the factis, less than 10 per cent of the Rs. 30 billion exports are covered byproduct patents. The rest are off-patent drugs; hence Indianmanufacturers are competing in the open market, with originaldiscoverers, there by proving the more efficient nature of their processtechnologies and control of manufacturing costs.

It is undisputed that the most important factor that will catapult Indiaonto the global stage, in terms of competitive presence, is the state oftechnology available for production of bulk drugs and formulations.

9 UPGRADING TECHNOLOGY


In terms of technological capability for bulk drug production, India isprobably the fourth major force in the world, after the US, WesternEurope and Japan, particularly for synthetic drugs.

In the area of fermentation for antibiotics, steroids, enzymes and aminoacids, Indian companies have to enhance their capabilities significantlyto catch up with global standards.

Today, there are nearly 800 bulk drug manufacturers in India. Someof them are being wooed by multinationals for tie-ups involvingmanufacture, marketing and even joint research.

A large number of high-selling antibiotics, cardiovascular and otherdrugs are going off-patent in the next five nears. There is also a growingshift towards generic drugs, particularly in the US. These new Indian‘techies’ are ambitiously planning to exploit the exploding NorthAmerican generic market.

To penetrate the developed markets like the US is not going to beeasy, whether it is for bulk actives or for formulations. There are anumber of entry barriers. Consider these for example:

Entry Barriers

1. The first barrier is that the regulatory environment in these marketsis very stringent. They allow imports only from those manufacturerswhose facilities are approved by their respective regulatoryauthorities. In the US for example, you need to have your facilityapproved by the US FDA. Likewise, it is MCA (Medicine ControlAgency) which approves for the UK and the HPB (Health ProtectionBureau) for Canada. The requirements of documentation andquality standards are very tough and expensive.

2. The second barrier is that, not only do your facilities need theirregulatory authority’s approval but even the bulk actives and otheringredients used in the formulations need to be sourced only fromapproved manufacturers. The approved sources too, need to gothrough the regulatory process, thus pushing the input costs high.You cannot use your own raw materials, even if you can manufacturethem more economically and even if they meet the materialspecifications, unless your facilities are approved.


3. The third barrier is that your generic formulation of off-patentdrug should match the innovator brand’s formulation like afingerprint in terms of dissolution profile and bio-equivalence. Onlywhen your generic formulation meets these criteria will yourAbbreviated New Drug Application (ANDA) get the approval ofthe US FDA and get a ‘therapeutic equivalence’ rating. And onlythen you will have chance of marketing your generic formulationbecause it can be therapeutically substituted by the pharmacist orsold to HMOs and PBMs.

4. The fourth barrier is that you have to get the bio-equivalence testingdone only at the US FDA approved research laboratories. This,once again, increases costs.

5. The fifth barrier is that you have to find the right distributor tomarket your products. Unless you have a basket of ANDAs for yourgeneric formulations in a given therapeutic area, that meet theemerging disease management criteria or approach, you cannotreach the large customers like HMOs and PBMs in the US.

6. The sixth barrier is that you have to achieve all this fast enough tobe among the first two or three generic versions of the innovatordrug soon after its patent expiry. A report by Lehman Brothers(1996) notes that, in the US, the first generic can sell at a 30 percent discount to the branded product compared to a 75 per centdiscount for later entrants. Industry experts say that 80 per cent (ofprofits) are milked out of a drug in the first 18 months of itsgenericisation.

7. Costs, ever escalating costs, in achieving all these are the seventhbarrier. Upgrading technology, doing bio-equivalence testing at USFDA approved laboratories, ANDA filing, finding the rightdistribution and marketing network in the developed markets likethe US, require large up front investments. This is a major entrybarrier by itself.

Gateways

The new Indian ‘techies’ are determined to convert these barriers intogateways. They have understood clearly that the gateways to thedeveloped markets are:


World class technology Superior product development skills Quality that meets the international standards International regulatory approvalsThat is why all these companies have been vying with each other inupgrading their manufacturing facilities to meet international standardsand regulatory approvals. Consider for instance, the rapid progressmade by these companies during the last few years.

Ranbaxy

Case 9.1: Technology wins kudos, gets business and evenarranges an alliance!

Ranbaxy’s success with the complicated synthesis of cefaclor (one ofthe largest selling antibiotics in the world during its patency), has becomean industry legend. The company’s technological prowess was amplydemonstrated when they developed their own process for cefaclorand patented it in the US.

The story goes that Dr. J.M. Khanna, head of research and developmentat Ranbaxy, went to the US patent office with 18 different processesfor cefaclor, each time failing to prove novelty. This is because, EliLilly made life difficult for potential competitors by patenting variousintermediates as ‘timebombs’ that went off as each stage was reachedthrough synthesis. Undaunted, he continued to work on the problemand produced the solution the 19th time. All that diligence and hardwork is paying off. An industry observer said,“If Ranbaxy can spend Rs. 350–400 million a year on R&D today, itis the money from cefaclor that they are ploughing back. Eli Lilly, thediscoverers of the drug themselves buy about $ 15 million worth ofcefaclor a year from Ranbaxy”.

A by-product of this success is the tie-up with Eli Lilly for a multi-leveljoint venture that covers marketing, manufacturing and developmentof pharmaceutical substances and dosage forms in India and selectoverseas markets.


Dr. Reddy’s Labs

DRL has been steadily investing in technology to create a world-classmanufacturing infrastructure. The group’s bulk drug facilities haveinternational regulatory approvals. They have been exporting theirbulk actives and intermediates to the highly regulated markets like theUS, Europe and Japan. All their plants implement cGMP and conformto international standards. Cheminor, a group company, has built aformulation plant mainly to cater to the North American and Europeangeneric markets and is awaiting the approval of US FDA.

CiplaCase 9.2: A Small step leads to a giant leap in theanti-asthmatic market!

Technology has been a core competence of Cipla. The company hasachieved a very high degree of cost effectiveness in its processtechnologies for a number of bulk drugs. One of the initial successes ofCipla was with the synthesis of salbutamol, an anti-asthmatic drugdiscovered by the international leader, Glaxo. Cipla has marketed itssalbutamol at prices much lower than the prevailing international prices.The company has never looked back since then.

That small step has indeed become a giant leap towards a dominantleadership position in the anti-asthmatic segment in India. Cipla, ofcourse, had developed sophisticated aerosol technology and hadintroduced a number of therapeutic options for treating asthma andhas further strengthened its position.

Case 9.3: Value addition through technology

Cipla has also achieved great success with its technological power inthe anti-cancer segment in India. One of its major triumphs was thecommercialisation of the extraction of vinblastin from vinca rosealeaves, which was later converted to vincristine – a popular anti-cancerdrug through out the world. Earlier, India used to export the driedleaves of vinca rosea and Eli Lilly used to make vincristine out of them.

Cipla has scaled up the known-but-difficult process of extracting thealkaloid vinblastin from vinca rosea, converting it to vincristine andmarketing it at a price slightly less than one third of the internationalprice. That is value addition through technology.


Lupin

Lupin’s successful affair with technology started with the manufactureof vitamin B6. The problem with the manufacture of vitamin B6 isthat it has a complex 12-stage process, where some of the intermediatesare unstable. Lupin acquired the technology from National ChemicalLaboratories (NCL), took up the challenge of scale-up and has masteredthe technology.

Lupin has also achieved significant success in three other areas. Thecompany is the world leader in the production of the anti-TB drugethambutol, accounting for 60 per cent of world production. Theirethambutol process is so efficient that even the discoverer of the drug,Lederle, is buying the bulk from Lupin.

Rifampicin is another success story of Lupin. They have a dominantleadership in the domestic market and also export the bulk to severalcountries. Cephalosporins is another area where Lupin has achievedconsiderable success. It is the technology strength of Lupin inmanufacturing injectable cephalosporins that is instrumental in findinga strong partner like Merck Generics of Germany for marketing thesein developed markets like the US, Europe and Japan once they comeoff-patents.

Lupin has recently achieved yet another technological breakthroughin stabilising its Rs. 800 million plant devoted to fermentation products,which will put them ahead of the others in fermentation technology.

Wockhardt

Wockhardt has constantly expanded its manufacturing technology. Overthe years it has invested over Rs. 1 billion in 8 manufacturing plantsthat harness six different technologies. The company’s aim of matchingthe world players both in terms of presence and technology is beingachieved through its massive modernisation and structural changes.Its manufacturing facilities have international regulatory approvals fromUS FDA and the MCA of UK.

Wockhardt, in addition is seeking tie-ups with the technology leadersof the world for development and manufacture of biotechnology basedtherapeutic proteins and vaccines. The technology thrust areas ofWockhardt are:


Bulk drugs Intermediates Formulations Biotechnology products IV fluids and Pesticides

Nicholas Piramal

Nicholas Piramal has created, in less than ten years, an impressivemanufacturing infrastructure, almost entirely through acquisitions. In1992, it had invested Rs. 200 million to build a world classmanufacturing plant for formulations at Pithampur in Madhya Pradesh.The company realised that creating green field projects is expensiveand time consuming and has taken the acquisition route. The companyhad acquired a bulk drug plant for manufacturing vitamin A at Thanenear Mumbai, when it took over Roche. It is being spruced up to meetthe international standards and approvals.

The group has acquired in 1996 the Hyderabad-based bulk drug company– Sumitra Pharmaceuticals and Chemicals, which has one of the largestmulti-product bulk drug manufacturing facilities in the country. Thecompany is planning to upgrade these facilities so that it can use its largemanufacturing infrastructure to meet domestic requirements and also useit as a sourcing base for some of the overseas markets.

Torrent

Torrent has embarked on a modernisation plan, which incorporatesthe latest available technology and reorganisation of the existing facilitiesbetween manufacturing locations. The company has also modified theexisting layout of its Vatva plant, to enhance production capacity andstorage facilities. Torrent manufactures a number of bulk drugs anddrug intermediates as well as formulations across a wide range oftherapeutic segments. The technology thrust areas for Torrent are:

Bulk drugs Drug intermediates


Formulations including novel drug delivery dosage forms Biotechnology

Sun Pharma

Sun Pharma has reached the critical mass in manufacturinginfrastructure in a short time through acquisitions, mergers andinvestments. It has in all six manufacturing facilities spread over thestates of Gujarat, Maharastra and Tamil Nadu for manufacturing bulkactives and pharmaceutical dosage forms. All these facilities conformto the international regulatory standards. The company is activelypreparing to file the drug master files and to get US FDA and UKMCA approvals for its bulk drug facilities. Sun Pharma, in addition has anoff-shore manufacturing base in the US (through its equity-based alliancewith Caraco Pharmaceuticals in Michigan), that is approved by FDA.

Zydus

Zydus–Cadila Health Care group is putting up Rs. 1 billion manufac-turing facility at Moriaya in Ahmedabad. This is one of the largestinvestments in a single location in Indian Pharma industry. The facil-ity will have separate blocks for biological production, antibiotic for-mulations and formulations for different therapeutic segments. It willconfirm to US FDA and European regulatory authorities.

Zydus is also investing Rs. 500 million in a joint venture project withKGCC for manufacturing hepatitis-B vaccine. The company is alsoinvesting Rs. 250 million up a joint venture with BYK Gulden ofGermany to manufacture and market pantaprazole.

Further more, Zydus has developed a number of cost-effective alterna-tive processes for some important bulk drugs. Zydus believes that tech-nological upgradation to international standards is a must to competeeffectively in the post-GATT era.

Ipca

Ipca has put up its first bulk drug unit in 1985. The company has investedin technology and upgradation of manufacturing facilities over the lasttwo decades. As a result, it had three formulation manufacturing


facilities and six bulk drug plants in 1996, which certainly should indicatethe technology focus of Ipca. What is even more credit worthy is thatthe company has US FDA approvals for nine of its bulk drugsmanufactured at its plant at Ratlam in Madhya Pradesh. Its Athal plantis in the process of getting US and European approvals.

The company manufactures 25 products covering segments from anti-malarials, anti-bacterial, anti-TB to cardiovascular.

Kopran

Kopran has systematically expanded and upgraded its technological andmanufacturing base since 1986. For example:

In 1986, Kopran started making one ton of amoxycillin per month.By 1995, Kopran had become the fifth largest producer in the worldand the first in Asia. Its plant at Khopoli near Mumbai boasts of800 ton-per-annum (TPA) capacity of amoxycillin. Furthermore,this plant has the approval of US FDA and the MCA of UK.

Orchid

Orchid has started as a 100 per cent export oriented unit formanufacturing bulk actives, with emphasis on cephalosporins. Buildingplants and upgrading technology to world class standards, therefore,has been a pre-requisite and it has had its facilities approved by USFDA and UK MCA. The company practices the latest cGMP standardsin its manufacturing facilities. It has its own power plant for captivegeneration and an effluent treatment plant that meets theinternational standards in terms of creating an eco-friendlymanufacturing environment.

Up or Out!

Technology upgradation is no longer a matter of choice, it is a must. Itis not only vital for progress or rapid growth, but is essential even forsurvival. The domestic market place in the coming product patentregime will be a level playing field. The level of competition andintensity will be different. Companies, that are upgrading technologicallyare the ones that are growing faster than the rest. The combined


market share of top ten multinational companies and the top ten Indiancompanies in Indian pharma market in 1998 is almost identical.

Eight of the twelve companies discussed here are among the top ten inthe domestic sector. The other four would also be among the top twelveif you consider total turnover and not just formulations’ sales. What iscommon to all these leading Indian pharma companies? All of themhave been investing consistently in technology upgradation. Theyaccount for almost eighty per cent of the total approvals in India byinternational regulatory authorities like US FDA and UK MCA.

The more aggressive players in the Indian pharmaceutical industry arevying with each other to build a technological infrastructure that isinternationally comparable and training their people to beinternationally competitive. Apart from competing effectively in thepost product patent regime, these companies are keen to exploit thevarious opportunities that the global pharmaceutical industry has tooffer.

Another major opportunity area is that the European companies arelooking for sourcing arrangements with Indian companies for patent-expired generic formulations. There are two reasons for this. EuropeanUnion laws prohibit local pharmaceutical companies from undertakingany sort of developmental activities before the expiry of patent. Theyhave to approach either the American companies for developmentprior to the expiry of patents, which can be very expensive, or exploitthe scientific talent in developing countries like India and China. Indiacan be the most favored destination because of the proven track recordin process development and availability of a vast, cost-effective pool ofEnglish speaking scientific talent. Upgradation of technology, therefore,will be a sustainable competitive advantage for Indian drug companies.

Furthermore, when trade barriers disintegrate and when the protectivearmor of process patents give way to strong IPR protection, the onlyoption is to be internationally competitive. When the competition isworld class the only option is to be world class your self. Implicit in alevel playing field is the ‘level’ of competence and competitiveness.For those who are well prepared, it is a level playing field. For others,it could as well be a minefield. In a market place that is driven bytechnology, it is indeed Up or Out!

Focusing on research 145

Executive Summary

Phamaceutical research is expensive, time consuming andrisky. A 1994 study conducted by economists at DukeUniversity found that only 3 out of every 10 NCEs introducedfrom 1980 to 1984 had returns higher than their averageafter-tax R&D costs. The analysis revealed that only 20per cent of products with the highest revenues generated70 per cent of the returns during the period. What is themoral of the story? Evaluate research programs thoroughly.Focus on focused research.

Given the high cost and risk of drug discovery, what withestimates ranging between $ 350–500 million for developinga single drug from concept to commercialisation, canIndian companies ever think of discovering new drugs? At$ 450 million, the total turnover of India’s largestpharmaceutical company for the fiscal 1997 just equalsthe amount required for developing just one new drug.

Dr. K. Anji Reddy has demonstrated that Indian drug firmscan do it, despite these odds. DRL became the firstIndian drug firm to licence its molecules (developed byits research foundation) to international drug majors

10 FOCUSING ON RESEARCH


against milestone payments, sharing of furtherdevelopmental and registration costs and royalty paymentsonce the drugs are approved. He has indeed shown the wayto drug firms in developing countries.

Close on the heels is Ranbaxy, India’s leadingpharmaceutical company, in announcing its NCEs. Ranbaxytoo is looking for partners for carrying on the furtherdevelopmental activities required and for registrationacross the world. Torrent has become the third company tofile for patents in India and the US for its NCE – TR 266,a coronary vasodilator. Very recently, Wockhardt too hasannounced its success in identifying two anti-infectivelead compounds. The company is also scouting for partnersfor further development and for marketing these, oncethey are approved. Lupin also has announced its drugdiscovery program. There are at least five other companiesthat have stepped up their R&D expenditure to about 5 percent as compared to the present industry average of 1.8per cent of sales.

The leading Indian companies are clearly shifting theiremphasis from imitative research to innovative research.There is a clear change of focus on focused research.


The relationship between patent protection and the pharmaceuticalindustry is closest and most direct in research and development.

The policy decisions here centre on the investment, the selection ofpriorities when setting up the programs and the balance betweenmanagement of innovation and the management of risk. All of theseare necessarily evaluated with an eye on patent protection. This isbecause unpatentable success in pharmaceutical R&D is rapidly devaluedby imitation, eventually forcing the innovators to become lessinnovative in order to reduce industrial risk.

In a world where progress in drug therapy is needed and desired, theindustry considers patent protection to be indispensable for innovativeendeavour. Patents do not guarantee innovative success, but their absenceor inadequacy will undermine the motivation to take the financial risksthat are implicit in drug development.

Difficult Odds

Pharmaceutical research is expensive, time consuming and risky. Theprocess of discovering and developing a new drug is long and complexand faces difficult odds. It takes upwards of 5,000 chemically synthesisedmolecules to produce just one approved drug. According to datacompiled by the Tufts Centre for the study of drug development, of allthe drugs that entered clinical trials between 1980 and 1984, only 18.3per cent have entered the market and a mere 23.5 per cent are everexpected to become marketed drugs.

10 FOCUSING ON RESEARCH


The Cost of a New Chemical Entity

A 1994 study conducted by economists at Duke University found thatonly 3 out of every 10 drug products (New Chemical Entities) introducedfrom 1980 to 1984 had returns higher than their average after-taxR&D costs. The analysis revealed that 20 per cent of products with thehighest revenues generated 70 per cent of returns during the period.In other words, given the high cost and risk of drug research, companiesmust rely on a limited number of highly successful products to financeR&D.

Economists have estimated the cost of bringing a new drug to marketat $ 359 million. This estimate, however, captures the final costs fordrugs that entered clinical trials during the late 1970s. A preciseprojection of what it may cost to develop a drug, beginning the researchprocess now is difficult. Since the late 1970s, however, major drivers ofdevelopment costs, including the number of required clinical trials andpatients in each trial, have more than doubled.

During the 1990s the average length of time required to develop adrug has increased to 15 years. Lengthening developmental timesdramatically increase the cost of bringing a new drug to market byincreasing the capital needed for R&D. The cost of capital increases ascompanies are exposed to economic risks and uncertainties over a longerperiod of time.

These are the underlying reasons why pharmaceutical progress isdependent on intellectual property protection. Without strong patentprotection, drug companies would not be able to attract the investmentneeded to conduct this high cost R&D.

Academia, Industry and Drug Research

Academic research establishments can, and often do, make importantdiscoveries in basic research. Industrial development, however, takesup two-thirds of the cost and risk of pharmaceutical R&D. The cost ofdrug discovery becomes prohibitively high, when you factor in the costof failure. Approximately nine out of ten drugs discovered enter thePhase I of clinical development. Nowhere in the world, has the publicsector been able to finance the cost of drug development as a result.


As a minimum, the industry insists that research and developmentrisk must, in the event of successful drug development, have a chanceof being well rewarded by ensuring marketing exclusivity of patenteddrugs from the date of launch until patent expiry. The protection ofintellectual property is regarded as a necessary pre-condition forindustrial and economic survival.

The Prerequisites of R&D

The experience of recent decades demonstrates that, as a general rule,three prior conditions must be fulfilled for pharmaceutical R&D toflourish. They are:

1. Infrastructure in relevant science and technology.

2. Adequate industrial cash flow and profitability.

3. Water tight patent protection of the results.

Infrastructure is evidently vital, especially for pioneering advancesin pharmaceutical science and biotechnology. Academic input andmechanisms to ease the flow of knowledge between ‘pure’ researchand applied technology must either exist or be brought into existence.

Cash flow and profits have to be adequate in order to stimulatesustained risk and investment. That is particularly true of innovativeR&D in pharmaceuticals and biotechnology, because the risk of failureis abnormally high when compared with many other research-basedindustries, especially during the development phase. This phase usuallyabsorbs two-thirds of pharmaceutical R&D time and budgets.

Water-tight patent protection, the third prerequisite, is nowuniversally accepted for pharmaceuticals in the industrialised world,for underwriting the risk of project failure and to cover the high costsof long periods of development and other costs of R&D.

Role of Government

It is now widely recognised that the real function of government is notto carry out, or even pay for, R&D in drugs and pharmaceuticalbiotechnology, but to help by way of fiscal and other incentives.Government’s basic responsibility is to ensure that the prerequisite


conditions for innovative research, development and investment byindustry are in place and the obstacles to the flow of knowledge andexpertise between academic service and applied technology areremoved. Only then will the ultimate purpose of such work – advancesin health care and benefit to the national economy and to society – beachieved.

In the industrialised world, the role of the state in pharmaceutical andbiotechnological R&D has in recent times been limited but is notunimportant. Public sector grants for academic research have helpedto create many centres of excellence. The main function of the statehas, however, been to manage economic stability and to define policiesthat are designed to encourage risk investment in pharmaceutical andbiotech research and development.

Results in these fields have generally been closely related togovernment’s willingness (or reluctance) and success (or failure) increating such a climate of encouragement, both for pharmaceuticalchemistry and biotechnology.

Project 1035

The government in China has played a very supportive role in therecent years to bolster the research and development activity in thecountry. It has earmarked $ 1.2 billion for 1996–2000 for ‘Project 1035’,which is aimed at producing 10 new chemical entities, 3 therapeuticmechanisms and 5 centres for synthesis, screening and testing – all infour years.

Government Support to R&D – The Indian Scenario

While the recent creation of the Technology Development Board is notcomparable to the Chinese government initiative, it is certainly a welcomesign. The Indian government finally, after a twenty-five year wait, hascreated a Technology Development Board (TDB) in 1995 and theTechnology Development Fund (TDF) in September 1996. But, in thetwo years since its creation, there has been visible progress in fundingcommercially viable technology development products. It has funded


Table 10.1

R&D initiative by government

Firm/ Technology Total cost TDBInstitute Rs. mil. component

Rs. mil. 1. Shantha Recombinant hepatitis-B Biotechnics vaccine 150 30

2. Shantha Paediatric version Biotechnics of the vaccine 66.5 55

3. Bharat Recombinant hep-B Biotech Intl. vaccine (collaboration

with IISC, Bangalore) 122.1 32.5

4. Alpha Amins Production ofamino Butanol, anti-TBdrug intermediate 32.2 15

5. Ranbaxy Cardiovasculars:pravastatin 38.6 19.3

6. Ranbaxy Anti-bacterials:cefpodoxime 31 15.5

7. J.K. Druga Manufacture of antibiotic: & Pharma cefixime 32 15

8. Cadila Recombinant hep-B

vaccine 90 45

9. AVRA Labs Anti-inflammatorydrug CMI-392abortive pill RU-486 50 20

10. Manukrit Reagent for detection of Biogems bacterial Endotoxin 11.5 55.7

26 projects, valued at Rs. 1.78 billion with a TDB component ofRs. 660 million. These are in varying stages of execution. Ten out ofthese 26 projects (Table 10.1) are in the pharmaceutical industry. Thesource of funds for the TDF is basically the 5 per cent cess levied on all


payments made for technology imports – in the form of technologypayments, royalties and dividends – as required under the R&D CessACT of 1986.

The Process of New Drug Development

What does it take to develop a new drug from concept to commerciali-sation? Typically, the new drug development process involves five majorstages (Table 10.2).

After extensive toxicological tests and animal studies, the manufacturermust decide whether the compound should be tested on humans. Ifthe company decides to go ahead, it must file an Investigational NewDrug (IND) application with FDA. This application may run as long as2000 pages and must include information about the pre-clinical testingand a description of the proposed clinical trials. Unless the FDA ordersa hold, clinical trials may begin 30 days after the application is filed. Inaddition, the application must be approved by a review board of theinstitution or institutions, where the trials are to be conducted.

Clinical trials are conducted in three phases. In phase I, safety studiesare conducted on 20 to 100 healthy volunteers. Potential side effectsare identified and dosage range is determined.

Phase II clinical trials are conducted to determine the effectiveness ofthe drug. Approximately 100 to 300 volunteers, who have the targeteddisease, participate.

Phase III typically involves 1000 to 3000 patients (and sometimesthousands more) in clinics and hospitals. They are closely monitoredto assess the drug’s efficacy and safety. The company compiles all thedata from these trials and, if the data successfully demonstrates safetyand efficacy, submits a New Drug Application (NDA) to FDA. TheNDA must contain all the scientific information the company hasgathered. NDAs typically, run into 100,000 pages or more. By law, FDAhas six months time to review an NDA. The average review time for allNDAs approved in 1996 was 17.8 months.


Table 10.2

New Drug Development Process

Stage Process Activity Timetaken

Stage I Screening: Plants and animalsscreened for biological 2 yearsactivities

Stage II Identification: Compounds are isolated from plants concerned 2 years

Stage III Toxicity studies: The drug (isolatedcompound) is tested on 1 yearanimals for toxicity

Stage IV Clinical trials: The drug is tested onhumans for efficacy and 7 yearstolerance

Stage V NDA filing: The drug is released inthe market after FDA 1 yearapproval

Launch of Post-marketing Feed back on the efficacy and After FDAthe drug surveillance side effects of the drug in approval

actual clinical practice afterlaunch

Development Time

Drug development time has grown from 8.1 years in the 1960s (11.6years in the 1970s, 14.2 years in the 1980s) to 15.3 years for drugsapproved from 1990 through 1995. A large part of this increase is dueto the lengthening of the clinical phase of drug development.


According to the Centre for the Study of Drug Development at TuftsUniversity, clinical development time for drugs approved between 1990and 1995 was 6.9 years, up from 5.5 years.

The State of R&D in India

Philip A. Roussel, Kamal N. Saad and Tamara J. Errickson of Arthur DLittle Inc., one of the leading management consultancy firms in theworld, have developed a frame-work for analysing the state of R&D intheir path breaking book “Third Generation R&D.” According to themthere are three types of research:

1. The Incremental Research aims at small advances in technologyon the foundation of existing body of knowledge. This is similar toapplied research. Most of the Indian companies like Ranbaxy,Dr. Reddy’s Labs, Lupin, Cipla, Wockhardt, Sun and Cadila havebeen engaging in this kind of research. The focus on incrementalresearch is due to the absence of product patents. A number ofIndian companies have demonstrated considerable skills in processresearch. These companies were able to compress the average timetaken to launch new drugs from five years in the seventies to oneyear in the nineties. The advantage gained through incrementalresearch, however, is not as long lasting as that from radical research.

2. The Radical Research aims at creating new knowledge on thebasis of the existing body of knowledge. Some companies likeDr. Reddy’s Laboratories, Alembic, Ranbaxy and Wockhardt haverecently become active in radical research.

Radical research is now being carried on in a limited way bygovernment sponsored research institutes like Indian Institute ofChemical Technology (IICT) and Central Drug Research Institute(CDRI). IICT concentrates on developing cost-effective technologiesfor life saving drugs and has recently shifted the emphasis fromprocess development to product development in tune with thechanging global scenario.

3. Fundamental Research is risky, time consuming and expensiveas it falls in the domain of the discovery of new products.Prof. H. Grabowski of Duke University has analysed R&D data of93 new drugs from 12 US companies in 1987. His study established


the cost of developing a new drug at $ 231 million. This has risento $ 300 million in 1993. His other findings are equally astonishing.It took an average of 12 years to develop a new drug and only 30per cent of the new drugs actually generate sufficient returns tocover the R&D costs. The break even time for a new drug was 16to 17 years on the average.

It is estimated that 20 substances out of 10,000 examined enter thestage of animal studies. Of these, 10 may reach clinical studies andfinally one of these may gain FDA approval. These facts amplydemonstrate the cost and difficulty involved in discovering newdrugs. It is difficult to do fundamental research without possessinga critical mass. And the list of the top ten R&D spenders bears thisout (Table 10.3).

Table 10.3

Biggest R&D spenders in 1994

Company R&D Sales R&D as aspending $ million per cent$ million of sales

1. Glaxo 1287.0 8484.0 15.2

2. Roche 1226.3 5285.6 23.2

3. Merck&Co 1120.0 8877.5 12.8

4. Bristol Myers Squibb 972.1 6524.0 14.9

5. Hoechst 955.8 6811.8 14.0

6. Sandoz 900.8 4972.9 18.1

7. Pfizer 888.1 6210.3 14.3

8. Bayer 840.1 5788.4 14.5

9. SmithKline Beecham 743.5 5231.3 14.2

10. Ciba 714.7 4466.0 16.0


R&D in Indian Current Scenario

For decades, the phrase ‘research and development’ in the Indianpharmaceutical industry parlance, meant little more than the copyingof patented drugs. Since India grants no product patents, Indian drugcompanies could legally manufacture a drug patented abroad using adifferent process and market it in India and third world countries withweak or no IPR protection. But not for very much longer. Now thatthe country has signed the GATT agreement, that easy route to profitsfor Indian companies will be blocked by the year 2005.

That is why some of the more progressive Indian companies have beeninvesting in building new laboratories, buying sophisticated equipmentand recruiting talented scientists both at home and abroad. IndianR&D finally seem to be getting the focus it needs.

These companies seem to recognise the fact that indigenous R&D isthe need of the hour, to become competitive internationally. Industryestimates put the start up cost of a basic research company at Rs. 10billion, as compared to Rs. 75 billion in the West.

Strategic Options for Indian Companies

New drug discovery is very expensive. It could cost around Rs. 15.7billion and take about 8–10 years from concept to commercialisation.The cost of capital to develop one new drug is more than the annualturnover of India’s largest drug company. What are the optionsavailable for Indian drug companies? Can they ever become innovative?Dr. Reddy’s Labs, Ranbaxy, Wockhardt, Torrent, and Lupin have shownthat it is possible to make the transition from imitative to innovativeculture. It is tough, but as these companies have shown, it can be done.Indian companies are focusing mainly on two areas:

1. Analogue Research: Analogues are modifications of originalmolecules and thus exhibit similar activity. Analogue moleculesbasically are superior versions of existing drugs. An analogue typicallyneutralizes side effects and/or improves the therapeutic efficacy ofan already patented drug. Under pressure from cost containmentstrategies, a number of research-based pharmaceutical companiestoo, are focusing on analogue research. Indian drug majors are


working mainly on analogue research. An analogue may take abouttwo years and Rs. 150–300 million to develop. Consider these initialsuccesses that some of the leading Indian companies have achievedwithin a short period of launching their drug discovery programs:

Dr. Reddy’s Laboratories has developed NCEs in therapeutic areaslike diabetes and cancer. It has already filed for international patentsand became the first-ever Indian drug company to licence its newchemical entity to a multinational against upfront payments linkedto pre-defined milestones and royalties once the drug iscommercialised.

Ranbaxy too has filed for international patents for its NCE fortreating BPH and is looking for a strategic alliance for taking thisthrough further development to commercialisation.

Wockhardt has also developed two anti-infective compounds andis ready to file for international patents. It is also looking for astrategic alliance partner to share the further developmental effort,registration and marketing internationally.

Torrent too has developed a new compound in the coronaryvasodilator category and is filing for international patents.

Nicholas Piramal also has identified an anti-cancer molecule at itsrecently acquired R&D centre from Hoechst. The company isplanning to file global patent application for the same.

Lupin has developed an anti-migraine product and is conductingclinical trials. It is filing for a provisional patent for this new herbalformulation. The company plans to take this product for clinicaltrials to Europe and US.

2. Novel Drug Delivery Systems (NDDS): Novel drug delivery systemsare superior ways of administering the drug and this requiresformulation development and process development skills. It maytake about three years and an investment of Rs. 1–2 billion fordeveloping a NDDS. A NDDS could be a helper compound(polymer used to direct the drug to the target site), a polymer implant(a small polymer wafer, a capsule or a gel that allows slow andsustained release) or a microsphere (a fatty compound or liposome,that encloses the drug to slow the release and lower the toxicity).


A new NDDS concept is patentable. If it is an improvement, it couldgive a market-exclusivity for three years in the US. Ranbaxy,Wockhardt and Cipla are seriously pursuing the NDDS market inthe US.

DOE – Strategy to Optimise R&D effort

Design of experiments (DOE) ensures optimisation in conductingexperiments in terms of speed and dependability. It is an R&Dtechnique developed by Sir Ronald A. Fisher, a British statistician, forsystematic experimentation. It is a scientific way to analyse the causaleffects. R.S. Chalapati, Head of start-up quality improvementconsultants, who has helped Ranbaxy implement the DOE program,highlighted the salient features of this highly useful technique in aninterview with Ms. Manjari Raman of Financial Express.

At the heart of DOE lie templates for experimentation called‘orthogonal arrays’. An orthogonal array is akin to a sophisticatedswitching system into which many different design variables can beplugged in. With the help of an orthogonal array, even a relativelyinexperienced scientist can extract the average results and thus reachreliable conclusions despite the large number of changing variables.Moreover, with an orthogonal array, the scientist has to run just eightexperiments in the order prescribed in the array to reach virtually thesame conclusions as he would have if he had performed up to 1024experiments. The six steps of DOE are:

1. Problem identification: To define the problem more precisely, ateam of scientists or design engineers needs to undertake a Paretoanalysis, use a cause and effect diagram and brainstorm the possibleparameters which lead to the problem.

2. Selection of experimental design: The team chooses the rightorthogonal array depending on the number of factors (elements ofa process, which have an effect on the outcome) and levels (thevalues the factors will take) involved in the experiment. The teamafter identifying the parameters, needs to isolate two levels for eachparameter – a high and a low – to run the experiments.

3. Conducting the experiments: The team has to do just eight experiments.The DOE principle can be applied to cycle time, yield, waste and cost.


4. Analysis of variance: Analysis of variance (ANOVA) is a statisticaltool used to measure the impact of each individual factor on thevariation in the final response. This step allows the team to prioritisewhich of the identified factors have maximum impact. The impactof each factor is ranked and only the factors with significant impactare chosen. This step invariably results in cost reduction.

5. Determining the best levels: The team now selects the optimumcombination of factors and levels. It is critical that the team selectsthe right factors, levels and parameters.

6. Conducting confirmation run: To reassure themselves that theoptimum experiment is designed by DOE does deliver, the teamconducts confirmatory experiments. Comparing the actual rejectionor defect levels improves the veracity of the new experiment.

Ranbaxy is the first and only domestic pharmaceutical company touse DOE techniques to develop new bulk drug and formulationdevelopment processes. Within eighteen months of implementingDOE techniques, Ranbaxy has achieved significantly higher yields– about 17 per cent improvement in one product. In anotherproduct, it was able to bring the costs down by slicing the quantityof one ingradient by 38 per cent. The company has been able toachieve better control over processes and has shrunk the cycle timefor developing a bulk drug from the lab to the manufacturing stagefrom 3 years to 18 months on average.

Collaborate to compete

Since Indian companies cannot match the MNCs for financial clout, itprobably makes sense to work in tandem, either with one another orwith the national laboratories. Some large Indian companies likeRanbaxy are holding discussions with the government on drugdevelopment with equal cost sharing. The infrastructure for R&D inthe public sector is sizeable. There are as many as twenty-five state-ownednational institutes that undertake research and development activities.These can be broadly classified under CSIR (Council for Scientific andIndustrial Research) and ICMR (Indian Council of Medical Research)as presented in Table 10.4. What needs to be done is to upgrade these


Table. 10.4

Government research institutes

CSIR Laboratories

1. Centre for Biochemical Technology (CBT), New Delhi

2. Central Drug Research Institute (CDRI), Lucknow 3. Central Food Technological Research Institute (CFTRI), Lucknow 4. Central Institute of Medicinal and Aromatic Plants (CIMAP), Lucknow 5. Central Electro-chemical Research Institute (CERI), Karaikudi 6. Centre for Cellular and Molecular Biology (CCMB), Hyderabad 7. Indian Institute of Chemical Biology (IICB), Hyderabad 8. Indian Institute of Chemical Technology (IICT), Hyderabad 9. Institute of Microbial Technology (IMT), Chandigarh10. Indian National Scientific Documentation Centre (INSDC), New Delhi11. Industrial Toxicology Research Centre (ITRC), Lucknow12. National Institute of Science of Technology (NIST), New Delhi13. National Botanical Research Institute (NBRI), Pune

ICMR Institutes

1. National Institute of Nutrition (NIN), Hyderabad

2. National Institute of Virology (NIV), Pune 3. Institute for Research in Reproduction (IRR), Mumbai 4. Tuberculosis Research Centre (TRC), Chennai 5. Central JALMA Institute for Leprosy (CJIL), Agra 6. Malaria Research Centre (MRC), Delhi 7. Institute for Research in Medical Institute (IRMI), Chennai 8. Institute of Cytology and Preventive Oncology (ICPO), New Delhi 9. Enterovirus Research Centre (ERC), Mumbai10. ICMR Genetic Research Centre, Mumbai

11. National AIDS Research Centre (NARC), Pune

Others

1. National Institute of Pharmaceutical Education and Research NIPER), Chandigarh2. B.V. Patel PERD Centre, Ahmedabad


to world class standards and inject the spirit of enterprise andcollaborative culture.

Interestingly, state owned laboratories have also begun serious work onnew drug development. Consider these moves:

Indian Institute of Chemical Technology (IICT), Hyderabad, whichhas turned the copying of drugs into a fine art, is taking to drugresearch with a missionary zeal.

In Lucknow, the Central Drug Research Institute (CDRI), the onlyinstitution in the country to have produced new drugs so far, isupdating its facilities.

The Council of Scientific and Industrial Research (CSIR) is tryingto pool and restructure its resources and expertise to start work ondrug development. Considering its infrastructure and experience,the CSIR could play a significant role in the joint drug researchprograms being considered by the government and a section of theindustry.

Key Issues

One of the key issues is that most of the new investments being madenow will not yield immediate results as they are making up for the lackof R&D investments in the past years to acquire facilities that are takenfor granted abroad.

Scientific expertise is another. Since they have become used toduplicating drugs, few companies have the required knowledge baseand talent to create new ones. Some companies are trying to bridgethe gap by bringing scientists from abroad, mainly from the US, buthave had only modest success so far. Ranbaxy and Dr. Reddy’s Labshad been advertising in the past in US publications but they had foundthat, despite the scarcity of jobs in the US, only one in every ten Indianscientists settled there is willing to come back.

Contract Research Opportunities

Pharmaceutical research is a different ball game. It is very much differentfrom other industries. Wherever basic research is highly dependent


on technology, India will not be able to be competitive enough forworld business to be interested. But in pharmaceutical research,particularly at the initial end of the funnel of discovery like identifyinga molecule and conducting tests, the value addition can be very high.The scientific skills of India definitely suit the business needs ofpharmaceutical R&D.

Within the US there is pressure to keep costs down. In the past, researchfunding generally kept rising by 10 per cent each year and the salariesof research scientists also kept rising annually. There is cap on researchspending now.

There are only two options in such situations. Either they would haveto reduce the number of projects or get more work done with thesame amount of money. One of the ways to do this is by what is called– “out-sourcing research.” This is happening very quickly within theUS. Contracting out to academic institutions, universities and non-profit organisations etc., has begun. This out-sourcing could extend tocountries like China and India.

The basic research costs of drug discovery are high the world over andstaffing cost, in particular, is very high. It is 40 per cent in Japan and ashigh as 60–70 per cent in the US. Because of the high quality of R&Dand qualified scientists, India can carry out the initial part (of theresearch funnel) at a tenth of international cost. By contracting outthe basic research, they can save the costs of development and deploythese for clinical research and other areas where costs are going upsignificantly.

This business–research model is already becoming popular in thedeveloped countries and will definitely usher in an era of contractresearch in India too. Here is what Randall L. Tobias, chairman andCEO of Eli Lilly, the global pharmaceutical major said about out-sourcing research some time ago:

“The dispersed research helps to achieve global level researchcapabilities by leveraging local research strengths. Each country orregion is strong in certain areas of disease and drug research. Alsotechnology has made it possible to access and also to communicateindividual and group research capabilities through a net work spanningthe globe. Such a dispersed approach should bring better results costeffectively”.


Patents Hold the Key

Furthermore, Richard Sykes, chairman of the world’s leading drugfirm – Glaxo-Wellcome, in his recent visit to India said:

“If all goes well with the patent bill, we would consider investment inR&D seriously as patents is one of the fundamentals governing inwardinvestment. We would look for strengths in the science base and inthe clinical base in India and that’s where we would put ourinvestments.”

Winning Moves

A handful of Indian companies have realised the potential that researchand development can offer. They have taken the initiative of investingin R&D in a bigger way. They have stepped up the R&D investmentto 4–5 per cent of their sales as compared to the industry average of1.8 per cent. These companies are shifting their focus from processdevelopment to product development. Here are the winning movesof some of the more progressive Indian drug companies:

Ranbaxy

Ranbaxy is India’s highest spender on research with a budget ofRs. 350 million in 1995, which was 5 per cent of sales. The companyhas come long way since 1978–79 when the research (lab renovationbudget as it was called then) budget was only Rs. 75,000. Today Ranbaxyhas 270 scientists, which will rise to 450 in two years. By the year 2000,Ranbaxy intends to spend 7 per cent of projected revenues of Rs. 20billion on R&D. Their objective is to be the first private sector companyin India to bring a new drug to market. Here is the progress of Ranbaxy’sR&D investment over the years:

Year Rs. mil.

1990–91 52

1991–92 53

1992–93 57

1993–943 50


In 1994, Ranbaxy spent Rs. 180 million on a new research laboratorynear Delhi. In addition, it also spent 4 per cent of sales on R&D. Thecompany has no product patent to its name and had only 13 processpatents till 1994. Cefaclor (a product developed by the internationaldrug major, Eli Lilly of the US) process patent development tookRanbaxy three years and Rs. 20 million. Eli Lilly, the discoverer of thedrug itself, buys $ 15 million worth of Cefaclor from Ranbaxy everyyear. The company within the fifteen years since 1978, could cut shortthe time from synthesis to commercialisation of a bulk active substancefrom five years to less than two years. It has indeed converted the scienceof process development into a fine art.

In its vision statement for 2003, the company has spelt out that itwants to attain $ 1 billion in sales to develop new molecules. Ranbaxyset the ball rolling in the product development area in 1995. Thecompany has just entered an NCE (New Chemical Entity). They havealready got three biological leads each in the anti-bacterial, anti cancerand memory-enhancing areas.

Biotechnology, an emerging area, is also getting attention. It is just thefirst step but the potential is tempting. Biotechnology-based drugs areexpected to corner a 22 per cent share of the pharmaceutical market by2000.

Ranbaxy has been very actively creating the essential infrastructure fordrug discovery. The research group has identified three more promisinglead compounds, an anti-fungal, an anti-hypertensive and a newgeneration anti-bacterial. The company will file applications before theDrug Controller of India (DCI) and the Federal Drug Authority (FDA)of the United States by October, 1998, asking for permission to conductclinical trials for its first Investigative New Drug (IND). The company plansto launch the first molecule from its original research before 2005.

Ranbaxy has become the second pharmaceutical company from Indiato taste an early success, when it unveiled its first new molecule – RBX2258 for treating the Benign Prostate Hyperplasia (BPH). The new drughas already been tested out successfully on animals. The company isplanning to carry out the other developmental studies required forcommercialisation of the drug worldwide. It is close to finalising astrategic alliance for taking this through further development to market.



Research has been a major thrust area for Dr. Reddy’s group right fromits inception in 1984. Dr. K. Anji Reddy, the founder and chairman ofthe group views it as an investment. The group has set up Dr. Reddy’sResearch Foundation (DRF), an independent basic research centre andthe first of its kind in the private sector in 1993, at a capital cost of Rs.200 million. DRF has world class research facilities.

The foundation pursues basic research programs in all important areasrelevant to the drug industry. These are:

Process development

Analytical R&D

Biotechnology

Phytochemistry

Pharmacology

Biochemistry

Discovery and development of NCEs

DRF is currently concentrating on anti-cancer, anti-diabetic, anti-inflammatory, anti-infective and cardiovascular research. Around 75per cent of its efforts are directed towards drug discovery with about25 per cent of the input going towards process R&D for differentdrugs, depending on the needs of Indian patients.

During 1994–95, its second full year of operation, the foundationincurred a capital expenditure of approximately Rs. 95 million and arevenue expenditure of about Rs. 45 million. The group plans to spendover 10 per cent of its turnover on R&D. Within a short span of threeyears they have demonstrated the promise of success, unprecedentedby any Indian drug firm. Dr. Reddy’s is the first group from India toever enter into research-based strategic alliances with internationalcompanies. These two alliances are the first of their kind, where anIndian drug firm has licensed out the molecules developed by them tointernational pharmaceutical companies. The company’s research isdriven by five principal objectives:

1. Speed of development


2. Pilot stage commercialisation

3. End stage production

4. Sustained cost cutting

5. Commercial prospects

Cipla

Cipla’s product developmental capabilities can be gauged from the factthat the company has achieved the distinction of developing the firstever oral drug for the treatment of thalassaemia. The company hasbeen at the forefront of process development for a long time. It hasdeveloped over the years, innovative processes for over 50pharmaceutical bulk actives. Many more new molecules are at variousstages of development.

Yet another feather in the cap of Cipla’s innovative process is that it hasdeveloped a number of new drug delivery systems and productsemploying new technologies including the micro-emulsion form ofcyclosporin. Development work continues on new formulations indispersible and sustained-release forms as well as CFC-free aerosols.

Cipla has three R&D centres and all of them continue to have theapproval of the Ministry of Science and Technology, Government ofIndia. The company works closely with the CSIR laboratories and otherresearch and educational institutions.

Lupin Laboratories

Lupin believes that the success of its business lies in innovation andtechnology. Lupin is one of the few Indian companies to invest over3 per cent of its sales on research and development since 1990, ascompared to the industry’s average of 1.8 per cent. The company isplanning for expansion of its R&D activity with an investment of Rs.200 million. Lupin’s thrust areas in research are:

Synthetic chemistry

Fermentation

Biotechnology


Process development

Novel drug delivery systems

Natural products

Immunodiagnostics

The R&T (at Lupin R&D is called as Research and Training) interactsclosely with national laboratories and academic institutions. Thecollaboration with National Chemical Laboratories (NCL) is a case inpoint, which has resulted in setting up of manufacturing facilities forvitamin B6 for the first time in the country. Lupin is developing strategicalliances with leading research based pharmaceutical companies and isalso open for collaborative and contract research.

Wockhardt

Basic research is one of the major thrust areas of Wockhardt’s plans.The company plans to invest Rs. 3 billion over the next three years onresearch. It is setting up a modern R&D centre in Aurangabad. Thefocus areas for research are:

New bulk drugs

Biotechnology

Chiral chemistry

Wockhardt’s focus on biotechnology is in the area of therapeuticsdevelopment through genetic engineering. It is estimated that by 2010,nearly 25 per cent of pharmaceutical products produced in the worldwill be through this process. In anticipation of this, the company isimporting nearly 80 per cent of its process technology for basic research,with the aim of becoming a front runner in this field.

Wockhardt has also committed Rs. 50 million to the United NationsIndustrial Development Organisation (UNIDO), for R&D indeveloping hepatitis-B vaccines and other biotechnology products. Inreturn, the company will have the exclusive rights to manufacture andmarket in India, the products developed through this project.

The strategy for research at Wockhardt is to develop patentable drugdelivery systems for off-patent drugs in the western world. These will be


the drivers for the company’s growth for the next three to five years.The company at the same time is investing about 20 per cent of itsresearch spend on drug discovery program. The immediate focus,however is to concentrate on research that can be converted intoproducts and business in the short term. Wockhardt has created theinfrastructure and established a research team for drug discovery. Ittakes about 10–15 years to develop a new drug.

The count down for new drug development has not only begun atWockhardt, but has also met with an early success. The company hasdeveloped two anti-infective compounds already. It is also carrying outdetailed evaluation of these drugs. Wockhardt is seeking global tie-upsfor further clinical studies of these compounds, after evaluations arecompleted. The company’s drug discovery program, which has screenedover 600 molecules, is focused entirely on anti-infectives.

Wockhardt has filed international patents for 3 technologies involvingnovel drug delivery systems. The company has invested over Rs. 1 billionon research and development in the last 5 years and has committedover 10 per cent of its sales towards research.

Nicholas Piramal

Piramal group has recently acquired the prestigious R&D centre ofHoechst Marion Roussel (HMR), for Rs. 200 million. While this is asignificant deviation from the group’s game plan, it is the rightacquisition at the right time. Just as the investors and analysts weregetting increasingly critical about the group’s excessive alliance-dependence without any inherent strengths, this acquisition has comeabout to ease all their apprehensions.

HMR’s research centre is a quarter century-old and it is the largestsource of natural product research in the country. Eighty-four scientists,who have 140 odd patents to their credit, staff the centre. HMR, ofcourse owns the patents now. What is even more interesting is thatHMR proposed to source its research products from the research centrethat it recently sold to Nicholas Piramal. While the details of thearrangement have not yet been worked out, collaborative research byboth companies and patents sharing is also a possibility.


Piramal plans to undertake basic research at this centre. The researchcentre’s 18 target disease areas complement the group’s focus areas too.These include diabetes, cardiovascular ailments and diseases of the centralnervous system.

The group will get a tax-break on the centre’s annual operating costs ofRs. 50 million and the R&D expenses of the group have gone up to 3per cent of sales in 1998.

Swati Piramal, medical director, who heads the R&D unit, says thatthey will focus on certain segments of the pipeline. They also hope tocarry out contract research work in quid pro quo arrangements – forseveral multinationals which are eyeing compounds based on Indiannatural products.

Nicholas Piramal very recently has identified an anti-cancer moleculeat this centre. Cancer therapy is a focus area for the company. Themolecule falls in the class of kinase, which usually acts as a catalystgiving rise to a reaction that may arrest the excess of cell multiplicationin the body. The company is planning to file a global patent applicationfor its new molecule.

Nicholas Piramal is investing Rs. 160 million to augment its clinicalresearch activity. It is adding a new building adjacent to the PiramalMemorial Hospital in Parel, Mumbai for conducting clinical researchactivity. The company is planning for a joint venture with foreignpartners to start a clinical research centre of international standards.The centre will undertake research programs for pharmaceuticalcompanies, both domestic as well as international. This will fill animportant gap in infrastructure requirements for pharmaceuticalresearch activity in India.

Four Pillars of Research at Nicholas Piramal

NPIL is restructuring its research activities into four groups:

1. Formulation development

2. Bulk drug development: organic synthesis and process development

3. Drug discovery

4. Clinical research at the group’s hospital in Parel, Mumbai


Clinical research would be the fourth pillar of the company’s R&Dstrategy (after its entry into drug discovery program, herbal researchand chemical process development). The clinical research centre inMumbai will employ 40 bio-statisticians and pathologists. In addition, about100 pathologists will be in each of the five clinical laboratories acquired.

Torrent

Torrent Health Care is setting up, an advanced research anddevelopment facility with a capital outlay of Rs. 750 million. Thecompany spends at present 6 per cent of sales for R&D, with acommitment to increase it to 10 per cent in the near future. Morethan 100 scientists are engaged at their research centre in basic as wellas applied research.

The research activities are concentrated on both non-peptide NCEsand therapeutic proteins for cardiovasculars, metabolic disorders, anti-infectives and vaccines. The centre has found some promising moleculesand has already filed for patents in India and in the US for NCE – TR266 and its analogues. TRC 266 is a selective coronary vasodilator thatdoes not lose its efficacy with continued usage and is less likely to causelow blood pressure.

Torrent Research Centre is also extending its scope of activities tomolecular pharmacology, long term toxicology, geno-toxicity and cellularand molecular diseases. The centre is to undertake a wide range ofactivities like:

Developing and synthesising new therapeutic entities of knownpathophysiology and therapeutic modalities in selected therapeuticsegments.

Evaluating the therapeutic and toxic potential of NCEs, developingprocess to a stage of clinical application.

Incremental innovation for existing products and developinginnovative and therapeutically beneficial formulation to extendproduct and market life cycles.

Tracking developments in various research institutes and universitiesfor licensing or buying technologies.


Torrent is one of the foremost sponsors of research in universities.The company is planning to back up its research activities with strategicalliances with well-known international companies.

Torrent is working out ways to make its R&D a profitable propositionand has signed up with the likes of William Harvey Research Institutein the UK for conducting collaborative research. Samir Mehta, thevice-chairman of the company, is confident that at least one-third ofthe R&D revenues will come through collaborative research and thenet earnings will be positive.

Zydus (Cadila Health Care)

Cadila Health Care is intensifying its R&D efforts. Firstly, the companyis investing Rs. 350 million in upgrading and expanding its R&Dinfrastructure. Secondly, it is planning to enter into collaborativeresearch both in developing new processes for pharmaceutical substancesas well as for developing new molecules.

The Zydus group is planning to spend 4 per cent of their turnover onresearch and will gradually increase it to over 7.5 per cent in the nextfive years. The group has two full-fledged R&D centres in Mumbai andAhmedabad that are recognised by the government of India. Besidesthese, they have commissioned a new state-of-the-art R&D centre inMoriaya, adjacent to their new manufacturing facilities at Ahmedabad.The investment outlay for this new centre is around Rs. 500 million.Zydus has identified five broad areas of research. These are:

1. Cardiovasculars

2. Anti-infectives

3. Biologicals

4. Gastrointestinals

5. Immunologicals

Sun Pharma

What is particularly noteworthy about Sun’s research and develop-mental effort is the fact that the company started a state-of-the-art ofresearch centre with an initial investment of Rs. 60 million even when


the company’s total sales turnover was a mere Rs. 200 million.Furthermore, the company even when it was smaller, it had theforesight to invest 4 per cent of sales before the other Indian drugmajors did. Today, Sun Pharma Advanced Research Centre (SPARC)at Baroda is one of the best equipped R&D centres in India with over70 qualified scientists focusing on areas like:

A. Organic synthesis

B. Novel drug delivery systems

C. Dosage form development

D. Peptide synthesis

E. Biotechnology

In addition, Sun Pharma has created another R&D facility at Mumbaiwith a focus on dosage form development for highly regulated marketsin the West.

Sun Pharma also is putting in place a core NCE development group aspart of its strategy to prepare itself for the impending product patentregime. This elite group will comprise of 40–50 top-notch professionalsfamiliar with the drug discovery process. The group will startfunctioning in fiscal 1999. With this, the total strength of R&Dpersonnel at Sun Pharma will be around 160. The company continuesto spend 4 per cent of its sales on research and development.

Ipca

Ipca’s research and developmental areas are mainly process developmentand formulation development. The company is not yet prepared tolaunch a drug discovery program. It, however, has developed cost-effective alternative processes for a number of pharmaceutical bulkactives and drug intermediates.

Kopran

Kopran has created a research facility in Navi Mumbai with an investmentof Rs. 100 million. Apart from process development, the centre willfocus on tropical and water borne diseases. These areas are neglected by


global pharma majors. Surendra Somani, the chairman and managingdirector of Kopran is confident when he says, “if India can do it withtechnology upgradation, given opportunity and infrastructure, it cando the same in research of molecules.”

Kopran is working on developing alternative cost-effective processes fora number of drugs like sterile cephalosporins, clarithromycin inmacrolides and proton pump inhibitors like lansoprazole etc. It hasalready developed sidenafil citrate. These are some of the moreprominent molecules that Kopran is developing at its Malad facility.

Orchid

Orchid has set up a research centre at a cost of $ 4 million. The companyis currently working on four molecules – acyclovir, granicyclovir,clauvulanic acid, 7 ACA and macrolides. Orchid is planning to diversifyinto all the six basic process technologies. Its current areas of researchfocus are:

Organic synthesis

Anti-virals

Fermentation

What should the Government do?

Dr. Parvinder Singh, chairman of an Indian multinational in thepharmaceutical sector, strongly feels that government should take theright initiatives and help India prepare itself to be competitive in thecoming product patent regime. Here are some of his suggestions to thegovernment.

1. Government’s role involves having to step up its own investmentsin infrastructure and of course, in the pharmaceutical industry.

2. Step back from controlling and move into a facilitating mode.Government does not need to fix prices of medicines; it shouldintervene only when a need arises as in case of a monopoly situationand when prices are unduly high.

3. We must have EMRs now and patents later as the industry and the


country is not ready for patents. We need the window of 5–6 years.This could be very useful provided the government uses this periodto help the industry.

4. We must have a large corpus for R&D in the pharmaceutical sector.The pharmaceutical industry contributes some Rs. 35 billion intaxes to government every year. Out of this, Rs. 5 billion can be putaside for R&D. Government should set up a committee, whichcan identify ten separate drug research projects every year andprovide each Rs. 500 million annually. This can be on a soft loanbasis for ten years at 2–4 per cent interest. The disbursement couldbe linked to milestone payments and commitments of technology,with adequate monitoring mechanisms in place to ensure that theprojects are on fast track. With this we can have at least 2–3 projectsevery year with the possibility of creating a new drug.

A Possible Dream!

Dr. Anji Reddy, Chairman of Dr. Reddy’s Laboratories, is very confident,even inspiring when he talks of research and development. He believesthat Indian companies will do well in the post GATT era. He says,“there have been many occasions when small companies have doneoutstanding research. So why can’t we? Consider the classic example ofKyorin, a small Japanese company, which has discovered norfloxacin(anti-bacterial drug) in the mid eighties.

He adds rather prophetically:“It is true that no Indian company is capable of taking an idea all theway up to the market, which involves an expenditure of hundreds ofmillions of dollars. But as Dr. Reddy’s Labs have proved, it is withinthe realm of Indian industry to undertake pre-clinical research andlicense it out for upfront payments and royalties. Unless a handful ofIndian pharmaceutical companies come forward to undertake this,even in the next 100 years, we will not see a ‘Merck’ or a ‘Pfizer’ fromIndia.”

Integrating strategically 175

Executive Summary

There seems to be a well-defined hierarchy of goals inthe pharmaceutical industries of the developing world.All firms virtually start off either as manufacturersand marketers of formulations or bulk actives and drugintermediates. Then they integrate backward or forwarddepending upon the point from where they started, tobecome fully or vertically integrated pharmaceuticalcompanies.

Vertical integration gives a significant and sustainableadvantage to a pharmaceutical firm. It gives them controlon costs, timely availability and quality of inputs. Theunderlying assumption here, of course, is that theintegrated firm has a more cost-effective process. Superiortechnology, therefore, holds the key to successfulintegration.

Barring Teva, the Israeli drug major, there are not manyinternational generic companies that are fully integrated.Many of them outsource their raw materials and here liesthe big opportunity. Indian drug companies, which havedeveloped very good process development skills over the

11INTEGRATING STRATEGICALLY


years, can compete very effectively in internationalgeneric markets.

That is why some of the leading Indian drug firms likeCipla, DRL, Lupin, Wockhardt, Kopran, Ipca and Sun havebeen pursuing vertical integration very aggressively tosucceed in the highly competitive international genericmarkets. Ranbaxy, which has already become a verticallyintegrated international generic company, has reset itsgoal: To be among the top three international genericcompanies in the world by 2015.


11What is common between the leading drug firms like Ranbaxy,Cipla, DRL, Lupin, Wockhardt, Kopran, Ipca, Orchid and the othersin terms of their strategic content and intent?

Vertical integration. Virtually every one of these firms and those otherswith aspirations to becoming international generic companies andresearch-based international pharma companies have been vying witheach other to become vertically integrated. This is because verticalintegration helps lower costs, achieve economies of scale and raise thecapital cost barriers.

Economies of Scale

The unit cost of a product (or operation or function that goes into theproduction of a product) declines as the absolute volume per periodincreases. Lupin has achieved significant advantages due to economiesof scale to become a world leader in the anti-TB segment. Kopran hasachieved similar benefits to become the second largest producer ofamoxycillin in the world, mainly due to of its backward integration.Ranbaxy, by virtue of its vertical integration among other strategicmoves, has become India’s largest pharmaceutical company.

Economies of scale also help in creating entry barriers, particularlywhen there are economies in vertical integration, when the firmsoperate in successive stages of production and distribution. In thepharmaceutical industry, there are significant economies of scale for avertically integrated company. The raw material costs account foranywhere between one-third to one-half of the production costs. A

INTEGRATING STRATEGICALLY


vertically integrated firm can, therefore, achieve considerable controlon input costs. The new entrant consequently must be either integratedor face a cost disadvantage, as well as foreclosure of inputs or marketsif most established competitors are integrated. Consider the case ofthe cephalosporin market. A number of molecules are going to be outof patent in the next few years. Orchid, although enjoying a strongposition in terms of exports of oral cephalosporins, is forced to integrateforward to enhance value addition and also to achieve synergies.

Backward Integration

Backward integration means that a manufacturer of finished dosageforms starts producing key raw materials like bulk drugs andintermediates. This gives the integrated firm the necessary control overcosts, quality and timely availability of its inputs. It also helps the firmto lower its production costs and put pressure on competitors, whocannot afford such integration.

In the case of backward integration, the volume of captive consumptionof the firm contemplating backward integration must be large enoughto support an in-house production unit. Otherwise the firm faces thedilemma of whether to sell the extra output to its competitors in thedomestic market or to export to reap the economies of scale in producingthe inputs.

Forward Integration

Forward integration means that a bulk drug manufacturer startsmanufacturing the end use applications of his products – finished dosageforms or formulations, generic or branded. In the case of forwardintegration, the firm is competing with its purchasing firms. Forwardintegration, thus helps the company to enhance value addition andallows it to charge a premium for its products. The firm can achievehigher margins for its products and a higher rate of return on itsinvestment due to higher price realisations.

Forward integration can often allow the firm to differentiate its productmore successfully because it can control more elements of productionprocesses. The race for developing novel drug delivery systems for out


of patent drugs by some leading Indian drug firms amply illustratesthis.

Vertical Integration

Vertical integration stated simply, means that a firm is integrated bothforward and backward. Vertical integration in the drug industry hasimportant generic benefits and costs. They apply to both forward andbackward integration.

Backward integration helps the firm lower costs and forward integrationhelps raise price realisation. Vertically integrated firm, therefore, canreap double benefits.

Economies of scale are at the core of vertical integration. Internationalgeneric companies have a strategic need to achieve low-cost productionand higher price realisation. They have a two-pronged approach forenhancing value-addition. They place greater value and emphasis onachieving economies of all types.

A second potential benefit of vertical integration, proposed by MichaelPorter in his brilliant treatise “Competitive Strategy”, is that it providesa tap into technology. In some circumstances it can provide closefamiliarity with technology in upstream or downstream (or both)businesses; a form of economy of information so important as to deserveseparate treatment.

Formulation manufacturers integrate backward into making bulk drugsand bulk drug manufacturers integrate further backward intointermediates to gain better understanding of this essential technology.

Manufacturers of bulk drugs integrate forward into formulation toenhance value-addition by improving margins and by expanding businessas a whole.

Key Issues

Vertical integration can reduce uncertainty of supply and hedge thefirm against fluctuations in prices. At the same time, it is important toensure that internal transfer prices reflect market realities. Porter stronglysuggests that products should pass from unit to unit within the integrated


company at transfer prices reflecting market prices to insure that eachunit will manage its business properly. If transfer prices differ frommarket prices, one unit will be subsidising the other compared to whatit could be achieving on the open market. One unit will be better offand the other worse off as a result. The managements of the upstreamand downstream units may then make decisions which reduce efficiencyand harm the competitive positions of the units.

Integrate to Succeed

Vertical integration gives the firm competitive advantage over theunintegrated firm, in the form of higher prices, lower costs and evenlower risk. Thus the unintegrated firm must integrate or bear adisadvantage. The new entrant to the business is forced to enter as anintegrated firm or face the consequences. The more significant thebenefits of net integration, the greater the pressure on other firms alsoto integrate. If the capital investment required for vertical integration issignificant, the necessity to integrate will raise an entry barrier.

Quasi–integration

Quasi–integration, as the name suggests is establishment of arelationship between vertically related business that is somewherebetween long-term contracts and full ownership. Common forms ofquasi–integration are:

A. Minority equity investment

B. Loans or loan guarantees

C. Exclusive dealing agreements

D. Cooperative R&D

Ranbaxy’s 30 per cent equity stake in Vorin Labs, the bulk drug firm,is an example of quasi–integration.

The following Indian drug companies are among the most integratedbranded generic companies. Between them, they manufacture as manyas 134 bulk drugs and a number of intermediates in addition.


Ranbaxy

Ranbaxy, when it was still a small company, had decided on backwardintegration. The company started manufacturing its own raw materialsin 1973. This has not only provided backward integration for its productsin India but also helped it in exploiting opportunities in industrialisedmarkets for its pharmaceutical substances. The company’s bulk drugportfolio is presented in Table 11.1.

Table 11.1

Ranbaxy’s bulk drug portfolio

1. Amoxycillin

2. Ampicillin

3. Cefaclor

4. Cefadroxyl

5. Ceftriaxone

6. Cephalexin

7. Ciprofloxacin

8. Cloxacillin

9. Di-cloxacillin

10. Flucloxacillin

11. Norfloxacillin

12. Ofloxacin

13. Sparfloxacin

14. Ranitidine

15. Terfinadine

16. Diazepam

17. Midazolam

18. Amlodipine (Croslands)

19. Cetirizine (Croslands)

20. Clotrimazole (Croslands)

21. Permethrin (Croslands)

22. Silver sulphadiazin (Croslands)

23. Cefpodoxime


DRL’s process innovation skills are an industry legend by now. Thecompany’s product strategy for bulk drugs is based on current marketintensity and appropriate timing. The company had scored a victoryover Ethyl Corporation in the US in an anti-dumping suit over itsibuprofen exports. The company could prove that its process route wasindeed different and highly cost effective. The group’s chairman knowsexactly what molecule to choose and when to enter and moreimportantly when to exit.


Table 11.2

DRL’s bulk drug portfolio

The company has developed so far innovative processes for over sixtydrugs even though only thirty-three are listed in its bulk drug portfolio.DRL is a vertically integrated player. The Group’s own bulk drugproduction covers over 87 per cent of its formulations.

1. Amlodipine

2. Cetirizine

3. Ciprofloxacin

4. Cisapride

5. Enalapril

6. Enrofloxacin

7. Fluoxetine

8. Lansoprazole

9. Lomefloxacin

10. Loperamide

11. Nimuselide

12. Norfloxacin

13. Omeprazole

14. Risperidone

15. Salmeterol

16. Finasteride

17. Pefloxacin

Cipla

Cipla has developed over the years cost effective, innovative processesfor over fifty drugs. Many more are under various stages of development.

18. Sparfloxacin

19. Flutamide

20. Terbenafine

21. Losartan

22. Valsartan

23. Diltiazem (Cheminor)

24. Naproxen (Cheminor)

25. Domperidone (Cheminor)

26. Doxazosin (Cheminor)

27. Famotidine (Chemonor)

28. Ibuprofen (Cheminor)

29. Iopamidol (Cheminor)

30. Ondansetron (Cheminor)

31. Ranitidine (Cheminor)

32. Terazosin (Cheminor)

33. Terfenadine (Cheminor)


Cipla’s bulk drug portfolioTable 11.3

1. Acyclovir

2. Albendazole

3. Albuterol

4. Alprazolam

5. Campothecin

6. Cetirizine

7. Ciprofloxacin

8. Clonidine

9. Danazol

10. Enalapril

11. Enrofloxacin

12. Etoposide

13. Febantil

14. Felodipine

15. Fenbendazol

16. Ketorolac

17. Mebendazol

18. Methocarbamol

19. Metopolol

20. Mitoxantrone

21. Nifedipine

22. Nimodipine

23. Norfloxacin

24. Omeprazole

25. Ondansetron

26. Pefloxacin

27. Pentoxyfylline

28. Progesterone

29. Propranolol

30. Salmeterol

31. Salbutamol

32. Selegeline

33. Terbutaline

34. Terfenadine

35. Testosterone

36. Vinblasine

37. Vincristine

38. Zidovudine

39. Carvedelol

40. Leuprolide

41. Mefloquine

42. Olsalazine

43. Bambuterol

44. Trimetazidine

45. Tenidap

46. Bambuterol

47. Lamotrigine

48. Fluticasone

49. Chandonium

50. Stavudine

51. Finasteride

52. Estramustine

53. Fluconazole

54. Lansoprqazole

Cipla has been one of the first two companies to come up withalternative processes for almost all the new molecules that have beenintroduced in the country during the last five years. The backwardintegration has helped Cipla considerably in controlling the quality,costs and availability of its bulk actives. Cipla is a highly integratedpharmaceutical company that is all set to prove its mettle in theinternational market. The company’s own bulk production covers aboutthree-fourths of its formulations.


Table 11.4Lupin’s bulk drugs portfolio

1. Cefaclor

2. Cefadroxyl

3. Cefotaxime

4. Ceftizidime

5. Ceftrioaxone

6. Cephalexin

7. Ethambutol

8. Rifampicin

9. Trimethoprim

10. Vitamin B6

Lupin

Lupin’s recent acquisition of Max-GB’s cephalosporins and 7-ADCAunit at Tonsa (near Chandigarh) in Punjab, is indeed a winning moveas it gives Lupin access to the main raw material for its third generationcephalosporins. This will make Lupin a vertically integratedcephalosporin player in the international market. Lupin has alreadytied up with Merck Generics of Germany to market its sterilecephalosporins formulations in the first world markets, once theirpatents expire. This acquisition will give the company a strategicadvantage. The main producers of cephalosporins world wide are:Biochemie in Austria, ChunKn Dong and Cheil of Korea, Antibioticsin Spain and Italy, and Hoechst and Gist Brocades. Max-GB is currentlya 50:50 joint venture between Max and Gist Brocades.

Lupin has already become the world’s leading player in the anti-TBsegment through a carefully planned integration strategy. It is planningto do the same in the oral and sterile cephalosporin market.

Wockhardt

Wockhardt has a sharply focused strategy of integration. It is one ofthe world’s largest manufacturers of analgesic – dextropropoxyphene.Wockhardt has a strong presence in pain management. Two of thecompany’s leading brands, which feature among the industry’s top 250are formulations based on dextropropoxyphene.


Table 11.5

Wockhardt’s bulk drug portfolio

1 Azithromycin

2. Captopril

3 Dextromethorphaman Hcl

4. Dextropropoxyphene

5. Pefloxacin

6. Toldimfos

7. Amiloride (Merind)

8. Amitryptyline (Merind)

9. Cyanocobalamin (Merind)

10. Cyproheptadine (Merind)

11. Dexamethasone (Merind)

12. Chloroquine phosphate (Tata Pharma)

13. Mebendazole (Tata Pharma)

14. Miconazole (Tata Pharma)

The company is also one of the very few global manufacturer’s ofcaptropil, an antihypertensive drug. Wockhardt is one of the earlyentrants in the off-patent generic formulations market of catropil inthe US.

With the merger of Merind, Wockhardt has became one of the lead-ing manufacturers of vitamin B12 bulk drugs in its portfolio. Wockhardtis also planning to manufacture recombinant hepatitis-B vaccine anderythropoietin. Wockhardt is one of the highly integrated players inthe Indian pharma industry.

Nicholas Piramal

Nicholas Piramal, with the acquisition of Roche, became a majorproducer of vitamin A. Later, it acquired the Hyderabad-based bulkdrug company Sumitra Pharmaceuticals, essentially as a step towardsvertical integration. Recently it has unfolded its strategy and made clearits intentions to become a vertically integrated player, by forming ajoint venture with the leading European company La Porte, formanufacturing and marketing bulk drugs. This joint venture wouldensure better technology that would be difficult to copy and give it adistinct and sustainable competitive advantage.


Table 11.6

Nicholas Piramal’s bulk drug portfolio1. Chlordiazepoxide

2. Ciprofloxacin

3. Diltiazem

4. Enrofloxacin

5. Ibuprofen

6. Vitamin A

Torrent

The quest for economies of scale is the great driving force in the Torrentgroup. Torrent doubled its penicillin manufacturing capacities, even asit launched a Rs. 350 million forward integration project in Baroda.Torrent–Gujarat Biotech Limited (TGBL), by doubling its capacity, willbe able to bring down the fixed cost per unit of penicillin produced toan extent that it can be internationally competitive. Doubling thecapacity would cost the group about Rs. 750 million, where as a greenfield venture would cost about Rs. 2 billion.

Table 11.7

Torrent’s bulk drug portfolio

1. Atenolol 2. Centochroman

3. Diclofenac

4. Diltiazem

5. Famotidine

6. Lithium Carbonate

7. Omeprazole

8. Ranitidine

9. Ketoconazole

10. Amoxycillin (Torrent – Gujarat Biotech)

11. Ampicillin (Torrent –Gujarat Biotech)

12. Cefadroxyl (Torrent – Gujarat Biotech)

13. Cloxacillin (Torrent – Gujarat Biotech)

14. Nicorandil


Table 11.8Zydus’s bulk drug portfolio

1. Dicyclomine Hcl

2. Ethambutol

3. Famotidine

4. Fluoxetine

5. Glibenclamide

6. Loratidine

7. Omeprazole

8. Amlodipine

Torrent, in a step toward backward integration, manufactures a numberof bulk drugs (Table 11.7). These are used both for captive consumptionas well as sales to other formulators.

The backward integration is aimed at cost reductions in the productionof formulations. The company is also planning to set up in-housemanufacturing for betalactam antibiotics to integrate forward strategicallyfor penicillin-G, semi-synthetic penicillin and semi-synthetic antibiotics.


Zydus has a very wide product portfolio. The company has beensourcing a number of new products that have high technological biasfrom international companies. The company manufactures about sevenbulk drugs, many more are at various stages of development. Its bulkproduction would cover about one-fifth of its formulations. Thecompany has not yet become a vertically integrated player.

Sun Pharma

Sun Pharma has leap frogged into the bulk drug arena in three yearstime through a combination strategy of in-house development at theirstate-of-the-art research center SPARC, green field project for a multi-purpose bulk drug facility at Panoli (that conforms to internationalstandards), acquisition of Knoll’s plant for bulk drugs at Ahmednagarand merger with TDPL. Till 1995, Sun Pharma had developedinnovative processes for only a handful of bulk actives. By 1998, thecompany had joined the big league comprising Dr. Reddy’s Labs, Ciplaand Ranbaxy in terms of the number of processes developed. SunPharma’s bulk drug portfolio covers diverse therapeutic segments. It


Table 11.9

Sun Pharma’s bulk drug portfolio

manufactures as many as 46 bulk drugs (Table 11.9). The company, inaddition, manufactures a number of intermediates. Sun Pharma isprogressing rapidly on its course to become a vertically integratedpharmaceutical company.

1. Amidioquin

2. Clomipramine

3. Clonazepam

4. Clopamide

5. Digoxin

6. Dobutamine

7. Flurbiprofen

8. 5-amino salicyclic acid

9. Carbidopa

10. Isosorbide 5 mononitrate

11. Lacidipine

12. Lofepramine

13. Olanzapine

14. Ornidazole

15. Magnesium stereate

16. Pentoxofylline

17. Tizanidine

18. Losartan

19. Carvedelol

20. Nicorandil

21. Luprporelin Hcl

22. Octreotide

23. Dothiepin Hcl

24. Fluoxamine Maleate

25. Iopamidol

26. Nortryptyline Hcl

27. Salmeterol Xinafoate

28. Tramadol Hcl

29. Buprenorphine

30. Buspirone

31. Calcium lactate

32. Carboplatin

33. Cisplatin

34. Danazol

35. Meloxicam

36. Erythromycin

37. Mebendazole

38. Metformin

39. Mitoxantrone

40. Ondansetron

41. Roxithromycin

42. Amoxycillin (Gujarat Lyka)

43. Ampicillin (Gujarat Lyka)

44. Cephalexin (Gujarat Lyka)

45. Cefodroxyl Gujarat Lyka)

46. Cloxacillin (Gujarat Lyka)


Table 11.10

Ipca’s bulk drug portfolio

1. Amidioquin

2. Atenolol

3. Bromhexine

4. Chloroquine

5. Frusemide

6. Metoclopramide

7. Probenecid

8. Pyrantel Pamoate

Ipca

Ipca has constantly focused on backward integration. Starting with arange of formulations, it established an R&D laboratory in 1981 whichdeveloped all the bulk drugs it sells today. The company spends a modestRs. 15 million every year, which is set to increase. The company hasgone into backward integration essentially to back up its formulations.All the major formulations of Ipca like lariago, tenolol, perinorm,eltocin etc., are backed by its own bulk drugs.

After it started producing bulk drugs in 1986, Ipca integrated intointermediates. Its own bulk drug and intermediate production currentlyback over one-third of its formulations. For instance, in atenelol, it hasintegrated right from phenol to its branded formulation – tenolol.This offers the twin benefits of steady supplies and better margins.

Kopran

Kopran, a leader in semi-synthetic penicillins has implemented abackward integration project by manufacturing chemicals andintermediates required for most of its bulk drugs. The company hasinvested about Rs. 1 billion for the backward integration project andexpansion of its manufacturing facilities of bulk drugs and formulations.About a third of this investment goes towards creating facilities formanufacturing chemicals and intermediates. With the commissioningof this plant, Kopran intends to become a highly integrated player forthe drugs that it manufactures. The company is planning to be one ofa few in the world in terms of manufacturing the widest range of anti-bacterials.


In bulk drug manufacturing, unless one has a more efficient processand integrates backward, it is not possible to be competitive. The backwardintegration enables Kopran to sell its bulk drugs abroad at prices thatare almost 4 per cent lower than its European competitors.

Kopran has also undertaken forward integration, through themanufacture of formulations of both penicillin and non-penicillin basedproducts at its Khopoli plant.

Table 11.11

Kopran’s bulk drug portfolio

1. Amoxycillin

2. Ampicillin

3. Atenolol

4. Cefadroxyl

5. Cephalexin

6. Ciprofloxacin

7. Cloxacillin

8. Di-cloxacillin

Orchid

Orchid is on its way to become one of the most integrated cephalosporinmanufacturers in the world. It currently has about 13 per cent share ofthe world cephalosporin market. The company is about to complete abackward integration project to manufacture some of the key intermediatesby end 1998.

Orchid is also implementing a forward integration project by launchinghigh end sterile and oral formulations of cephalosporins in the domesticmarket by October, 1998. For this purpose, the company has set up aseparate division – Orchid Health Care.

Table 11.12

Orchid’s bulk drug portfolio

1. Cephazoline sodium

2. Cefradine arginine

3. Cefradine sodium carbonate

4. Ceftazidime

5. Cefonicid

6. Sidenfil citrate


Competitive Advantage

Vertically integrated pharmaceutical companies in India have a distinctcompetitive advantage that is sustainable. Many overseas genericmanufacturers out source their bulk requirements, whereas a verticallyintegrated manufacturer can achieve lower costs of production. This is adefinite competitive advantage leading to either higher margins or morecompetitive prices to penetrate the market.

Many of these leading Indian drug companies have demonstrated thebenefits of vertical integration. Dr. Reddy’s process innovation skillsand consequent cost advantages are well known to the pharmaceuticalworld. Through highly cost-effective alternative, non-infringing processesfor products like ibuprofen, norfloxacin, ciprofloxacin etc., the companyhas demonstrated that these products can be marketed at unbelievablylower prices. Lupin has achieved similar successes in the anti-tubercularsegments with rifampicin and ethambutol and now it is repeating thesame in the cephalosporins segment. Wockhardt has achieved thedistinction of becoming one of the largest producer of dextropropoxypheneand is planning to do the same with vitamin B12.

Kopran, which has become one of the largest manufacturers ofAmoxycillin in the world, too has reaped the benefits of integrationstrategies. Due to its planned backward integration the company hasbeen able to realise 4–5 per cent higher margins than its Europeancompetitors in the fiercely competitive high-volume, low margin bulk drugbusiness.

Ipca’s success with the bulk active of the most widely prescribed anti-hypertensive molecule – atenolol is due to its ability to integrate rightup to the basic stage. There are many examples of similar successes byother companies.

All these companies and others, who have achieved a high degree ofbackward integration, are now moving up the value chain intoformulations. That would make them vertically integrated and highlycompetitive.

One company that has become vertically integrated in the real sense isRanbaxy. It has a clear strategy to support its global brand building for25 products with its own low cost bulk actives. This puts Ranbaxy in an


enviable position, because there is hardly any international genericcompany, which is so fully integrated and operates in as many markets.The company is able to command higher margins in both bulk drugsand formulations, because it controls costs throughout the value chain.That is what has made Ranbaxy the ninth generic company in theworld. It is this distinct competitive advantage which will drive its genericbusiness in the US and Europe and help it achieve its objective to beamong the top three generic companies in the world by 2015.

As Dr. Parvinder Singh, chairman of Ranbaxy says, “the fact is that ifyou control bulk, you also control cost, quality and strategy.”

‘Internationalising’ the business 193

Executive Summary

There is more to the phrase-‘internationalisation’, thanmere semantics. The transition from exports tointernationalisation is not simple. It is an arduousjourney, which requires determination and an uncompromisingattitude. Above all it needs a change of mindset to viewthe world as a whole. The transition from an export-oriented company to an international company broadlyinvolves five phases:

1. Domestic operations with some exports

2. Strongly export oriented

3. Regional operations with core domestic strengths

4. International operations with strong headquarter control

5. Global operations

Ranbaxy is one company that has been working hard tointernationalise its operations. It started its exportsin 1975 and has evolved as the first Indian multinationaldrug company through a well crafted strategy, matched byimpeccable execution. Other leading pharma companies like

12‘INTERNATIONALISING’ THE BUSINESS


Lupin, Wockhardt, Cipla and Sun too have been aggressivelypursuing a course of internationalisation. The degree ofaggression of course varies from firm to firm.

The key success factors for an internationalisation strategyare:

1.Creating, developing and upgrading to world class inmanufacturing technology, product development, packagingand marketing.

2.Building manufacturing facilities that conform tointernational regulatory standards and getting themapproved. Without these approvals, one cannot exportformulations or bulk actives to the industrialisedworld which accounts for over 80 per cent of the totalpharmaceutical market.

3.Reach a critical mass and economies of scale in timethrough what ever means it takes to achieve – brand,business or company acquisitions.

4.Collaborating to compete. Improving synergies andmarket and product access through strategic alliances.Convert entry barriers into gateways through jointventures.

5.Formulating country-specific strategies.

6. Establishing manufacturing presence to improve marketaccess and logistics.

7.Moving closer to customers by setting up regionaloperations across various countries.



12“Going global” has become a catchphrase for many companiesacross industries worldwide and the pharmaceutical industry in Indiais no exception to this. The Indian drug industry has earned a netexporter status for over four years now, mainly due to the spectaculareffort by a handful of companies. The main reasons for this pursuit ofthe greener pastures abroad are:

The market outside your home market is much larger, however bigyour domestic market might be.

India for example accounts for just two per cent of the worldpharmaceutical market in value terms and 6–7 per cent of worldproduction. The market is thus low priced and realisations are lower.In fact, even neighbouring countries like Bangladesh, Pakistan andSri Lanka have higher prices.

The global market is higher priced and offers better realisations.Globalisation, therefore, is the natural choice for any company thatwants to expand in terms of value and volume.

Drug industry is technology-driven and research intensive. Bothtechnology and research need huge up front investments. Revenuesand profits generated in the domestic markets are not adequate infunding to fuel growth.

International operations enable an organisation to develop world classtechnological and marketing competence.

The Indian drug industry has come a long way from the status of a‘necessary evil’ during the license raj of the early 1980s to the export-led

‘INTERNATIONALISING’ THEBUSINESS


growth stage in the early nineties and now towards internationalisationof the business.

In the early eighties, exports were seen as unprofitable but necessary ifone wanted an import licence as were linked. Ranbaxy was perhapsthe first Indian pharmaceutical company, which thought otherwise;that exports could be profitable. After all, prices of pharmaceuticalproducts were much higher all over the world. It is this winning mindsetthat has been responsible for keeping Ranbaxy ahead of othercompanies in India since the late 1980s.

Exports to Internationalisation

There is more than semantics to the expression ‘exports tointernationalisation’. The first pre-requisite is a change of mindset, toview the world as a whole. It is not merely the act of establishing officesoverseas. The second pre-requisite is sharing of knowledge pertaining toproducts, processes, technology and customer databases across theorganisation. A global company achieves sustainable advantages overrival firms through competitive benchmarking and strives to be a costleader. The transition from an export-oriented company to aninternationalised company broadly involves five phases:

1. Domestic operations with some exports

2. Strongly export oriented

3. Regional operations with core domestic strengths

4. International operations with strong headquarter control

5. Global operations

Ranbaxy

Ranbaxy decided to export in 1975–76. The company has never lookedback since then. Today in 1997–98, about one half of their Rs. 13.5billion sales come from their international operations. How did Ranbaxyachieve what it did? By focusing. Through a well defined strategy. Aboveall by effectively implementing it.

Ranbaxy wanted to be an international company that stands on its feetagainst stiff competition in overseas markets. The only way to achieve



this was through building competitive advantages both in terms ofstrategy and implementation. The key elements of Ranbaxy’sinternationalisation strategy are:

Developing and upgrading to world class level in manufacturingtechnology, product development, packaging and marketing.

Creating and building infrastructure that support the strategy. Inother words, building manufacturing facilities conforming tointernational standards and getting them approved by internationalregulatory authorities for both pharmaceutical substances and dosageforms.

Reaching the critical mass and economies of scale through acquisitionof brands, businesses and companies that fit into the overall gameplan of the company.

Improving synergies and market access to difficult-to-penetrate marketsthrough joint ventures.

Formulating country-specific strategies. Establishing manufacturing presence to improve market access andlogistics.

Moving closer to customers by setting up regional operations acrossvarious countries.

Ranbaxy had set its sights on the global market way ahead of its peersin the Indian drug industry. The company had taken an approach toexports in the late 1970s that is significantly different from what wasthen prevalent in the industry. While the industry was convinced thatexports were not profitable (as they had to be done on a marginalcosting basis), Ranbaxy thought otherwise. The company had seen,much before the others, that exports could be profitable as pricerealisations in international markets for pharmaceutical products aremuch higher. The company identified the emerging markets that hadmaximum potential and pursued those aggressively. Here is theevolution of Ranbaxy’s internationalisation process (Table 12.1)

Ranbaxy has always been ahead of the competition by continu-ously revitalising its strategy. Today, the company has achieved thedistinction of being one of the major international generic companies



with a turnover of close to half-a-billion dollars. There is no othercompany except for perhaps Teva, an Israeli company, that has a pres-ence in as many markets as Ranbaxy. Further, it has a distinct competitiveadvantage over many overseas generic companies. It is one of the mostintegrated generic companies in the world. Many overseas generic com-panies out source their bulk drug requirements, whereas Ranbaxy isvertically integrated and can use its low-cost bulk manufacturing basein India for generic launches overseas. The fact is that if you controlbulk, you also control cost, quality and availability. Ranbaxy, therefore,is likely to derive more value addition than its peers in the US genericmarkets, as it controls costs throughout the value chain.

China: The first country that Ranbaxy targeted in a big way was China,where it set up a 79 per cent subsidiary – Ranbaxy–Guangzhou ChinaLimited. The company began marketing formulations in 1995 and is amarket leader in many of the drugs that it makes. Sales growth in 1997was 30 per cent and it is now making profits as well, apart from paying6 per cent royalty on sales to the parent company – Ranbaxy. In thepast two years, Ranbaxy has invested around Rs. 300 million in itsChina venture. Ranbaxy maintains a 100-member sales team in China.

Table 12.1

Evolution of Ranbaxy’s internationalisation

1975 Exports to Sri Lanka and Malaysia

1976 First Joint Venture in Nigeria

1982 Exports to Africa, Marketing office in Singapore

1984 Joint Venture in Malaysia

1985 Exports to Europe

1987 Joint venture in Thailand

1988 Marketing office in Cameroon

1992 Strategic Alliance and a Joint Venture with Eli Lilly, USA

1996 Acquires the New Jersey-based Ohm Laboratories

1997 Sets up 50:50 joint venture with Schein Pharmaceuticals for marketing thegeneric formulation of Ranitidine Form I in the USTies up with the generic firm – HMS for marketing off-patented, multi-source generic formulations of Cefaclor and other products in the US.


Middle East: Iran is an emerging market in the Middle East. Ranbaxyhas already achieved the distinction of being the top exporter of bulkdrugs to Iran with sales of about $ 20 million.

Further, Ranbaxy has re-entered the UAE market in 1998 with the re-registration of five of its products. Ranbaxy is the only Indian companyto be re-registered with the ministry of health, when many pharmaceuticalcompanies were de-registered for failing to comply with the new stringentcriteria laid down by the UAE government in 1994 for sale of foreignpharmaceuticals.

Ranbaxy will initially export these formulations from India. Later manyof these, and new formulations that the company is planning to register,would be imported from their Irish and American manufacturingfacilities.

CIS: Ranbaxy was also an early entrant into the Russian market. Itgot there as soon as the USSR disintegrated and the market openedup. Despite the difficult market conditions and law and order problems,Ranbaxy stayed on with a belief that it was the right time to build up sothat when Russia stabilised, the company would be able to take off. Ithas acquired the over-the-counter business of Natco in the RussianFederation to reach critical mass. Ranbaxy today has a 50-membersales team in Russia covering the CIS markets. To further consolidateits business in Russia, the company has acquired the formulationbusiness of Natco Laboratories in 1995. Ranbaxy was able to achieve aturnover of Rs 1 billion in 1997, even without a manufacturing basein CIS.

Europe: The company, in 1997, has invested in Ranbaxy NetherlandsBV, a 100 per cent subsidiary which was set up as holding company forexpansion in the region. This was used to set up Rema Pharmaceuticals(Ireland) and four new subsidiaries:

1. Ranbaxy, Egypt

2. Ranbaxy SP, Poland

3. Bounty Holdings, Thailand

4. Ranbaxy, Mauritius

With these, Ranbaxy now has joint ventures in 14 countries:


1. China

2. Malaysia

3. Thailand

4. Hong Kong

5. Mauritius

6. US

7. Canada

8. Netherlands

9. Ireland

10. Nigeria

11. South Africa

12. Egypt

13. Poland

14. India (with Eli Lilly)

US: It is the US operations, which would be the key determinant ofthe success of Ranbaxy’s globalisation effort. The company beganoperations in the US through a 100 per cent subsidiary called RanbaxyPharmaceuticals Inc. In September 1996, it acquired a New Jersey-basedcompany, Ohm Laboratories, which produces over-the-counteranalgesics. Ranbaxy had a big victory in 1997 when Glaxo–Wellcomewithdrew a case against it and cleared the way for marketing its owngeneric version of the world’s largest selling prescription drug, ranitidineForm I, in the US.

The company since then has set up a 50:50 joint venture with ScheinLaboratories, the generic arm of the German drug major Bayer AG inthe US for marketing ranitidine.

In yet another strategic alliance for penetrating the lucrative Americangeneric market, Ranbaxy has tied up with a highly successful genericmarketing firm, HMS for marketing its generic formulations, startingwith cefaclor. This explains the swift response of the company, followingthe decision of Eli Lilly its partner in multiple alliances, of not enteringthe US generic market with new drugs except where it could innovate onexisting products. Rather than break off their relationship completely,the partners now have an arrangement to market some of Eli Lilly’sexisting off-patent drugs through HMS.

Ranbaxy is planning for a big basket of off-patented genericformulations for the US market. The company plans to file for approvalof eight to ten new drug applications before the US FDA this year andfollow it up with 10 to 12 ANDAs every year. All these marketing


alliances will help the company realise its ambitious objective of reachinga critical mass of $ 150 million in the US generic market. The companyalso has plans to create its own marketing team by 2002.

Ranbaxy has divided the world into four regions, each headed by aregional director. One is India and Middle East, which accounts for 50per cent of its turnover. The second region is Africa, Europe and the CIScountries, headquartered in London. Asia-Pacific, the third region hasits headquarters in Hong Kong. The fourth region is America with itsheadquarters in New York. Ranbaxy has a manufacturing facility ineach of the regions.

Dr. Reddy’s Labs

DRL has been shifting emphasis of international operations from bulkdrugs to value added formulations for some time now. The companyhas a strong presence in the CIS markets, including a joint venture. Ithas however, taken a conscious decision, in the wake of the roublerubble, to restrict its exposure to the Russian market. The company hasbeen focusing on marketing its branded generic formulations in a numberof countries across the globe. While the focus is mainly on China andBrazil, the company has been registering its products in a number ofcountries in South East Asia, Africa, Middle East and South America.It has so far 204 registrations under its belt and many more are atvarious stages of development. DRL has recently launched six productsin Venezuela. With this, it has become the first Indian pharma companyto market its products in that country.

Cheminor Drugs, a group company has built a state-of-the-art formulationsplant, essentially to cater to the generic markets in North America andEurope. The company has also entered into strategic alliances with twogeneric companies in the US, Pharmaceutical Resources Inc. and ScheinPharma, for marketing generic formulations. The company is activelypursuing similar alliances in Europe.

DRL has gone a step ahead of the others in internationalising its busi-ness by exporting its intellectual property. DRF, the independentresearch arm of the DRL group, is the first Indian company to licencea new molecule to a multinational corporation.Its licensing arrange-


ment for its novel compounds for the treatment of diabetes to theDanish drug major, Novo Nordisk, takes these compounds throughthe further stages of development to commercialisation against mile-stone payments and royalty on sales. This is unprecedented and is ahistoric achievement. The group has already received the first instal-ment of $ 4 million towards the milestone payments.

Cipla

Cipla has decided to aggressively pursue the international marketingopportunities only recently. The company has proven technologicalcompetence and product development capabilities. It also has a versatileportfolio of bulk actives and formulations covering a wide range oftherapeutic segments. Cipla also has manufacturing facilities that areapproved by international regulatory authorities like US FDA, UK MCAand the Australian TGA. It has decided to exploit the marketingopportunities that the liberalised business and economic environmenthas to offer.

Cipla has chosen the joint venture and strategic alliance route to conquerthe international markets. The company’s strategy is to create a win-winalliance in all the key markets of the world.

Cipla will enter into a strategic alliance or a joint venture with a localpartner in each of the key markets. Cipla will provide the products andthe technology. The alliance or the joint venture partner will provide themarket knowledge, distribution and marketing support. The joint venturecompany will initially source the finished dosage forms from Cipla’sapproved manufacturing facilities in India. As the alliance progresses,the local company will manufacture the finished formulations, sourcingbulk actives from Cipla’s approved facilities in India. As the internationalmarkets take shape, the joint venture company will integrate backwardsand manufacture even the bulk actives. Cipla will provide the technology.

Cipla is planning to set up at least one manufacturing base in each regionand then leverage these bases through technical tie-ups and franchisingarrangements in the long run. The company has set an ambitiousobjective for its international operations of achieving a third of itstotal turnover by the year 2000.


Lupin

Desh Bandhu Gupta, the founder chairman of Lupin, while talking aboutthe company’s future said that the globe is their market but the focus ison the US, Europe, China, Russia and South East Asia. Exports havemultiplied five times from Rs. 400 million in 1992 to Rs. 2 billion in1996–97. Lupin too has been aggressively pursuing the strategy ofglobalisation by opening up formulation markets in a big way andbringing synergies between their bulk drug and formulationmanufacturing. It is planning to achieve this through a combination ofjoint ventures and the setting up of manufacturing and marketing basesin key overseas markets. Consider these winning moves:

Lupin’s 60:40 joint venture with Quatromed of South Africa willmanufacture and market anti-TB products and cephalosporins. This,apart from ensuring the preferential treatment rendered to localcompanies in South Africa, will provide a spring-board for penetratingneighbouring markets in Namibia, Botswana, Mozambique and Malawi.

Established marketing offices in Kenya, Vietnam, Kazakhistan,Ukraine, South China, Hong Kong, and Myanmar.

Planning to set up a joint manufacturing venture in the RussianFederation with the St. Petersburg Research Institute.

Investing about Rs. 520 million in two joint ventures with HerbiePharmaceuticals and Shanghai No. 3 in China.

Established a strategic alliance with Merck Generics to enter the genericmarkets in the US, Europe and Japan with its formulations of injectablecephalosporins.

Currently exporting to about 60 countries. Aims to achieve a turnover of $ 250 million from the North Americanmarket and $ 150 million from the Europe and CIS countries by theyear 2002.

Wockhardt

Wockhardt has been progressing aggressively on the exports front andbelieves that it will survive and grow only if it globalises. Presently,exports account for about 22 per cent of its revenues. The company


plans to achieve 40–50 per cent of its turnover from internationaloperations by the year 2000.

Wockhardt’s strategy for globalisation includes strategic alliances, jointventures and even acquisitions in key markets. The company’s strongestplaygrounds are the most difficult and highly regulated markets like Europeand US, accounting for 80 per cent of Wockhardt’s total exportscurrently. Wockhardt expects to achieve a turnover of Rs. 800 millionfrom its bulk drug exports to Europe alone in 1998–99. Some importanthigh lights of Wockhardt’s globalisation plans are:

Wockhardt’s joint venture in China has received approval from thegovernment of China and it will be operational by the middle of 1999.

The company has already acquired the New Jersey-based Acumed Inc.,which will help it enter the generic market in the US.

It has recently acquired Wallis Laboratories of UK for $ 5 million,which will help it gain market access to UK and key European markets.Wallis with its $ 18 million turnover offers great strategic advantagebecause of its committed set of buyers for its products like tesco,unichem and ASDA etc.

Wockhardt has also established a marketing joint venture in Egyptto enter important markets in Africa and the Gulf in addition togaining access to the Egyptian market.

The company is also shifting its emphasis from bulk drug exports tomarketing of value-added formulations in select international marketswhere product patents are not yet recognised. It has submitted over200 product registration dossiers and received registrations for someof the products in China, CIS and from some South Asian andAfrican countries.

Continuous focus on exports of select bulk actives likedextropropoxyphene and captopril to industrialised markets withstrong IPR protection like Europe, US, and Japan.

Entering the generic markets for off-patent, multi-source productsin the West by filing ANDAs ( Abbreviated New Drug Applications)through joint ventures.

Wockhardt has recently entered into a marketing alliance betweenDenmark’s Ferring Labs and its recently acquired Wallis.


Another winning move of Wockhardt is its recent joint venture withSidmak in the US to market 15 generic formulations of off-patentdrugs. The JV envisages a turnover of $ 100 million by 2003.

Nicholas Piramal

Nicholas Piramal’s exports in 1998 took a dip of about 24 per cent toRs. 310 million from the previous years’ Rs. 421 million.

The company has chosen the ‘alliance route’ even in its strategy toconquer the foreign shares. Nicholas Piramal is setting up a joint ven-ture with Swiss-based Siegfried Pharma Ltd for entering the off-patentgeneric markets in European Union – The JV will also identify a mar-keting partner to penetrate the North American generic markets. TheCompany’s alliance with La Porte, the leading European firm shouldhelp Nicholas Piramal boost its exports of bulk actives and intermedi-ates. The alliance with US-based Cytran too covers some internationalmarkets in Asia and the Middle East.

While Nicholas Piramal has not made any significant headway inexports so far, all these alliances indicate its keenness in creating a strongpresence in overseas markets too.

Torrent

Torrent’s portfolio for export is made up mainly of formulations. Mostof its exports are to CIS and the developing markets. It has overseasoffices in Moscow and in Poland. In fiscal 1998, Torrent has achievedan exports turnover of Rs. 1.05 billion. Torrent has registered itsformulations in Sri Lanka, Iraq, Iran, Africa and China. The sales fromthese markets are not significant yet. Torrent is chalking out anaggressive export strategy including strategic tie-ups in all major markets.The company wants to consolidate its position in existing markets andalso penetrate the highly industrialised markets in Europe.

Zydus

Having consolidated its presence in domestic market, Zydus group isactively preparing to step up its exports and international operations.


The company is planning to harness the power of alliances even ininternational arena. Once its new manufacturing facility gets the ap-proval of international regulatory authorities in the US and EuropeanUnion, the Company is confident that exports will take off.

The JV with Bayer, apart from pushing Zydus into the top five leaguein Indian pharma industry, will also give it a shot in the arm in increas-ing exports.

In addition, the Company’s JV with BYK Gulden of Germany forpantoprazole will also help boost its exports.

Sun Pharma

Exports are one of the major growth drivers at Sun Pharma. It hasbeen marketing its branded generic formulations in a number ofdeveloping markets in Asia Pacific, Africa, Middle East and CIS. SunPharma has a three-pronged strategy for accelerating its exports:

1. To enhance exports of speciality bulk drugs to the highly industrialisedmarkets in Europe and US.

2. Market branded generics in those developing markets with relativelyweak protection for IPR.

3. Ride the first wave of generics, as the drugs go off-patent, through itsjoint venture Sun–Caraco in the US.

Sun Pharma’s objective is to achieve 45 per cent of its revenues frominternational markets (from the present 30 per cent), with in two yearsfrom now.

Ipca

Export is the other leg of Ipca’s business strategy. The company hasbeen building its export base for the past few years and this gave thecompany an advantage over the later entrants, since exports cannot bebuilt overnight. Ipca’s export strategy, has so far been:

To export formulations to developing countries.

Bulk actives and intermediates to both developed and developingcountries.


Marketing of branded generic formulations in select markets likeSouth East Asia, South Africa, Mauritius and the Russian Federation.

Bidding for bulk business such as Red Cross tenders in Africancountries.

The company has registrations in about 50 countries for exporting itsproducts. Ipca was the first Indian company to be registered in SouthAfrica. It has approvals in the industrialised first world countries inNorth America and Europe only for bulk drugs.

Ipca also makes two products for a European company. The company isplanning for more contract-manufacturing arrangements.

Kopran

Kopran has emerged as one of the world’s leading manufacturers ofamoxycillin. It has two overseas subsidiaries in Hong Kong and UKsince 1995. It has distributors in all major markets of the world like theUS, Western Europe, South East Asia and the Middle East. Exportsaccounted for over 43 per cent of its total turnover in fiscal 1996.

The company is planning to accelerate growth by increasing exports ofbulk actives and drug intermediates and by sharpening the focus on valueadded formulation exports. It is taking the strategic alliance route toachieve these twin goals.

The company has formed a 50:50 joint venture in Uganda to penetratethe African market. It has also taken a 39 per cent stake in a joint venture,which is setting up a new pharmaceutical company in UAE, to gain accessto the Middle East markets. Kopran has also entered into two alliancesin Europe with DDSA and Synpac, to enter the fast expanding genericmarkets for off-patent drugs in the European Union. The company isactively looking for similar alliances in the US.

Orchid

Orchid continues to maintain its status as a 100 per cent export-orientedunit for its bulk drug operations. The company, within a short span offour years, has achieved an export turnover of Rs. 2.4 billion by focusingon a range of bulk actives of sterile and oral cephalosporins. It has


already achieved a 13 per cent share of the world cephalosporin marketfor bulk actives.

Common Thread

What are the common factors in the strategies for internationalisationof all these leading Indian pharmaceutical companies? Virtually all thesecompanies are keenly pursuing a strategy of progressing from export ofbulk actives and intermediates to exports of more value addedformulations. The strategic objective of each of these firms, which arepreparing themselves to effectively compete in the post-GATT era, isto become an integrated, international generic firm.

On closer examination, it is clear that Ranbaxy has been the role modelfor most of these companies, in terms of strategy. The evolutionary processof some of the leading Indian drug firms in internationalising theirbusinesses seems to have a common pattern. The steps or the milestonesin this evolutionary process are:

A. Exports of bulk drugs to developing countries.

B. Exports of generic formulations to third world countries.

C. Exports of bulk drugs and intermediates to developed countries.

D. Marketing of branded generic formulations in developing countriesthrough agents or distributors.

E. Marketing of generic formulations through company’s marketingteams in developing countries.

F. Marketing of generic formulations of patent-expired drugs indeveloped countries.

G. Marketing of branded generic formulations of patent-expired drugsin developed countries.

H. Licensing of own NCEs to MNCs in developed countries.

I. Marketing own NCEs in developed countries through company’smarketing teams.

J. Having a full-fledged joint venture with a local partner coveringproduct development, manufacturing and marketing in developedcountries.


Paradigm Shift

Sounds impossible? Companies like Dr. Reddy’s and Ranbaxy haveshown that it is a possible dream. There are at least seven companieswhich have entered into strategic alliances, including joint ventures, totap into the off-patent generics markets in the highly industrialised West.Dr. Reddy’s have already licensed their NCEs to an MNC in a path-breaking alliance. This has indeed opened new vistas for other aspirantsamong the Indian pharmaceutical companies. Ranbaxy, Wockhardt andTorrent are also looking for partners to take their NCEs through furtherdevelopment, registration and commercialisation on similar lines.

There is more to internationalisation of business than mere exportturnover. What is needed to make the real transition from exports tointernationalisation is a paradigm shift or a change in mindset. A changein attitude from patent busting to respecting intellectual property rights.This can be seen from the recent licensing arrangements that some ofthe Indian pharma companies like Ranbaxy, Wockhardt and NicholasPiramal have entered into for introducing the molecules of MNCs. Ifyou want to be a global player, you cannot have two sets of rules – onefor domestic market and another for overseas markets.

Acquisition of a true international character is more important thanthe acquisition of manufacturing facilities or even brands in overseasmarkets. Ranbaxy is the only Indian drug company to acquire aninternational character. It has manufacturing bases in six regions andhas marketing operations in 26 countries. Fourteen per cent of its 7000strong work force is non-Indian.

Whom do you benchmark against is another important aspect thatcompanies wanting to internationalise should consider seriously. Youcannot achieve global competitiveness if you benchmark your operationsagainst your domestic rivals. You need to benchmark against the globalplayers – the best in class. Ranbaxy has been benchmarking itsoperational targets against global generics manufacturers like Ivax andMylan of the US, Tofa of Italy and Teva of Israel – to become costcompetitive. Small wonder then, that it has become the 9th genericcompany in the world. It had planted the seeds for international businessas early as 1968 and it has worked relentlessly at it.


Many of these companies, whose approaches we have discussed here,have achieved significant success in terms of export turnover and havecontributed to the domestic industry’s net exporter status. Butinternationalisation of business is a different ball game. It requires worldclass skills and capabilities, relentless pursuit, international character,respect for intellectual property rights and a winning mindset. Above allan openness to change.

Attracting alliances 211

Executive Summary

Necessity, as in the case of invention, is the mother ofalliance too. The basic reason behind any alliance is astrong need. The need for gaining access to products,markets, technology, know-how and even capital.

Alliances between companies, whether they are fromdifferent parts of the world or different ends of thesupply chain, are facts of life in business today.‘Collaborate to compete’ and ‘Co-opetition’ have becomesigns and symbols of business today.

The Indian pharmaceutical industry is no exception. Frombeing a highly protected environment until recently,Indian industry, particularly the pharmaceutical industry,seems to be in a tearing hurry to get into the alliancemode. How else can any one explain the sudden increase inalliances with both Indian and foreign companies?

The top ten Indian drug companies have forged into asmany as 63 alliances with leading international playersduring the last three to four years. Out of these, justtwo companies, Nicholas Piramal and Zydus, have enteredinto 30 alliances as on date. Nicholas Piramal is clearly

13ATTRACTING ALLIANCES


dependent on its alliances for growth. The company expectsto achieve 50 per cent of its turnover from allianceswithin two years.

Alliances do not guarantee success. An alliance is likea marriage. The success of an alliance depends on howcompetent, open, understanding and mutually dependenteach alliance partner is. In the absence of mutual respectand importance, alliances are no more than fleetingencounters, lasting only as long as it takes one partnerto establish a beachhead in a new market. Others maybecome a prelude to a full merger. What is of paramountimportance in making an alliance successful is ‘being agood partner’. It has become a key corporate asset.

In today’s global economy, a well-developed ability tocreate and sustain fruitful collaborations is a significantcompetitive advantage.


13What is the new trend in the world pharmaceutical industry?Alliances. Strategic alliances of various types, shapes, sizes and levelsare on the increase. Ernest Young, the international accounting firm,reports that drug firms in the US alone had invested a whopping $ 1.3billion in 152 alliances during 1994.

Bigger drug companies have been making deals with relatively smallresearch-intensive firms to get marketing rights for drugs that they arediscovering. Consider for example Ciba-Geigy’s (Novartis, now) tie upwith Oncogene to develop TGF-beta 3 for treating mouth and throatlesions, and Berlex Laboratories’s deal with Chiron to manufacturebetaseron, which slows the progress of multiple sclerosis.

Why Are Alliances On The Increase?

The basic reason behind any alliance is to achieve synergy. To optimiseutilisation of resources. To do more with less. Here are nine importantreasons for this unprecedented increase in alliances or partnerships inthe pharmaceutical industry the world over.

1. Stagnant growth rates in many markets.

2. Slowing down of population growth rates (or even no-growth) inmany industrialised countries.

3. Continuous escalation of costs in manufacturing, marketing andother areas.

4. Huge costs of research and development.

ATTRACTING ALLIANCES


5. A number of block-buster drugs that fueled the growth in theprevious decade coming off-patents.

6. Not enough potential block-buster drug candidates in the newproduct pipeline of companies.

7. Shortening of product life cycles due to intense competition.

8. Increasing pressure from cost-containment programs in virtuallyevery market.

9. Eroding profit margins resulting from direct or indirect pricecontrols by various governments.

All these changes in the marketing environment of the global healthcare industry are most likely to result in a greater harmony betweenthe needs of pharma producers in the developed world and thedeveloping world. Research-based pharma companies in the developedworld will be even more selective in setting up off-shore manufacturingbases. There will be a sharp increase in the number of marketingalliances and technology transfers between multinational companiesthat do not want to manufacture locally and the local generic companiesthat do not have product development capabilities.

Generic companies in developing countries will look for alliances thathelp them in upgrading their technology base and to gain market accessfor their pharmaceutical substances and generic formulations.

Alliances – The Indian Scenario

India has all the features to become one of the most attractive alliancepartners for prospective suitors. Consider these reasons:

India has the potential to become one of the largest bulk drugmanufacturers in the world. This is crucial, as the biggest singledevelopment in the late 1990s will be the growth of the genericmarket in the advanced countries. Moreover, all these countries arecurrently reeling under the pressure of rising health care costs andcost-containment strategies of their respective governments. Theyare likely to out-source off-patent generic drugs and formulationsfrom low cost producers that meet their quality.

The key success factor in the generic market is low cost manufacturing


of bulk actives, drug intermediates and generic formulations. Indiais strong on both counts.

Further, India is a large market with a growing middle class that istwo hundred million large. This is almost the size of the populationof the whole of Europe. Increasing living standards of the urbanmiddle class and the rural population make it a potentially attractivemarket, despite its present per capita consumption of $ 3 per annum,which is the lowest in the world.

A number of brand-name drugs are going off-patent in the next fiveyears. This will increase the opportunities for significant revenuegrowth in the generic drug market.

There is considerable pool of highly trained scientific personnel. Thecost of conducting research in India is considerably lower than indeveloped countries like USA, Germany, France, UK and Japan.The costs of conducting pre-clinical tests too, are extremely low whencompared to the developed countries. A rough estimate puts thecost of conducting clinical trials at about eighty per cent lower thanin the US. India, thus can be very attractive to those MNCs that arelooking for out-sourcing part of their research and developmentwork.

Why Ally?

Almost all companies enter alliances out of need. A company may havethe technology, but lack an important piece of the puzzle, such as marketaccess. Alliances help the partner companies get a head start in tappingnew business opportunities and overcome obstacles. The key questionsto ask before deciding on an alliance are:

Why do you need a partnership? With whom you want to collaborate? How are you going to combine your core competencies with yourpartner-to-be?

How will you structure your relationship or alliance?The international experience suggests that there are nine strategicfactors that drive alliance formation.


1. Changing customer demands

Customer demands in many markets are changing. Consider forexample that in the highly industrialised countries in Western Europe,North America and in Japan, the cost-containment drives by therespective governments are creating new opportunities for low costgeneric drugs on an unprecedented scale. Many of the research-basedpharmaceutical companies are making new strategic moves to meetthe challenges either by starting their own generic companies or byallying with generic companies or by sourcing generic drugs from lowcost manufacturers in developing countries.

A number of leading Indian companies like Ranbaxy, Dr. Reddy’sLaboratories, Lupin, Wockhardt, NPIL, Torrent and Cipla have beenforming multi-level alliances with well-known MNCs. The salientfeatures of these alliances are:

Collaborative research in select areas. Sourcing of off-patent generic drugs – bulk actives and formulations. Access to new products, markets and technology.

2. Sharing of R&D costs

The pharmaceutical industry is research-led. Research is very risky andexpensive. High financial stakes, escalating R&D costs and cut-throatglobal competition have fueled a number of collaborations based onresearch. Out-sourcing of research too is on the increase. The majorpurpose of this is to optimise resource utilisation, reduce costs and speedup the development process.

Take for example the three recent research-based alliances betweenIndian pharma companies and their international partners:

Ranbaxy’s joint venture with the American drug major – Eli Lillycovers research, marketing and out-sourcing of generic formulations.

Dr. Reddy’s collaboration with Novo Nordisk covers research anddevelopment, licensing and manufacturing.

Lupin’s alliance with Merck Generics involves market access andout-sourcing of generic formulations.


Wockhardt’s alliance with Sidmak covers market access, productdevelopment and marketing.

NPIL’s alliances are mainly in the area of marketing.

3. Sharing of knowledge

Companies that are focused can capture new developments throughalliances without reducing their focus. A number of drug firms, theworld over, are allying with highly specialised developmental firms inareas like biotechnology, novel drug delivery systems etc. Alliancesbetween pharma companies and governmental research institutionslike IICT and CDRI to share assets and fill knowledge gaps are alsoincreasing.

4. Achieving economies of scale

Alliances can achieve the economies of scale needed to amortiseinvestment and improve profitability. Alliances between Ranbaxy andSchein Pharma, Lupin’s alliance with Merck Generics are going toachieve considerable economies of scale.

5. Enhance scope of economies

Companies can dramatically enlarge the scope of their operationsthrough alliances. Consider for example the multi-level strategic alliancebetween Ranbaxy and Eli Lilly, that covers two 50:50 joint ventures,collaborative research in select therapeutic areas, manufacturing andmarketing of generic drugs and formulations in the US, India andSouth East Asia. Companies with well-defined strengths can, throughtie-ups like these, enter new business areas more effectively and enhancethe scope of economies significantly.

Development-based alliances can generate a steady stream of productenhancements in banded generics, generic drugs and formulations.

6. Converting barriers into gateways

However formidable the position of a company in its ‘home’ marketmay be, the company may not be able to market its major or matureproducts equally well in all the international markets. More so in thecase of companies in developing countries trying to enter the advanced


countries like the US, UK, France, Germany, Japan etc. That is whythe number of alliances between some leading pharma companies andthe generic companies in the US and Europe is increasing. Considerthe following alliances in progress:

Lupin and Merck Generics Cheminor Drugs (Dr. Reddy’s group) with Schein Pharma Ranbaxy and Schein Pharma Cipla with Geneva Pharma Wockhardt and Sidmak Sun and CaracoAll these alliances are trying to get an access to the very lucrative,difficult-to-penetrate North American generic market. They are alltrying to get a foot in the door by creating a beach-head through thesealliances.

7. Pre-empting the competitive threats

You can pre-empt and blunt the competitive threats by a time-testedmethod through alliances. Remember? If you cannot beat them, jointhem!

8. Using excess capacity

A small number of companies in India are preparing themselves forentering into manufacturing alliances with some well knownmultinational companies to soak up their excess capacities.

9. Minimising exit costs

Companies can use tie-ups, collaborations and alliances to minimisethe costs of leaving a business sector by establishing an alliance with acompetitor and becoming a partner.

Ranbaxy

1. Alliance with Eli Lilly: Ranbaxy has entered into a major strategicalliance in 1994, covering two 50:50 joint ventures with an


investment of $ 100 million, one each in the US and India.

One of the joint ventures will be a research and development andmanufacturing venture. The investment for this will be around$ 60 million in the next three years. The R&D focus in this venturewill be to develop off-patent products, introduce line extensions ofLilly and Ranbaxy products and bulk synthesis and dosage formdevelopment of new products.

The other joint venture is for marketing products developed by theresearch-based joint venture. The marketing joint venture will bebased in the US and will have an investment of $ 30 million.

Lilly will have access through this alliance to high quality, low costproducts which will help in disease management programs in theUS. They will also gain access to excellent product development aswell as research and development capabilities.

For Ranbaxy, these alliances will spearhead the company’s entryinto the US market. Recently these alliances have been scaleddown, both in terms of investment and scope, as Eli Lilly hasdecided not to get in the generics business.

2. Alliance with Schein Laboratories: Ranbaxy has set up a 50:50 jointventure with Schien Laboratories to market its generic version ofranitidine in the US.

3. Alliance with HMS: In yet another strategic alliance, Ranbaxy hastied up with HMS, a highly successful US generic firm to marketsome existing generic formulations of Eli Lilly, starting with cefaclor.This is because the planned entry into the generic market by theLilly-Ranbaxy alliance was called off.

4. Co-marketing with HMR in India: Ranbaxy has entered into a co-marketing arrangement with HMR, India for marketing three ofHMR’s molecules – ofloxacin, anti-bacterial (HMR markets thisunder the brand name tarivid and Ranbaxy markets under thebrand name zanocin), roxatidine, an anti-ulcerant (HMR marketsthis under the brand name rotane) and fexofenadine, anti-allergic(HMR markets this as allegra and Ranbaxy markets under thebrand name altiva). Ranbaxy, through this arrangement, gainsaccess to HMR’s new products.


5. Ranbaxy has entered into a co-marketing agreement with Cipla formarketing carvediol, the new betablocker that is useful in treatinghypertension and CHF and cefpodoxime proxetil, an advanced thirdgeneration oral cephalosporin. Ranbaxy developed cefpodoximewhereas Cipla developed carvedilol. Ranbaxy will market carvedilolas caslot and cefpodoxime as cepodem and Cipla will market theseas carloc and cefprox respectively. Both the companies will sourcethe bulk actives from each other.

6. Ranbaxy has very recently entered into a strategic alliance with itsrival – Glaxo in India for co-marketing an advanced dosage firm ofcephalexin. The new formulation has been developed by Ranbaxyusing proprietory controlled drug delivery system for which thecompany has filed an international patent. The new formulationallows a convenient twice-a-day dosage schedule as opposed to theconventional 3 to 4 times a day.

Ranbaxy and Glaxo are two dominant players in the cephalexinmarket with a 55 per cent market share between them. Theadvantage of this tie-up is that the two market leaders can use theirmarketing muscle to convert the market to twice-a-day schedule ata faster rate. It is a win-win alliance as Ranbaxy and Glaxo are theonly two companies offering this delivery system.


1. Alliance with Novo Nordisk: DRF has also earned the distinctionof becoming the first Indian firm to license its discovery to amultinational pharmaceutical company.

Novo Nordisk, the Denmark-based drug firm is a world leader ininsulin and diabetes care. The company also manufactures andmarkets a number of other pharmaceutical products in a numberof countries. It is also the world’s largest producer of industrialenzymes.

The present agreement of DRF with Novo Nordisk coverscompounds having potential for treatment of diabetes, obesity,dyslipidemia and complications associated with these diseases. DRFhas already filed a few patents for NCEs discovered by it in the US.Novo Nordisk would obtain exclusive license to develop and market


pharmaceutical products based on these compounds discovered andpatented by DRF.

DRF in return would receive up front and milestone paymentsand royalties from Novo Nordisk. Though the products would bedeveloped and marketed exclusively by Novo Nordisk in theinternational markets, they would be co-marketed in India by boththe partners.

Dr. Bruce Carter, the executive vice president, Health CareDiscovery and Development at Novo Nordisk, said about thisalliance, “the agreement with DRF is another important step inour efforts to widen the scope of our research and to gain access tocompounds which may prove useful in the treatment of diabetesand its complications”.

2. Cheminor Drugs, a group company of DRL has entered into anequity based strategic alliance with the US-based ScheinPharmaceutical Inc. to penetrate the North American genericformulations market. Schein has invested 12.79 per cent of thepaid up equity in Cheminor, which has built a state-of-the-artformulations plant essentially to cater to the North American andEuropean generic markets.

3. Cheminor Drugs has also entered into a marketing alliance withPRI of the US to penetrate the North American market for off -patent generic drugs and formulations.

4. DRL is entering into a marketing joint venture in Brazil with alocal partner – Biochimico. The investment is a modest $ 1 milliontowards 50 per cent equity of the marketing firm. Biochimico is a $40 million company in Brazil with access to distribution network.DRL will export finished formulations to Brazil to be marketed bythe joint venture marketing company . The company expects aturnover of $ 10 million in the second year.

5. DRL is also planning to invest $ 5 million in China for amanufacturing tie-up. It may enter into an alliance with more thanone partner. Canada-based Rotan, which has a presence in theChinese market, is one potential partner. DRL is currently sellingtwo of its brands in China: cetrine, an anti-histamine brand andenam, an anti-hypertensive.


Cipla

1. With Nova Pharm, Canada: Cipla has entered into a strategic alliancewith one of Canada’s leading generic companies to gain market accessfor its bulk drugs and formulations. Cipla will manufacture theseat its US FDA approved facilities and Nova Pharm will market thesein Canada.

2. With Geneva Pharma, US: In a move to gain access to the rapidlyexpanding off-patent generics market, Cipla has tied up withGeneva Pharma, one of the largest generic companies in NorthAmerica.

3. With Medpro Pharmaceutica, South Africa: This alliance is to gainaccess to the South African market for its pharmaceutical bulkactives and finished dosage forms.

4. Cipla is also planning to enter into a 50:50 joint venture withZhejiang Autokang Pharmaceutical Company in China. The jointventure company will be set up with an initial investment of $ 2.1million for manufacturing infusion based formulations. The jointventure company will source bulk actives from Cipla and once thevolumes increase, the JVC will integrate backwards. Cipla will ofcourse provide the necessary technology.

5. Yet another joint venture in Cipla’s game plan is with Helio Pharma,Egypt, to gain access to Egypt and other countries in Africa and theMiddle East. The main purpose of this JV is to overcome the entrybarrier (Egypt currently restricts imports of pharmaceuticals onlyto bulk actives and breakthrough areas). Pharmaceutical companieshitherto state-owned are likely to be privatised in Egypt. Also inthe offing is a Free Trade agreement with Europe. This JV, whichwill manufacture and market a wide range of Cipla’s formulationson a royalty basis, can also exploit the emerging opportunities inthe region.

6. Cipla has also entered into a marketing joint venture withGenpharm of Australia, as a part of its strategy to consolidate itsglobal presence. The company is also planning to set up a state-of-the-art formulations facility in Australia and the investment couldbe in the range of $ 5 million.


The joint venture brings together Genpharm’s extensive knowledgeof the Australian market, marketing expertise, field sales force,and distribution net work and Cipla’s extensive product range,research and development capability and technical expertise. WhileCipla will manufacture the formulations in India, Genpharm willhandle marketing of these.

The alliance will market over 20 products including antibiotics,anti-ulcerants and cardiac drugs. The prescription drug market inAustralia is valued at about A$ 3 billion. Cipla’s manufacturingfacilities at Kurkumbh and Patalganga in India have already beenapproved by Therapeutic Goods Administration (TGA) of Australia,which is a prerequisite for undertaking exports to Australia.

7. The company has forged a strategic alliance with a $ 40 millionIrish company – Chanelle, for marketing human health andveterinary products in key European markets. This alliance willcover major markets like the UK, France, Holland among othersand would generate around $ 5 million in sales once the productregistrations are in place. Major therapeutic segments covered inphase one include cardiovascular drugs, anti-virals, antibiotics andanti-helmintics.

Cipla will manufacture these products at its facilities in India whilethe overseas partner will handle marketing. Three of the company’sfive manufacturing facilities in India have been certified by the UKMCA, which is a pre-requisite for exporting to European countries.

This alliance may start a green field manufacturing facility abroad.The investment envisaged is in the range of $ 3–5 million.

8. Cipla has entered with a strategic alliance with the UK- based NeoLabs for marketing generic formulations in Europe. Cipla willreceive royalty on the sale of the products marketed by Neo Lab.

9. Cipla has also entered into a marketing alliance with Cipharm topenetrate the African markets.

10. Cipla has entered into a strategic alliance with Ranbaxy to jointlymarket a basket of drugs in India. This alliance combines theintellectual capital of the two companies leading to consolidation ofmarket share and the creation of sustainable competitive advantagein marketing.


As a first step the two companies are launching two moleculesjointly – carvedilol, the new anti-hypertensive that is very usefulin congestive heart failure, and cefpodoxime proxetil, an advancedthird generation oral cephalosporin. Cipla has developed carvediloland Ranbaxy has developed cefpodoxime.

Ranbaxy will market carvedilol under the brand name caslot andcefpodoxime as cepodem whereas Cipla will market these underthe brand names carloc and cefprox respectively. The companieswill buy the bulk drugs from each other. This is Cipla’s first strategictie-up in the domestic market.

Lupin

1. Lupin and Merck Generics: Lupin laboratories has entered into astrategic alliance with Merck Generics for marketing genericformulations of its injectable cephalorsporins in the developedmarkets like the US, Canada, Germany and other Europeancountries. Lupin is already manufacturing three injectablecephalosporins – cefazoline sodium, ceftriaxone and cefotaximesodium. Besides marketing in India, the company is also exportingthese products to China, South East Asian countries and the CIS.

Merck Generics is the fully owned subsidiary of Dramstdt basedE Merck, which is the fifth largest company in Germany and thetenth largest in Europe. Merck Generics has become one of theworld’s biggest generic companies following the acquisition of theAmerpharm group of companies and Dey Laboratories in the USby E Merck.

Merck Generics has a strong marketing strength in the hospitalsegment and therefore will be able to market the injectable rangeof cephalosporins manufactured by Lupin in North America andEurope. The alliance aims to capture around 10 percent of the $ 2billion world market for these products.

Both the companies jointly undertake the responsibility for theapproval and registration formalities for these products worldwide.Lupin has a strong manufacturing base for these products with afacility approved by the US, FDA. As the market for these products


in India is small, the thrust is on overseas marketing. Merck Genericswith its hospital focus brings synergy to this alliance.

2. Lupin and MOVA: Lupin Laboratories and Puerto Rico-based MOVAPharmaceutical Corporation have formed a 50:50 joint venture firm– CEPH to manufacture and market multi-source oralcephalosporins in the United States.

This tie-up is a major step in Lupin’s game plan to emerge as adominant integrated player in the $ 10 billion-large worldcephalosporin market.

Lupin’s recently acquired oral-cephalosporins plant in Puerto Ricofrom Eli Lilly has been transferred to CEPH. Lupin will export thebulk actives from its US FDA-approved plants in India to CEPH,which will formulate these into finished dosage forms for marketingin the US. In addition, CEPH will continue to manufacture productsfor Eli Lilly for four years.

Lupin will export cefaclor and cephalexin to start with; subsequentlycefadroxyl will also be exported. CEPH will target two businesssegments within the cephalosporins market:

A. Multi-source cephalosporins generic market.

B. Contract manufacturing segment.

3. Lupin has very recently finalised a deal to takeover a pharma companyin Ireland. This beach–head will help Lupin gain access to the rapidlygrowing off-patent generic markets in European Union.

Wockhardt

1. Wockhardt and Ferrings: Wockhardt has entered into a marketingalliance with Ferrings of Denmark through its recently acquiredWallis Laboratories of UK. This move is a part of its strategy to gainmarket access to the European Union.

The company wants to convert Wallis, primarily a UK company,into a European firm. The new alliance will market Wallis’s as wellas Wockhardt’s products in Europe and the USA. Wallis specialisesin manufacturing generic and over-the-counter pharmaceuticals andhas almost all the major retail pharmaceutical chains such as Boots,Sainsbury’s, APS, Booker and Unichem as its customers.


Wockhardt plans to export 50 per cent of its sales globally throughthese alliances by 2005.

The company’s strategy is to manufacture these products in bulk inIndia and supply them to its partners abroad, where theseformulations will be packed and marketed.

2. Wockhardt and Rhein Biotek, gmbh: Wockhardt entered into ajoint venture with the German firm Rhein Biotek, gmbh, fordeveloping, manufacturing and marketing biotechnology-basedproducts in India. The JV will launch its hepatitis-B vaccine by July1999 and recombinant erythropoietin by the end of 1999.

3. Wockhardt and Proctor & Gamble: Wockhardt and P&G haverecently signed a marketing agreement for promoting some of theOTC brands of P&G like vicks inhaler, vicks sinex and whispersanitary napkins to the medical profession. The strategy behind thisis to create a positive endorsement by the medical profession to theOTC brands that are advertised directly to the consumers.

Wockhardt will detail these brands to about 30,000 doctors throughthe 140-strong field force of its Mother & Child Care division. P&Gwill handle sales and distribution. Proctor & Gamble seems to beon the look-out for a partner for introducing its ethical range ofproducts in India. Wockhardt, through this alliance is looking (apartfrom profitability), for winning the confidence of P&G and gainingaccess to the company’s ethical range of products when it introducesthem in India.

4. Wockhardt has recently entered into licencing agreements with twoJapanese firms: Histamitsu and Daichi to facilitate exclusivemarketing rights of their products in the country. The productscovered under these agreements are in therapeutic segments ofWockhardt’s interest. One is in the haemostatics category, whichwill be marketed by the Mother & Child Care division and theother is in the topical pain management category, a segment whereWockhardt has considerable interest. Daichi is one of Japan’s topthree drug companies, whereas Histamitsu is a strong player in topicalpain management. Wockhardt will pay a royalty to the Japanesefirms, besides sourcing the active ingredients from them.

5. Wockhardt and Sidmak Inc.: Wockhardt has recently tied up with


the New Jersey-based Sidmak Inc., a $ 100 million generic firm withmore than 100 products in its portfolio. The joint venture is notbased on equity participation but on sharing costs and profits. Allproduct labels will carry names and logos of both Wockhardt andSidmak. The venture will cover 15 products in various therapeuticsegments to be launched between February 1999 and 2003. Thefirst product to roll out in February 1999 under this alliance is thegeneric version of ranitidine. The JV envisages an annual turnoverof $ 100 million by 2003.

This alliance is in line with Wockhardt’s stated policy of globalisationthrough strategic alliances and joint ventures. It also achievessynergies by exploiting Wockhardt’s strengths in product and processdevelopment and Sidmak’s distribution network and marketingreach.

Nicholas Piramal Industries limited (NPIL)

1. The Piramal group has set up a joint venture to manufacture andmarket a wide range of opthalmic products of Allergan of the USin India. This collaboration has enabled the production andmarketing of hydration fluids, intra-ocular lenses andpharmaceutical formulations for eye care.

2. NPIL has set up another joint venture with Scholl of the UnitedKingdom for manufacturing and marketing their foot care productsin India.

3. In yet another joint venture with the Baroda-based AmbalalSarabhai Enterprises, the Piramal group will market select brandedgeneric formulations in orthopaedic and pain managementsegments. This joint venture company Sarabhai Piramal has recentlyentered into a marketing alliance with the Israel-based Teva Pharmafor manufacturing and marketing of their anti-cancer products inIndia.

4. The group has entered into a 50:50 joint venture with the Seattle-based Cytran Inc. for developing molecules to be marketed in Indiaand select international markets in Asia and the Middle East.

5. NPIL has entered into the over-the-counter pharmaceutical market


with two joint ventures. The first one is with Boots Health CareInternational for marketing its OTC brands such as strepsils,sweetex and icy. The company is also working on furthercollaboration.

6. Reckitt–Piramal is the second joint venture for marketing the OTCbrands of Reckitt & Colman like dettol, disprin and the NPIL’sOTC brands such as saridon, polycrol and rennie.

7. NPIL has started marketing ambisome, a life-saving liposomalampothericin-B for treating fungal infections through its alliancewith Nextar.

8. Stryker–Piramal is the new alliance of the group with StrykerCorporation of the US. This alliance will explore research,development and manufacture of the high technology orthopaedicdevices. Through the Stryker division, NPIL will be able to offertotal surgical solutions from therapeutic treatment upto post surgicalcare.

9. The group has entered into a marketing and distribution alliancewith the Connecticut-based US Surgicals as an exclusive distributorof its products in India.

10. In the area of bulk drugs too, the group is planning a joint venturewith La Porte, a leading European company. The tie-up with aEuropean company would ensure better technology that would bedifficult to copy and give the joint venture company a distinct andsustainable competitive advantage.

11. Nicholas Piramal, in a rather unconventional move, entered into a50:50 joint venture with the Maharashtra-based 125 year oldayurvedic and plant based product manufacturer – ShriDhootpapeshwar (S D) to form Solumix Piramal Limited. The jointventure company will market a range of 16 products of the ethicalproduct division of S D. Annual turnover of these sixteen productswas around Rs. 70 million last year.

The ethical products division is being transferred to the joint venturecompany along with its field force of 100.

This JV is targeted to bolster its recent initiatives in new drug dis-covery through the acquisition of the Hoechst research centre. The


research centre has vast experience and a strong knowledge base,particularly in phytochemistry. The JV partner will provide a readyand steady source of inputs for its new research thrust area from its10-acre herbal culture farm at Bangalore.

12. Nicholas Piramal is embarking on a very ambitious health care planof acquiring control of a chain of pathological labs in Delhi, Calcutta,Mumbai, Bangalore and Hyderabad. The company is planning toacquire an 80 per cent stake in the equity. It is planning for achievinga ROCE (return on capital employed) of 25 per cent from theselabs.

13. The company is also setting up a joint venture company with uptothree foreign partners for conducting Phase III clinical trials (drugtrials on human volunteers) for pharmaceutical companies. NicholasPiramal will hold 50 per cent stake in the venture. The JV will alsoget into ambulatory care and offer insurance and health care productsfor corporates and individuals.

14. Nicholas Piramal is also finalising a co-marketing arrangement,wherein Nicholas Piramal will market formulations of moleculesdeveloped by Hoechst. Nicholas will market these under its ownbrand names. The various payment terms available to companiesgoing for such arrangements are transfer pricing, manufacturingarrangements, brand-user agreements and technical-service-cum-royalty payments. Both HMR and Nicholas Piramal may opt fortransfer pricing. The co-marketing arrangement is expected to takeoff from April 1999. In the first year Nicholas Piramal will co-markettwo products each in anti-diabetic and anti-infective segments.

In the anti-diabetic segment HMR will market their human insulinas insuman, while Nicholas Piramal will market the same moleculeunder their own brand name. The second product in the anti-diabeticsegment is HMR’s research product – glimipride, an oral anti-diabeticdrug. HMR will market this as amaryl and Nicholas Piramal willmarket under its own brand name. The market for anti-diabetic drugs(both injectable and oral solid dosage forms) is estimated to be aroundRs. 2.2 billion and is growing at 20 per cent per year. Nicholas Piramalhas identified ‘diabetes’ as a thrust area. It already has a presence inthe oral anti-diabetic market with its euglucon.


In the anti-infectives segment Nicholas Piramal will market twoproducts – ofloxacin and roxithromycin under its own brand names.

15. Nicholas Piramal has already entered into another collaborativearrangement with the German drug major – HMR in the area ofresearch and development, shortly after the acquisition of Hoechst’sresearch center in India.

16. Nicholas Piramal has signed a joint venture agreement with Swiss-based Siegfried Pharma Limited, a $ 400 million pharmaceuticalcompany – for development and manufacture of certain formulationsgoing off-patent after the year 2000. This is the first among a seriesof joint ventures lined up with European companies, who are eyeingthe fast expanding global generic markets.

Siegfried will market these off-patent formulations manufacturedby Nicholas Piramal in Europe. The JV will identify a marketingarm for the US. The costs and profits will be shared based on themarketing performance in both the continents, equally by thepartners.

Both the companies have identified four formulations goingoff-patent between the year 2000 and 2003 and decided to fileANDAs (Abbreviated New Drug Applications) jointly, soon afterthe expiry of patents.

17. Nicholas Piramal is about to sign a memorandum, involving totaltechnology transfer of a new anti-malarial compound (80/53)developed by CSIR to combat chloroquine-resistant malaria. Thecompany would target South East Asian markets for this new drug.

18. Boots Health Care International, the £ 300 million British pharmamajor is in talks with Nicholas Piramal India Ltd (NPIL) formarketing a range of 13 products from the Indian company’sayurveda stable. These products are developed at NPIL’s QuestInstitute of Life Sciences, the research centre acquired by thecompany from Hoechst Marrion Roussel.

Boots intends to brand these products using its own name formarketing in Europe through the group’s chain of ‘Boots – TheChemist’ stores. If this deal materialises, it will probably be the firstinstance of an international marketing network picking up ayurvedicpharma products for sale.


Torrent

1. Torrent has entered into a 50:50 joint venture with the Frenchdrug major, Sanofi to manufacture, market and export the latter’sformulations to countries in South Asia and South East Asia. Sanofiis a part of the $ 40 billion Elf group.

Besides manufacturing and marketing the Sanofi range of patentedformulations in India through a new marketing arm, Sanofi–Torrent in India, the joint venture also will use Torrent’s R&Dfacilities to develop new molecules.

This alliance would eventually extend to setting up manufacturingfacilities with the aim of making India as the export base.

This joint venture is a part of the Torrent group’s ambitious plansto invest Rs. 3 billion in the next three to four years in the drugindustry to become a major player in the post-GATT scenario.

2. Torrent has joined the hepatitis-B bandwagon with its recent tie-upwith the US firm Scitech Inc to manufacture 20 million doses ofrecombinant hepatitis-B vaccine in India. This alliance is equity basedwith 48 per cent equity share held by the foreign partner. The totalinvestment would be around Rs. 250 million. The project Torrent– Scitech will manufacture the vaccine in India and market theproduct in India and select overseas markets. The foreign partnerwill receive a royalty of 5 per cent on domestic sales and 8 percenton exports.

Zydus (Cadila Health Care)

1. Zydus has entered into a marketing alliance with Centeon of theUS, for marketing a wide range of plasma protein therapies coveringanti-haemophilic factors, wound healing agents, immunoglobulinsand plasma substitutes in India.

2. Indo-Pharma (Indon), a group company of Zydus, has also enteredinto a technical alliance with Bio Sidus of Argentina, in the area ofbiotechnology and genetic engineering. Indo Pharma will bemarketing the only thermo-stable erythropoietin manufactured byBio Sidus in India under the brand name zyrop in India.


3. Zydus is also setting up a 51:49 joint venture with the Germanchemicals and health care major – Bayer. The new joint venturecompany, Bayer–Zydus will be marketing the existing pharmaceuticalbrands of Bayer and select brands of Zydus in India. There will alsobe co-marketing arrangements between Bayer and Zydus for newproducts and the export of Zydus products to Bayer AG andsubsidiaries. The joint venture would also consider possibilities ofco-operation in R&D and for training of Zydus personnel in R&D.

Very recently in May 1999, Bayer and Zydus have decided to call offthe proposed marketing joint venture. They came to the conclusionthat their mutual interests would be better served by not enteringinto the marketing joint venture. Other options for cooperationare under evaluation.

4. Zydus has recently entered into another joint venture formanufacturing recombinant vaccine for hepatitis-B with SouthKorea’s leading pharmaceutical company, Korean Green CrossCorporation (KGCC).

5. The group is also planning a tie-up with South Korea’s HanmiPharma for manufacturing and marketing cyclosporin, an essentialdrug for preventing organ rejection.

6. Another strategic alliance that is on the cards is the one with Sancarlo of Italy for the production of calcitonin injections for treatingosteoporosis.

7. Zydus Path Line, the diagnostic division, has entered into a marketingalliance with Anda Biologicals of Austria for marketing their Elisakits for diagnosing TB.

8. Zydus Path Line has also entered into another alliance with the USbased Chembio Diagnostic Systems for marketing their single steprapid immunodiagnostic test for hepatitis-B.

9. In another strategic alliance with Germany’s Diasys, Zydus Path Linehas started marketing liquid biochemistry reagents in India.

10. Zydus–Cadila Health Care division has entered into a co-marketingarrangement with Abbott for marketing two research molecules ofAbbott’s terazosin and clarithromycin in India under the brandnames of olyster and clarimec respectively.


11. The company has formed another marketing alliance with ChinaScience Resources for marketing artesunate, the anti-malarial underthe brand name falcigo, for treating falciparum and cerebral malaria.

12. Aqua Vet, the veterinary division of Zydus has forged an alliancewith Mallinckrodt of the US for marketing their veterinary anti-rabies vaccines – butalex and rabdomun in India.

13. As a part of its global strategies for competing effectively in the post-GATT era, Zydus is setting up a joint venture with BYK Gulden ofGermany to manufacture and market pantoprazole, the protonpump inhibitor used in the treatment of gastric ulcers. To be set upa cost of Rs. 250 million, the export oriented unit (EDU) is expectedto generate a business of over Rs. 1 billion in its third year ofoperations from 1999.

Sun Pharma

Sun Pharma has entered into a equity based joint venture with theMichigan-based Caraco Pharmaceuticals, a generic firm, to gain accessto the rapidly growing North American generic market. Under thisagreement, Sun Pharma will initially invest $ 4 million. It will also sellrights of 20 off-patent generic formulations. Sun Pharma will furtherdevelop generic formulations for manufacturing and marketing in theUS by Caraco. Both the partners will share the development andregistration efforts. Sun Pharma would be acquiring about 68 per centequity in Caraco within three years.

Ipca

Ipca is one of the most eligible suitors for strategic alliances. It hasupgraded its technological infrastructure to international standards. Ithas US FDA approvals for nine of its bulk activities. The companytherefore, is best prepared to exploit opportunities in custom synthesisand contract manufacturing for multinational companies.

1. Ipca, for the past five years has been supplying PHPA, a drugintermediate for atenolol and other drugs to Hoechst Celenase ofthe US. This tie-up is generating around Rs. 60–70 million perannum.


2. Ipca has entered into a MOU (memorandum of understanding) withSmithKline Beecham for manufacturing some unbranded dosageforms. The company is actively pursuing alliances in this area.

3. Ipca has also been supplying certain drug intermediates to Teva ofIsrael, which churns out sales of about Rs. 60 million per year.

4. Ipca has entered into an alliance with Tillomed, a British genericmanufacturer for supplying atenolol tablets from fiscal 99.

5. Ipca will also be supplying Rs. 50–60 million worth of PHPA andother drugs to Zeneca of UK in fiscal 99.

Kopran

1. Kopran and Industrial Promotion Services (IPS), a subsidiary of theAga Khan Fund for Economic Development (AKFED) have formeda joint venture to take over Kampala Pharmaceutical Industries (KPI),the bigger of Uganda’s two pharmaceutical companies. Kopran willsupply the bulk drugs to KPI for manufacturing formulations locallyat its facility in Kenya. Kopran will also license some of itsformulations to KPI on a royalty basis.

2. Kopran is forming a marketing alliance with Glaxo India for sellingits own respiratory brands. Kopran is forming Kresp, a new strategicbusiness unit to market respiratory products of the alliance. Glaxowill manufacture a whole range of inhalers including Bevent andvent and kresp will market them.

3. The second alliance is with DDSA in the UK. This will be a 50:50joint venture under the name K D Pharma. Kopran will invest inthis venture through its 100 per cent subsidiary Kopran InternationalLimited. The Joint Venture Company will market generic formulationsof off-patented drugs in the UK and other European countries.

4. Kopran has forged another alliance for the supply and manufactureof pencillin-G with the UK based Synpac. Kopran will sourcepenicillin from Synpac to make pencillin based products, whichSynpac will in turn buy back from Kopran for the internationalmarkets. If the alliance is successful, the two companies will worktowards a 50:50 joint venture. This alliance will make Kopran oneof the largest players in the pencillin market. Kopran will also extend


support towards upgrading technology and will supply enzymes toSynpac under this agreement.

5. Kopran is taking up a 39 per cent stake in a new pharmaceuticalcompany being set up in Dubai by Dubai Investments, a domesticcompany promoting business opportunities in United Arab Emirates(UAE). The company will manufacture and market a range of lifesaving drugs including antibiotics, anti-ulcerants and cardiovasculars.

The company would serve the markets in the Gulf and the MiddleEast in the first four years before going global in the fifth year. Thecompany would be the first in the region to manufacture activeingredients and innovative dosage forms.

The company is planning two more alliances – one in West Asia andanother in the US.

Orchid

Orchid Chemicals has entered into an informal manufacturing alliancefor its non-cephalosporin bulk drugs and formulations with theChennai-based American Remedies. Orchid, as a part of its forwardintegration strategy, is entering into marketing of cephalosporin andnon-cephalosporin formulations. American Remedies will be utilisingtheir surplus bulk-active and formulation capacities for manufacturingthese till Orchid sets up its own plants.

Orchid recently entered into subcontracting agreements for sourcingformulations with Nashik-based Liva pharmaceuticals and Hyderabad-based Armour Pharmaceuticals.

Outlook for Strategic Alliances

Alliances are here to stay. Just the ten leading Indian drug companieshave entered into as many as 71 alliances during the last three to fouryears. Most of these are marketing alliances to gain access to new products.Many Indian companies are pursuing a very aggressive strategy tointroduce new products before the product patent regime arrives. Somealliances cover manufacturing, technology transfer and collaborativeresearch. A few of them are even equity-based.

Two companies – Nicholas Piramal and Zydus, lead the pack in forging


alliances with a total of 30 between them. Nicholas is clearly dependenton alliances for its growth. Already alliances account for about 35 percent of its turnover. The company expects this to grow to 50 per cent inthe next two years.

About a third of these seventy one alliances focus on gaining marketaccess. Cipla has entered into six alliances within the last three years topenetrate the overseas markets via the joint venture route with localpartners.

Another major focus of at least a fifth of these alliances is thepenetration of the difficult to enter but highly lucrative North Americangeneric market for off-patent drugs. Companies like Ranbaxy,Dr. Reddy’s, Lupin, Wockhardt and Sun Pharma are actively pursuingthis. Ranbaxy is clearly ahead of the rest and is expecting to achieve atleast $150 million from its North American strategic alliances alonewithin the next three years. Lupin is also well placed to make a markwith its recent alliance with MOVA in the US.

Whatever be the objectives and the duration of these alliances, being agood partner has become a key corporate asset. How to become a goodpartner may be a matter of pure and simple common sense. But theonly thing common about common sense these days is that it hasbecome so uncommon. It is, therefore, worth reiterating what RosabethMoss Kanter emphasised in her HBR article sometime ago as the eight‘I’s for an enduring relationship.

Eight ‘I’s

Indeed, the best organisational relationships are, like the best marriages,true partnerships that tend to meet certain criteria. These arerelationships, where both partners are strong and have something ofvalue to contribute to the relationship. The eight ‘I’s of an enduring,fruitful relationship are:

1. Individual excellence

2. Importance

3. Interdependence

4. Investment

5. Information

6. Integration

7. Institutionalisation

8. Integrity

Intellectual capital 237

Executive Summary

Business, the world over, is moving into a new era, wherecompetitive advantage comes only from intellectual capital.

Generations of business and accounting students havebeen taught that value lies in ‘assets’. Assets come infour forms – three of them (current, fixed and investments)are precise and measurable, and the fourth (intangibleassets) is imprecise and essentially unmeasurable untilit is sold.

All this is changing rather rapidly. It is increasinglybecoming obvious that the new source of wealth is notmaterial – it is information, knowledge applied to workto create wealth.

How fixed are fixed assets really? Gary Hamel, a professorat London School of Business has argued that an asset isreally ‘only a perception of an opportunity about which,a majority of people have agreed!’

Some observers have even suggested that intellectual

14INTELLECTUAL CAPITAL


capital actually subsumes what we usually think of asfixed assets, which on closer observation prove to beless fixed, than we thought.

Whatever viewpoint you may agree with, it is apparentthat the value of intellectual capital in the world’sbusiness is immense. Consider these facts:

Charles Handy of London Business School has estimatedthat these intellectual assets may typically be worththree or four times a company’s tangible book value.

Morgan Stanley’s world index estimates that the averagevalue of companies on the world’s stock exchanges istwo times the book value.

In the United States, corporate market value typicallyranges from two to nine times the book value.

Closer home in India, Price Waterhouse Coopers havedone an indicative analysis of listed Indian companieswith 1997-98 turnover of more than Rs. 1 billion. Thestudy has identified 25 companies which, even in today’sdepressed markets, command a market value which ismore than 4.5 times the book value of tangible assets.

Alfred P. Sloan, the legendary chairman of General Motorsrealised the intrinsic value and true worth of intellectualcapital long before any one could even visualise it forhe said: “Take away my factories, my money and assets. But giveme back my people and my organisation. In five years, Iwill have all of them back”.

That should be convincing enough even for the sceptics onthe real power and value of intellectual capital.


One of the greatest challenges facing any business today is the gapbetween its balance sheet and market valuation. This gap, representingthe bulk of a company’s true value, consists of indirect assets –organisational knowledge, customer satisfaction, product innovation,employee morale, patents and trademarks – that never appear in itsfinancial reports.

It has increasingly become obvious that the real value of the companiescannot be determined by only traditional accounting measures. Theworth of any knowledge-based and information-intensive organisationlies not in bricks and mortar, or even in inventories and receivables,but in another intangible kind of asset: intellectual capital.

Walter Wriston in his highly influential book, “The Twilight ofSovereignty”, writes: “Indeed, the new source of wealth is not material– it is information, knowledge applied to work to create wealth”.Welcome to the new age of intellectual capital. Rick Karlgaard, editorof Forbes ASAP, identified the importance of intellectual capital andwrote almost prophetically in a 1993 editorial:

“As an index, book value is dead as a doornail, an artefact of theIndustrial Age. We live in the Information Age. Of course, thoughremarkably few people have come to terms with the fact. Failure tounderstand the declining relevance of book value – and the hardassets that form the ratio’s numerator – is the proof of this. Humanintelligence and intellectual resources are any company’s mostvaluable assets”.

14 INTELLECTUAL CAPITAL


In the pharmaceutical industry, leveraging of intellectual capital is evenmore important. A few years ago a huge pharmaceutical entity (Novartis)was created by the merger of two Swiss-based pharmaceutical giants –Sandoz and Ciba, mainly on the platform of intellectual capital: bothcompanies wanted to benefit from the combined pipeline of new drugsunder research once they came together.

Three Essential Elements

Intellectual capital has three essential elements. These are:

1. Human Capital is the combined knowledge, skill, innovativecapabilities and employee competence. It also includes thecompany’s values, culture, and philosophy. The company cannotown human capital.

2. Structural Capital includes the hardware, software, customerdatabases, patents, trademarks and infrastructure – in other wordseverything left at the office when employees go home.

3. Customer Capital is essentially the relationships built with the keycustomer groups.

Intellectual Capital – Future implications

A few years from now, investors may look for things like a customersatisfaction index and employee satisfaction index. Steven M.H.Wallman, the then commissioner of the Securities & ExchangeCommission (SEC), at a symposium in 1996 at Washington predictedthat intangible assets and their use would become the heart of annualreports and financial statements, the way they are today, would be addedas appendices.

Furthermore, a special committee on financial reporting formed bythe American Institute of Certified Public Accountants (AICPA) toaddress a growing concern about the relevance of orthodox financialreporting and disclosure to the modern economy, in its report suggestedthese improvements:

1. The provision of information about corporate plans, opportunities,risks and uncertainties.


2. Better alignment of external reporting systems with internalmanagement control and information systems.

3. Enhanced discussion of non-financial performance factors thatcreate long term value such as non-financial performance data, havevalue relevance and can be effectively used by analysts as leadingindicators of future financial performance.

Four Pillars of Intellectual Capital

1. Employee satisfaction index: There is a strong correlation betweenmarket capitalisation and employee satisfaction. Human resourcedevelopment (HRD) policies and practices in all relevant areas likerole clarity, goal clarity, performance review mechanisms,compensation systems, training and development initiatives,transparent transactions with employees and team building activitiesare essential to create a performing organisation. In the ultimateanalysis, morale can be high where performance is high andemployees enjoy what they do. Organisations should therefore,constantly benchmark their practices against the best-in-classcompanies and monitor their progress. Periodical employee surveyson the following areas are very useful to achieve high levels ofemployee satisfaction:

Average years of service

Employee turnover

Willingness to take up new projects

Willingness to be relocated

Time and resources spent in training and development.

2. Customer satisfaction Index: Customer satisfaction leads to customerloyalty. It is your contented customers who will drive your marketshares up. In the ethical drug business, prescription monitoring isone sure way of measuring customer satisfaction. The number andfrequency of prescriptions and even the number of productsprescribed can measure the relative loyalty levels of customers.

3. Share of talent: In the new millenium, knowledge is the crucialdeterminant factor of success in the market place. Competition is


not just between products and markets. Competition is essentiallybetween the talent of one company versus others. Acquiring andretaining talent, therefore, is of paramount importance. Successstrategies for acquiring and nurturing talent include:

Drawing up a list of the best available talent in the industry

Acquiring them

Monitoring the response to job advertisements

Involving the top management in hiring

Developing and building internal commitment throughempowerment.

4. Capturing organisational knowledge: An organisation’s knowledgeis the sum of the knowledge of all the employees. But, when peopleleave companies, they usually take away whatever they have learntwith them. This vital loss is preventable. While you cannot capturewhatever they have learnt entirely, you can capture a substantialpart of it. The two strategies to prevent this loss are:

A. Ensure that your employees document almost everything thatthey have learned while working with the company.

B. Make sure that people work in teams that are mutuallysupportive so that learning is always shared among the employees.

The Only Source

What are the factors that are responsible for creating a competitiveadvantage? Some thing which is not freely available, not easilysubstitutable and cannot be leveraged across the business is ofcompetitive advantage.

Capital, which has been historically a scarce commodity, is no longerscarce. Today as markets have globalised and become more efficient, itis relatively easy for companies around the world to access cash atrelatively inexpensive rates from anywhere on the globe. Its access isnot restricted any more with more and more countries liberalising theireconomies.


Customer relationships and employee commitment are not easilyreplicable. One cannot leverage them across the businesses. In such ascenario, what is the only non-replicable, unique, proprietary andsustainable competitive advantage your business has? Intellectual capitalof course!

How Successful Companies Build Intellectual Capital

Intellectual capital in the pharmaceutical industry comprises intangibleassets like brand equity, FDA approvals, trademarks, patents, physicianrelationships, relationships across the supply chain, relationships withalliance partners, relationships with original patent holders andemployee competence and commitment.

Research overseas has shown that customer loyalty and employeecommitment are perhaps two of the most important intangible assets.A few years from now, investors may look for things like a customersatisfaction index and employee satisfaction index.

Here is how successful companies constantly work on building andstrengthening their intellectual capital base and enhance the value oftheir intangible assets:

1. Customer Relationships: Pharmaceutical companies monitorcustomer contacts product category-wise and prescriber segment-wise. They track customer loyalty and customer conversion throughcontinuous prescription monitoring.

They involve their key customers like opinion makers and trend-setters in identifying new product opportunities and evenformulating their product strategies to gain greater internalcommitment.

They build wide distribution networks of stockists and retailers andmanage them effectively to ensure continuous availability of theirproducts at the right time, at the right place and at the right price.

2. Relationships with Alliance-Partners: The key to success in anyalliance is the ability to build a win-win relationship based on mutualtrust and respect for each other’s competence and contribution.Ability to build and manage a strategic alliance is an increasinglyimportant intangible asset. When technology changes (it is changing


rapidly), you automatically get the benefits of change throughalliances, if you manage them effectively. Further, if a multinationalis looking for a partner in India, it would obviously choose acompany with a strong base of intellectual capital like goodcustomer franchise, wide distribution network, product and processdevelopmental capabilities and employee competence.

3. Brand Equity: Successful pharmaceutical companies review thehealth of their brands internally and take corrective action asrequired. They actively pursue an aggressive strategy of brandbuilding. They track brand preferences and prescription switchesthrough continuous prescription monitoring. Based on this, theyformulate customer conversion and consolidation strategiesaccordingly.

4. Research and Development: They step up the R&D investment tocreate world class infrastructure for doing research and developmentwork. They put up a competent and experienced research teamfocusing on all key aspects of research like process development,formulation development, NDDS, biotechnology and even drugdiscovery (analogue research, mainly). They file for internationalpatents for the molecules developed and look for strategic alliancesfor sharing the further developmental work, product registrationand marketing across all key markets in the world.

5. Management Processes: Winning companies are constantly lookingfor improvement in their management processes. They reorganisetheir operations around customer segments to be more competitive.

6. Information Technology: Highly successful pharmaceuticalcompanies like Ranbaxy, Dr. Reddy’s Labs and Nicholas Piramalare investing in information technology. Ranbaxy in particular issetting the pace in creating an infotech culture within the company.The company believes that there is more to infotech than mereinvestment in hardware and software. Building an infotech cultureinvolves, apart from hardware and software, top manage-ment commitment to training and development and changemanagement. It is investing about one per cent of its sales ininformation technology and is convinced that infotech is an enablerof operational effectiveness.


7. People: Progressive companies realise that people are their mostimportant asset as they create and enhance the value of theirintellectual capital. Their top managements spend time inrecruitment, training and development of managers. They believethat increasing levels of productivity is a direct outcome of increasedhours spent on training. They also track training per employee.Some of them even put the value of their employees (Infosys, forexample) on their balance sheet. There are others who track theeducation levels of their employees and the value added peremployee.

How Indian Pharma Companies are Building it?

Table 14.1 illustrates how the twelve fast growing Indian pharmacompanies, who are preparing themselves aggressively to compete inthe post-GATT era are building their intellectual capital bases. Thisqualitative assessment of ‘High, Medium, Low’ is essentially subjectiveas it is based on the perceptions communicated during informaldiscussions of various participants in the industry, including some wellinformed managers and employees of the respective companies. Thisis also supported by secondary data like their compensation packages,published reports, press releases interviews with key managers in themedia, manpower, turnover rates and training and developmentactivities etc. They are at best indicative of the relative emphasis onthese parameters and the direction in which they are progressing.

Do it Now!

Leif Edvinsson and Michael S. Malone in their pioneering book on‘Intellectual Capital’, write about its future very convincingly:

“The rise of intellectual capital is inevitable, given the irresistiblehistorical and technological forces not to mention the investmentflows, that are sweeping across the modern world and driving us tothe knowledge economy. Intellectual capital will dominate the waywe value our institutions because it alone, captures the dynamics ofan organisation’s sustainability and value creation. It alone recognisesthat a modern enterprise changes so fast that all it has left to depend


Tabl

e 14

.1

Inte

llect

ual c

apit

al –

how

Ind

ian

pha

rma

com

pani

es a

re b

uild

ing

it?

Com

pan

yC

usto

mer

Rel

atio

n-

Bra

nd

Res

earc

hM

anag

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form

-P

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ere

lati

on-

ship

s w

ith

equi

tyde

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p-m

ent

atio

nsh

ips

allia

nce-

men

tp

roce

sses

te

chn-

part

ners

olog

y

Ran

baxy

Med

ium

Med

ium

Hig

hH

igh

Hig

hVe

ry H

igh

Hig

hD

r. R

eddy

’sH

igh

Hig

hH

igh

Hig

hM

ediu

mM

ediu

mM

ediu

m L

abs

Nic

hola

sM

ediu

mH

igh

Low

Med

ium

Med

ium

Med

ium

Med

ium

Pir

amal

Cip

laH

igh

Med

ium

Hig

hM

ediu

mH

igh

Med

ium

Low

Woc

khar

dt

Low

Med

ium

Med

ium

Hig

hM

ediu

mL

upin

Med

ium

Med

ium

Hig

hM

ediu

mM

ediu

mM

ediu

mLo

wZy

dus

Med

ium

Hig

hH

igh

Med

ium

Med

ium

Med

ium

Med

ium

Sun

Pha

rma

Hig

hLo

w*

Hig

hM

ediu

mLo

wM

ediu

mLo

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ntH

igh

Med

ium

Hig

hM

ediu

mM

ediu

mM

ediu

mLo

wK

opra

nL

ow to

Med

ium

Low

toL

ow to

Low

Low

Low

Med

ium

Med

ium

Med

ium

Ipca

Low

toLo

wH

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wLo

wLo

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wM

ediu

mO

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d #

Low

toLo

wLo

wLo

w to

Low

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w M

ediu

mM

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m M

ediu

m

* Su

n Ph

arm

a vi

rtua

lly h

as n

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rate

gic a

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date

# O

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ecen

tly h

as e

nter

ed th

e fo

rmul

atio

n bu

sine

ss. T

he c

ompa

ny h

as v

ery

good

fran

chis

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ith it

s bu

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of b

ulk

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in

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ts


on, are the talents and dedication of its people and the quality of thetools they use. But most of all, intellectual capital is inevitable becauseit alone, of any model for measuring corporate performance, piercesthe surface and uncovers true value. In doing so, it restores bothcommon sense and fairness to economics”.

Make no mistake, whatever the path you choose, intellectual capital isour future. Invest in it. Build it. If you are investing in and building theintellectual capital base of your organisation, you are in fact buildingyour own future. Do it Now!

Operational excellence 249

Executive Summary

Formulating winning strategies is one thing. Executingthem effectively is quite another. It calls for managingthe present effectively and efficiently. Whileconsiderably less glamorous, at least conceptually,implementation is at the heart of the strategy. Withoutit nothing gets accomplished.

Strategic brilliance or operational excellence is asmindless a question as whether the chicken or the eggcomes first? Operational excellence translates strategiesinto action plans as effectively as they are conceived.It is the ‘doing’ part, converting the ‘thinking’ intodoing. In the ultimate analysis, a strategy is only asgood as its implementation.

Let us consider for a moment the strategic approaches ofsome of the leading companies in the Indian pharmaceuticalindustry, which are planning to compete effectively inthe post-GATT era. The key elements of strategy aresimilar because the problems and prospects that thesecompanies are going to face are similar. There are however,differences in the relative emphasis each company givesto these various elements. When the basic approaches are

15OPERATIONAL EXCELLENCE


so similar, what is the critical success factor that isgoing to make the difference between winners andspectators? Operational excellence, of course!

Ranbaxy and Cipla stand out, as far as their operationalexcellence is concerned. Both the companies are in thetop bracket in the domestic pharmaceutical industry.Both have very good systems in place. Other leadingpharma companies too, have been planning aggressively toimprove their operational efficiencies and effectiveness.The important factors to consider in achieving operationalexcellence are:

Building core competencies. Introducing performance management systems based on

positive reinforcement.

Managing costs strategically. Improving productivity in all functional areas.


Formulating winning corporate strategies with detailed functionaland resource plans is one thing: implementing them is quite another.Specific actions required for successful implementation will depend onoverall organisational factors such as structure, the appropriateness ofthe company’s management systems, company culture, organisationalvitality and leadership. These “contextual” variables, of course can bechanged in the medium to long term, but in the short term they arerelatively fixed. Like competence and resources, these organisationalfactors form the “back drops” within which short-term plans have tobe implemented.

Implementation in the short term therefore, boils down to managingthe present efficiently and effectively. It calls for actions needed tocarry through today’s plans, nominating those responsible for carry-ing out the actions and setting timetables for their successful comple-tion.

Unless an organisation manages its present effectively, it cannot havea future. Implementation, therefore, is at the heart of the strategy.Without it, nothing is accomplished. It tends to be grossly underesti-mated as a part of the overall strategic process. Specifying the discreteactions needed to implement a strategic program in a segment is atime-consuming and rigorous undertaking. Being explicit about whathas to be done, by whom and by what date is an important discipline.It is a large step on the way to accomplishing the visions which other-wise may remain largely cerebral, restricted to planning documentsfiled away until the next planning cycle.

15OPERATIONAL EXCELLENCE


Operational excellence as the name implies is about excelling in allfunctional areas of the firm. Since it is the critical determinant factorfor success, the organisation has to ensure that it improves executionalcapabilities of all its strategic action plans.

How do Successful Companies Achieve OperationalExcellence?

1. Revamp their processes to prevent defects, rework and reinspectionand thus reduce costs.

2. Analyse their operations to root out unnecessary work that doesnot add any value in the eyes of the customer.

3. Benchmark other companies to find a better way of doing thingsand then implement and spread the best practices across theorganisation.

4. Eliminate redundant administrative functions by setting up centresof excellence which perform repetitive, high volume, transactionalfunctions across the organisation.

5. Go against the conventional wisdom of ‘don’t fix it if ain’t broke’and fix it before it breaks proactively by following the principles of‘Kaizen’ (continuous improvement).

How to Achieve Operational Excellence

How does an organisation excel at operations? The first step is to achievea clarity of goals and roles. The second step is to introduce appropriateperformance measurement systems and review the progress periodicallyto ensure course correction when required. There are eight importantsteps to achieve superior levels of implementation. Any organisationthat can follow these logical steps can excel in its operations. Here arethe key elements of a strategy to achieve operational excellence:

A. Productivity improvement through constant rationalisation ofprocesses

B. Revitalisation of strategies to accelerate growth

C. Strategic cost management


D. Performance measurement

E. Strategic benchmarking

F. Performance management through positive reinforcement

G. Speed

H. Empowerment

A. Productivity Improvement

Productivity improvement is possible only through continuousrationalisation of processes and existing activities. It helps theorganisation eliminate redundancies in resources and processes. It thushelps to cut down avoidable costs and frees people and money neededfor growth.

B. Revitalisation of strategies

Revitalisation of growth strategies across the organisation is alsonecessary to generate the energy and enthusiasm to sustain the gruelingchallenge of relentless productivity improvement.

Winning Combination

Professor Sumantra Ghoshal wrote very emphatically in his thought-provoking article on ‘Radical Performance Management: The sweet‘n’ sour’ in ‘The Economic Times’ sometime ago that:

“The process of rationalisation and revitalisation are not mutuallyexclusive as most managers think. It is their ‘either – or’ mind-setthat causes this misperception. What is needed is a clearunderstanding that these two processes are symbiotic and mutuallyreinforcing. They are the winning combination to open the gates ofsustained superior corporate performance. Growth withoutproductivity is like building castles in the sand – inevitably theycollapse under their own weight. An exclusive focus on productivityalone with no attention for growth proves to be corrosive, ultimatelysapping all the energy and creativity of the organisation. Sustainedsuperior corporate performance, therefore, requires both – continuous


process rationalisation and relentless pursuit of productivityimprovement.”

C. Strategic Cost Management (SCM)

Strategic cost management can probably be defined better byarticulating what it is not. Strategic cost management is not costreduction. While cutting all avoidable costs is vital for the organisation’shealth, it is important to understand the limitations of a cost reductionfocus, which we will discuss later.

Table 15.1Strategic cost management approach

Key questions Strategic cost managementapproach

1. What is the most useful way A. In terms of the various stages of toanalyse costs? the overall value chain of which the

firm is a part.B. Has a strong external focus.

2. What is the objective of cost A. Three basic objectives: score keep- analysis? ing, attention directing and problem

solving.

B. In addition to these, the design of costmanagement systems changes dramati-cally depending on the basic strategic po-sitioning of the firm: either under a costleadership strategy or a product dif-ferentiation strategy.

3. How should we try to Cost is a function of strategic choicesunderstand cost behaviour? about:

A. The structure of how to compete .

B. Managerial skills in executing thestrategic choices: in terms of structuralcost drivers and executional cost drivers.

Source: Adapted from the book: ‘Strategic cost Management – The new tool for competitive advantage’ byJohn K. Shank and Vijay Govindarajan, The Free Press, New York


Cost analysis traditionally is viewed as the process of assessingthe financial impact of alternative managerial decisions. StrategicCost Management (SCM) is cost analysis in a broader context, wherethe strategic elements become more conscious, explicit andformal. Strategic cost management uses cost data to developsuperior strategies to gain sustainable competitive advantage. It blendsfinancial analysis with three major elements of strategic planning –value chain analysis, strategic positioning analysis and costdriver analysis. A broad overview of strategic cost managementapproach and what it stands for is presented for in Table 15.1.

Cut Costs, Not Corners!

Whatever financial strategies you decide to follow, the basic objectiveremains the same for any business. The bottom line needs to be strength-ened. There are no two opinions about it. Many change programsmainly aim to improve profitability by reducing costs. In spite of thenoble-sounding names that companies give to these programs like –Mission 2000, Top Three by 2003, Fast Track etc. – the basic driver istoo often the need to reduce costs, mainly personnel costs.

Corporate dieticians in India and elsewhere in the world prescribe costcutting when profitability is hit. The same people tend to ignore this asenthusiasm overpowers these very tenets in the growth phase.

The focus on cost reduction will tend to cripple most change programsfrom the start. This is because excessive costs are normally the result ofpoorly operating processes. If you reduce staff without fixing processes,you are likely to find that the remaining staff will be unable to supportthe workload. Consequently, service level falls and costs gradually driftup again. It is therefore, important to target process improvement firstand cost reduction next. If you don’t completely agree, consider this:According to a study by Mercer Management Consulting in the UnitedStates, over the past decade, fewer than 20 per cent of cost cutterswere subsequently able to get their companies back on a profitablegrowth track. They point out that, “traditional cost cutting tools,including benchmarking and process re-engineering provide at best, aone-time snap shot of the organisation and do not take into accountthe long term value that the investment creates”.


Cost consciousness should be built into the strategic framework. Thekey question one needs to ask when cutting costs is what approachshould be used? The mistake most companies makes is to use the lawnmower approach, without taking into account what it means for theircompetitive position. Do not sub-optimise in the name of cost cutting.Cost reduction has to be a strategic process and should not be dealtwith in isolation. Cut costs by all means, but not corners!

D. Performance Measurement

Successful organisations achieve superior performance with greater ef-ficiency and effectiveness than their competitors. Effectiveness hererefers to the extent to which customer requirements are met. Effi-ciency is a measure of how economically the organisation’s resourcesare utilised when providing a given level of customer satisfaction.

The level of performance a business attains is a function of the effi-ciency and effectiveness of the actions and activities it has undertaken.Enter performance measurement. Performance measurement is botha process and metric of quantifying the efficiency and effectiveness ofpast actions. It enables informed decisions to be made and actions tobe undertaken.

To achieve sustainable business success in the demanding worldmarkets, a company must use relevant performance measures. Worldclass manufacturers recognise the importance of metrics in helping todefine goals and performance expectations of the organisation. Allsuccessful companies in the world constantly track performance undervarious dimensions like:

Customer satisfaction Employee satisfaction Intellectual capital Supplier performance Financial performance Market performance Manufacturing performance


A Vital Tool to Achieve Operational Excellence

“What gets done is only what gets measured” is a frequently quotedhomily. You cannot manage what you cannot measure. Knowing whereyou want to go and where you are is crucial to achieve any objective, letalone operational excellence. Without the right measures in place,everything from strategic planning to local operational improvementbecomes unreliable at best and impossible at worst. Performancemeasures provide a means of tracking position. They enable managersto monitor the progress on their journey to excellence.

Andy Neely in his thoroughly researched and insightful book,‘Measuring Business Performance: Why, What and How’ suggests thatall reasons as to why performance measurement is a must, fall intofour generic categories. He calls these as 4 CPs:

1. Check Position

2. Communicate Position

3. Confirm Position

4. Compel Progress

Measurement in itself will not improve performance. The impact willbe observed when people do things more efficiently and effectively.Measurement can compel progress by communicating priorities.Measurement is very often linked to a reward. Further, measures makesprogress explicit. The very act of measuring sends a signal to membersof the organisation, which says: this is something we care about.Remember the not-so-old adage: ‘you get what you inspect, not whatyou expect!’

Balanced Scorecard

The most popular and widely known balanced measurement frame-work is the ‘Balanced Business Scorecard.’ Developed by Robert Kaplan,professor of accounting at Harvard Business School and David Norton,president of Renaissance Strategy Group, the balanced scorecard hastaken the business and consulting worlds by storm. The basis of thebalanced score card is simple. If an organisation has a good, well-bal-anced measurement system, information should be available whichallows people within the business to answer four questions:


1. The financial perspective: how do we look to our shareholders?

2. The customer perspective: how do our customers see us?

3. The internal perspective: what must we excel at?

4. The innovation and learning perspective: how can we continue toinnovate and create value?

Performance Framework for Operations

Mark Brown, a US-based consultant in his book, ‘Keeping the Score:Using the right metrics to drive world class performance’ suggests thatprocesses are evaluated in terms of input, process, output and outcomemeasures. It facilitates a pinpointed analysis that can identify where anintervention is needed:

A. Input measures focus on issues such as quality and quantity of input.

B. Process measures focus on cycle times and process parameters.

C. Output measures monitor quality and dependability of output.

D. Outcome measures track the impact of the output.

E. Strategic Benchmarking

Benchmarking is the process of identifying, understanding and adapt-ing the best and outstanding practices from within the same organisationor from other businesses to improve performance.

This involves a process of comparing practices and procedures to thoseof the best to identify ways in which an organisation can makeimprovements. Thus new standards and goals can be set which, in turnwill help to better satisfy customers’ requirements for quality, cost, productand service.

Organisations in this way can add value to their customers and distin-guish themselves from competitors.

The benchmarking process pioneered by Xerox Corporation in theUnited States consists of four phases (Table 15.2).


F. Positive Reinforcement

The only way in which you can achieve sustainable superior performanceand minimise discrepancies between varying performance levels withinyour organisation is through modification of your employees’ behaviouron the job. You can achieve this by demonstrating to the concernedpersons that it is going to make a difference to them, if they changetheir behaviour on the job. In other words, you can achieve this throughpositive reinforcement.

Joseph H. Boyett and Henry P. Conn highlight the power of positivereinforcement in their book on ‘Maximum Performance Management:How to manage and compensate people to meet world competition.’

Table 15.2

Four phases of benchmarking process

Phase Issues to be addressed1. Planning A. What will be benchmarked?

B. Who will be the benchmark companies?

C. How will the data be collected?

2. Analysis A. Are the benchmarking companies better?

B. If so, by how much?

C. Why are they better?

D. How can we apply what we have learned to our business?

3. Integration A. Have the results been accepted by management?

B. Do goals have to be changed or modified based on the results?

C. Have these new goals been communicated to all affected parties?

4. Action A. Have the steps required to achieve the desired goals been identified?

B. Is the process being tracked?

C. Is there a plan for recalibration of the benchmarks?


Positive reinforcement works. In research and day-to-day experience ofmanagers who use it, positive reinforcement has repeatedly been shownto produce significant gains in performance. Moreover, performancegains with positive reinforcement are sustained over time. Comparedto negative reinforcement, positive reinforcement typically results inperformance that is 20 to 50 per cent better. Occasionally, the perfor-mance is even hundreds of percentage points better.

Positive reinforcement in addition, improves morale, job satisfactionand relations between managers and employees. In a positively rein-forced organisation, people have a much more positive attitude abouttheir jobs, feel a heightened sense of satisfaction and self-worth andare much more positive about the company.

The ‘How’ of Positive Reinforcement

Fran Tarkenton, the former professional quarterback, who now runsTarkenton & Co, a business consulting firm specializing in productiv-ity solutions in the US, suggests how to implement positive reinforce-ment program. He writes about the price system of positive reinforce-ment program developed by them in his book, ‘How to Motivate People:The team strategy for success’.

Pinpointing: The first essential step in motivating people towardachievement is to set precise, measurable, ‘pinpointed’ objectives thatare realistic, meaningful, simple to understand and perceived aspersonally worthwhile by every one involved in their implementation.

Recording: Recording or scorekeeping is the second important step bywhich, people can tell how fast and how far and in what directiontheir motivation is taking them.

Involvement: The role of managers today is much more challengingthan ever before. Three factors are mainly responsible for this. Theseare: changing attitudes toward authority, a change in the relative im-portance of work and a heightened expectation for participation indecisions. Involvement of employees will certainly result in sustainablesuperior performance. How to get employees more committed andinvolved is an important area that every organisation is trying to fig-ure out. The challenge is to see if we can incorporate into our workinglives the same elements of cooperation and joint decision making and


democracy that we keep exhorting in our political lives. That wouldcertainly help us improve employee involvement to a very greatextent.

Consequence: It is only a change in behaviour on the job that can leadto performance improvement. To change a given behaviour, you havegot to start with its consequences. There are three basic ways in whichyou as a manager could impact the performance of your team. Youcould give them Positive reinforcement by making the consequencesof their behaviour better. You could give them Negative reinforcementby making the consequences unattractive. Or you could give them Neu-tral reinforcement – that is no reinforcement – by asking for a newbehaviour without tying it to consequences.

Positive reinforcement, without doubt, results in outstandingimprovement in performance. Negative reinforcement leads toincreased compliance and improvement in performance and thus pavesthe way for superior performance. Neutral reinforcement leads toextinction effect. Unless you reinforce good behaviour, that behaviourwill inevitably decrease.

John D. Rockefeller said long ago that, “good management consists inshowing ordinary people how to do the work of superior people”. Thismeans learning to balance negative and positive reinforcement so thatthe general level of achievement in the middle is increased.

Evaluation: “Feedback is the breakfast of champions” is an often-quotedtruism. Evaluation is providing this vital feedback to employees on howthey are doing, where they need to improve and how they can im-prove their performance. The purpose of evaluation is to improve per-formance and develop employees.

G. Speed

“It is not the big companies that eat the small; it’s the fast that eat theslow”, wrote ‘The Wall Street Journal’ sometime ago.

Jack Welch, one of the most successful and highly respected CEOs inthe United States, is well known for his communications on the needfor ‘speed’ throughout GE (General Electric) one of the largest corpo-rations in the world. Taste this: “Faster, in almost every case is better –


from decision making to deal clinching, to communications to productintroductions – speed, more often than not, ends up being the com-petitive differentiator”.

Speed has three main advantages:

1. Speed has a striking impact on new product introduction process –the driver of tomorrow’s top line growth.

2. Speed has impact on asset management too – speed of the order-to-remittance cycle- from the time of order to when you get paid,which can drive bottom line growth up.

3. Speed redefines capacity, reducing plant and equipment investment.

A few words of caution here. Speed, as a management tool does notequate with haste. Rather it means removing wasteful activities andsimplifying products and processes to get to the market faster. Speedachieved by short cuts and compromised quality will hurt more than itwill help.

There are three prerequisites for achieving speed:

1. A company needs to know how to learn quickly if it is to movefaster.

2. It also needs employees who are prepared to take decisions. A longchain of command is the enemy of speed.

3. Good information technology linking the company from custom-ers to suppliers.

H. Empowerment

Empowerment literally means power to people. In the organisationalcontext it means that people are involved in decision making and takeresponsibility and control their destiny and make a difference to theorganisation. Empowerment is a goal that organisations approximatebut never quite reach.

Employee Satisfaction

A 1997 study by researchers from the Institute of Work Psychology atthe University of Sheffield found a strong correlation between em-


ployee satisfaction, employee organisational commitment and overallbusiness performance.

Research completed in 1998 by Gallup in the United States suggeststhat organisations achieving higher levels of employee satisfaction thantheir rivals outperform them by 22 per cent in terms of productivity,38 per cent in terms of customer satisfaction, 27 per cent in terms ofprofitability and 22 per cent in terms of employee retention.

Two Kinds of Commitment

Chris Argyris, professor emeritus of education and organisationalbehaviour at Harvard University wrote in his famous HBR article‘Empowerment: Emperor’s New Clothes’ that human beings cancommit themselves in two fundamentally different ways: externally andinternally. Both are valuable in the work place, but only internalcommitment reinforces empowerment.

It is a fundamental truth of human psychology that the less powerpeople have to shape their lives, the less commitment they will have.

If management wants employees to take more responsibility for theirown destiny it must encourage the development of internal commit-ment. As the name implies, internal commitment comes largely fromwithin. Individuals are committed to a particular project, person orprogram based on their own reasons and motivations and closely al-lied with empowerment. The more top management wants internalcommitment, the more it must try to involve employees in definingwork objectives, specifying how to achieve them and setting stretchtargets.

If you want to create a climate of internal commitment, you need toempower people. To identify how far an organisation is in empoweringits people, a simple and quick check-list is presented in Table 15.3. Theattributes and characteristics of a control-driven organisation are atone extreme end of the spectrum and of an empowered organisationat the other end of the spectrum. Treat it as a ten-point scale and placethe control-driven organisation at ‘one’ and empowered organisationat ‘ten’. You can identify areas of improvement and change requiredfor becoming an empowered organisation. You can calibrate the


Table 15.3Quovadis? (Whither goes thou?)

Control-drivenorganisation

Management acts as“individuals” in taking andcommunicating decisions. Theypromote the need to developand improve the organisationand to set targets. Trust is low.

Partial business plans existconcentrating only on financialtargets. Plans are not widelycommunicated or visiblychampioned by the top team.

Empoweredorganisation

All managers are active insideand outside the organisation inpromoting improvement activ-ity. Commitment is internalised.Continuous improvement is theculture and business philosophy.

Strategic direction visiblyachieved. Peoples’ successrecognised by leaders at all levels.Innovation and continuous im-provement is the culture andbusiness philosophy. Environ-ment and climate are chargedwith positive reinforcement.

Training is seen as an investment.Employee morale is high andexceeds competitive benchmark.The full potential of all people isbeing realised to achieve the stra-tegic direction. People are viewedand treated as a resource.

All the company’s resources aredeployed to meet agreed policiesand strategies. Benchmarkingagainst the ‘best in class’ is a keyresource improvement driver.Resources are planned opti-mally.

System ensures existing and newproducts and services meet allstakeholders’ needs. Customersfind it easy to do business. Con-tinuous feed back causesimprovement and innovation.

Performancedimension

1. Leadership

2. Policy and strategy

3. People management

4. Resources

.5. Processes

Training is seen as a cost andpeople employed to do a job areviewed as commodity.

Resource management tends tobe directed solely at financialareas. Decisions on stock andmaterials are taken usinghunches and ‘gut’ feeling.Information is kept in peoples’heads. Resources areunderplanned.

Few procedures exist apart fromfinancial controls. Every onedoes his best and ‘ fire fighting’ isthe norm. Changes are made tofix the problems as and whenrequired.


midpoints in the scales with identifiable and measurable characteristicsand attributes so that tracking the progress on your journey toempowerment is possible.

The Imperative of Operational Excellence

Professor Sumantra Ghoshal cautions the Indian pharmaceuticalindustry that: “a simple benchmarking exercise comparing major Indiancompanies in key industries with their global competitors, shows thatIndian companies are (pharmaceutical companies in particular) runninga major risk. They suffer from a profound bias for growth. There isnothing wrong with that. The problem is when you do not have thesame bias for productivity improvement.

6. Customer satisfaction

7. Employee satisfaction

.8. Impact on society

9. Business results

Customer satisfaction onlyconsidered in terms of externalcomplaints. Complaints aredealt with as and when they arisewith little attempt to correct thecause.

Disputes and grievances areresolved as and when they arise.Absenteeism and staff turnoverare high. Morale at times is poorand management tends toconcentrate on themselves.

Environmental and socialobligations seen as costly and athreat to competitiveness.Damage limitation exercises areused to counter the problems.

The financial results are availableand some non-financialindicators are published. Theyare seen as ‘management data’by majority of the staff.’

All processes and relationshipsare delivering customer commit-ment. Improvement andinnovation exceed customer ex-pectations.

Benchmarking against otherorganisations shows employeesatisfaction is high and has animproving trend. 360-degreeappraisal is taken as the norm

Data gathered and views soughtfrom local society and employ-ees are used in business planning.Formal recognition of environ-mental performance has beenreceived.

The organisation’s performanceexceeds external benchmarks.Continuous performance im-provement is a part of theorganisation’s culture.

Source: Adapted from ‘The West midlands Excellence Award’ as described in ‘Measuring Business Performance:Why, What and How’ by Andy Neely, The Economist Book, published by Profile books, London.


While companies are showing a robust growth of 20 per cent or more,their ‘returns on capital employed’ (ROCE) and labour productivityare considerably lower than some of the leading multinationals. Whatmakes matters even worse is that many Indian pharma companiesbarely manage to cover the cost of their capital while leading interna-tional drug companies like Glaxo, Smithkline Beecham and Pfizer earnaverage ROCE of 65 per cent.

Passion for growth is fine. If it is not matched by a strong desire toimprove productivity, the growth will not only become unsustainable,the firm’s ability to cover even its cost of capital will come down drasti-cally, eroding its value. They need to focus on the productivity side ofthe equation as well.

Towards Operational Excellence: The Indian example

Here are some examples of initiatives taken by leading Indian pharma-ceutical companies to achieve excellence in their operations. Ranbaxyhas achieved a considerable level of operational efficiencies and leadsthe pack. It has a number of ‘firsts’ in terms of initiatives launched toimprove its operational efficiencies and effectiveness.

1. Ranbaxy has decided to benchmark its cost management practicesagainst the best in class in the world – like Ivax and Mylan of theUS, Tofa of Italy and Teva of Israel. The company gathers cost dataon these companies constantly through its overseas’ arms. Ranbaxyuses these inputs for improving its process design, manufacturingand product development teams to control costs. The companyhas already set a cost reduction target of 8 per cent by the year2000. It has already slashed operational costs by 3 per cent.

2. Ranbaxy and Dr. Reddy’s Labs have started subjecting themselvesto the discipline of Economic Value Added (EVA). They are planningto use EVA as a tool to enhance shareholder value.

3. Ranbaxy has started a Total Quality Management (TQM) exerciseand christened it as ‘culture change and quality management’.Dr. Reddy’s Labs, Wockhardt and Lupin too have startedimplementing Kaizen (continuous improvement) programmes.

4. Ranbaxy has also decided to affect all inter-departmental transfers


are marked to market so that inefficiencies in one department arenot subsidised by efficiencies in another. Its raw material expensesare down to 46 per cent of sales from 60.11 per cent six years ago.

5. Ranbaxy is the only Indian pharmaceutical company to invest oneper cent of its sales on infotech. The company is planning todigitalise its operations across all its markets around the world.

6. Ranbaxy is also investing substantially to excel in operations onhigh-tech information technology tools like ‘Enterprise ResourcePlanning’ (ERP). Dr. Reddy’s Labs are also implementing ERP.

7. Ranbaxy has been paying attention to the productivity side ofthe equation too. Turnover per employee has gone up to Rs. 2.27million in 1996–97 from Rs. 1.07 million in 1992–93.

8. Ranbaxy is the first Indian drug firm to implement a statisticalmanagement tool – design of experiments (DOE) to optimiseresearch effort and achieve significant reduction in costs and cycletimes.

9. In so far as process development capabilities are concerned, a num-ber of Indian drug companies like Cipla, Wockhardt, Kopran, Ipca,Orchid, apart from Ranbaxy and Dr. Reddy’s Labs have developedhighly cost-effective alternative processes for a number of bulk drugsand become internationally competitive.

10. Cipla has achieved a very high degree of operational effectiveness byvirtue of its systems-driven approach. Its process and product devel-opment capabilities are comparable with some of the best in thebusiness internationally.

The Rule of Three

The three most important factors that can help an organisation excelin operations are very precisely identified by Jack Welch, the legendaryCEO of General Electric when he said:

“We always said that if you have three measurements to live by, theywould be: employee satisfaction, customer satisfaction and cash flows.If you have got cash in the till at the end, the rest is all going to work.If you have got high customer satisfaction, you are going to get mar-ket share. If you have got high employee satisfaction you are going toget productivity. And if you have got cash you know it’s all working.”

Winners and spectators 269

Executive Summary

The pace of change in the Indian pharmaceutical industryever since the government has joined WTO and signed GATT,can only be described as ‘radical’. How else can youexplain the recent spate of mergers and acquisitions ofall sizes and shapes and types – brand, business, facilitiesand even research centres?

In any radically altered environment what is put to thetest is one’s ability to adapt and cope up with thechange. The peculiar characteristic of any change isthat it gives only one option for dealing with it. Eitheryou master the change or you will be mastered by thechange.

Mastering change involves anticipation. It calls for aproactive approach. You have to visualise the changebefore it arrives. That is what strategic vision is allabout. The detailed accounts of twelve of the leadingIndian drug companies are presented here. These companieshave visualised the likely aftermath of GATT and theinevitable product patent era. They have been preparingthoroughly and proactively to meet the challenges of astrong IPR protection regime – a virtual about turn from

16WINNERS AND SPECTATORS


the highly protected process patent environment of thepresent.

These twelve companies are ranked in order of theirreadiness and preparedness to compete effectively in thepost-GATT era. They have been taking a number ofinitiatives to build sustainable competitive advantagesinto their strategies. Their workouts too, have been farmore strenuous than those of their peers. It is said thatthere are three basic types of companies:

A. Companies that make things happen

B. Companies that let things happen and

C. Companies that wonder what happened

These twelve companies obviously belong to the firstcategory. They are distinctly ahead and are planning tostay ahead. Consider for example that these twelve companiesif fact collectively account for:

1.Over a third of the industry’s turnover

2.About 40 per cent of the industry’s exports

3.Close to 90 per cent of manufacturing facilities inthe country that are approved by internationalregulatory authorities like US FDA, UK MCA

4.Over 90 per cent of acquisitions – brands, businesses,facilities and research centres- in the industry

5.Over 90 per cent of all strategic alliances in theindustry both in India and abroad

And the winners are. . . . .


The marketing environment of the Indian pharmaceutical industryis changing radically. Analysts and pundits predict that the industry isin for a major shake-out. The symptoms and the telltale signs are alreadythere for the discerning observer to see. How else can you explain therecent spate of mergers and brand acquisitions? All these portend astrong and positive consolidation phase for the industry.

How do you decide, select and identify the winners in such a rapidlyand constantly changing scenario? Picking up winners against such abackdrop is not an easy task. You cannot just evaluate them on mereperformance indicators. Current performance does not necessarilyguarantee future success. Neither can you judge based on the potential.Potential is only a promise on the evaluation sheet till it is realised.

Apart from the current performance indicators, it is important to assesshow the companies are preparing themselves for competing in theimpending product patent regime.

Based on the international experience of countries like Italy and Japanwhich have embraced product patents in the late sixties, ten strategicelements can be isolated as criteria for evaluating the degree ofpreparation by Indian pharma companies to meet and beat competitionin the post-GATT era:

1. Strategic Vision


3. The marketing mindset

4. Technology upgradation

16WINNERS AND SPECTATORS


5. Research focus

6. Strategic integration

7. Internationalisation of business

8. Alliance attractiveness



For each of these strategic elements, a set of evaluation criteria isdeveloped. All these companies are assessed on a ten-point scalequalitatively where a rating of ‘high’ means ‘ten’ points, a ‘medium’rating ‘five’ points and a ‘low’ rating ‘one’ point. The assessment,although qualitative in nature, is backed by quantifiable evidencewherever possible. Here is the rationale for the ratings:

High: significant evidence that the company has made substantialprogress towards its strategic objectives and has reached thepredetermined milestones. Clearly the leader of the pack.

Medium:adequate evidence that the company is making progress onits strategic objectives. There are also clear indicators that thecompany is investing its efforts and money in critical areas tostay competitive in the future. Not a leader, but a competentand competitive follower.

Low: evidence to suggest that the company is on its way to reachthe critical mass in all key areas. Growth rate usually higherthan the industry average. The company has started investingits effort or is yet to invest significantly in critical areas toeffectively compete in the post-GATT era.

Evaluation Criteria # 1: Strategic Vision

How does one evaluate a company on a criterion like strategic vision?Strategic vision essentially means building the best possible assumptionbase about the future and thereby develop intuitively proactive strategiesthat shape the industry evolution. Competition for strategic vision,therefore, is to establish one’s company as the intellectual leader interms of anticipation and influence over the direction of industryprogress. It is virtually seeing the future before it arrives.


Ranbaxy, viewed against this background, certainly emerges as theintellectual leader of the Indian drug industry. It has always been aheadof the competition. The company over the years has been able todevelop the much-needed prescience to anticipate changes almostintuitively and was virtually able to see the future before it arrived. Itsstrategy is almost a model for many aspirants in the Indianpharmaceutical industry for survival and growth in the post-GATTera.

Strategic Vision

A.Industry foresight and strategic focus

B. Ability to spot, anticipate changes

C.Translating strategic vision into detailed action plans and ability toimplement

Observation

Clear vision, Precision in termsof strategy and immaculatecapabilities of execution differen-tiate Ranbaxy from the rest.The company has always beenahead of competition, be itin strategic integration,internationalisation of business,upgrading technological infra-structure and competence andinvestment in R&D.

The vision and mission of theTechnocrat-founder Chairmanof Dr. Reddy’s labs has in factput India in general andHyderabad in particular on thebulk drug map of the world. Thecompany’s strength is in technol-ogy, research and development.

Company Assessment

1. Ranbaxy High

2. Dr. Reddy’s High Labs


3. Cipla Medium

4. Lupin Medium

The company of late has demon-strated a strong marketing bias.The power of the company’svision becomes palpable whenyou consider the first-of-their-kind collaborative agreementswith trans-nationals like NovoNordisk for licensing the mol-ecules developed at Dr. Reddy’sResearch Foundation.

Cipla has been a dominantplayer in the domestic market forsome years now. It’s the secondlargest pharma company in theIndian sector in terms of marketshare. Its core competencies aretechnology and marketing. Thecompany has very quickly drawnup its plans to exploit theopportunities that the liberalisedeconomy and the post product-patent era have to offer. Ciplahas forged a number of allianceswith overseas partners whereinit will provide the technologyand products and theinternational partner will takethe responsibility for marketingand distribution.

Lupin too, had a very clearstrategy when it entered thedomestic market and built itscore competencies in technologyto become a leader infermentation technology. Itsstrategy for internationalising thebusiness is also a focused one. It is


5. Wockhardt Medium

6. NPIL Medium

poised to achieve a sizeable shareof the world generic market forinjectable cephalosporins throughits win-win alliance with MerckGenerics. Its recent acquisitionstrategies too reinforce itsdominant position.

The grand strategy of Wockhardttoo, has been clear and wellexecuted. The company’s focushas been on key markets in theindustrialised world. Thecompany is well placed to exploitthe rapidly expanding genericmarket for off-patented drugsin North America and Europethrough its recent acquisitionsand alliances abroad.

Timing seems to be theessence of this rapidly growingconglomerate. The companyseems to be in a great hurry toreach the top. The company haschosen the acquisition and alli-ance route to move up theindustry ladder. What analystshave been pointing as a strate-gic gap – the absence of focus onresearch and development andexcessive reliance on alliances –has been filled with the recentacquisition of the prestigious re-search centre of themultinational Hoechst MarionRoussel at Mumbai. Yet anotherrecent tripartite joint venturewith American and British bulk


7. Torrent Medium

8. Zydus Medium

drug manufacturers will com-plete the success strategy jig-sawpuzzle at NPIL.

Torrent has started as a nicheplayer and achieved leadershipposition in cardiovascular, neuro-psychiatry segments in India.Some companies in Indiaemulated Torrent and becamesuccessful. Torrent has later goneinto unrelated diversificationand diluted its focus. Recently,Torrent has been regaining itsfocus in pharmaceuticals andpursuing strategic alliancesstrengthening its R&D effort.Torrent has earlier heavilydepended on its exports in theRussian market and enjoyed ahigh market share. After thedisintegration of the formerUSSR and in the changingenvironment it has yet to regainlet alone build on its market inthe CIS region. Over all, Torrenthas yet to firm its plans forinternationalisation.

Zydus in less than two years afterthe division of Cadila has movedinto the top ten of the Indianpharmaceutical industry all byitself. The company has a clearvision and a strategy to match tomeet the challenging objective ofRs. 1 billion in sales by the year2000. The company has enteredinto as many as thirteen alliances


with leading players in the worldto gain access to new productsand markets.

Sun Pharma too, like Torrenthas followed the niche strategyto enter the Indian pharmaceu-tical market and achieved theleadership in neuro-psychiatryand coveted 2nd position cardio-vascular markets. The company’sstrategy for international opera-tions is based on marketingbranded generic formulations inoverseas markets. The companyhas also been following an acqui-sition route to buy time inbuilding infrastructure and capa-bilities to meet its ambitiousgrowth plans. It continues tomaintain its status as one of thetop 5 companies in terms ofgrowth rate.

Three areas of focus. Backwardintegration. Export thrust.Brand building in domestic for-mulations market. These are thedrivers of growth at Ipca.

Kopran’s entry strategy has beento exploit a dormant opportu-nity in building up huge capaci-ties and economy of scale ofsemisynthetic and other penicil-lin based antibacterials. The com-pany has become one of theleading players in the interna-tional amoxycillin market. It hasbeen following the alliance route

9.Sun Pharma Medium

10. Ipca Low

11. Kopran Low


12. Orchid Low

and integrating forward intovalue added formulationsto meet the post-GATT oppor-tunities and challenges. Thecompany’s recent restructuringand the new alliances are boundto sharpen its focus.

Orchid, a 100 per cent exportunit has achieved outstandingsuccess in the world cepha-losporin market with a 13 percent share in less than fiveyears. The company’s focushas been on building andcommercialising process devel-opment and technological capa-bilities. The company has beenembarking on a forward integra-tion project into high value for-mulations like sterile and oralcephalosporins among otherswithout losing its 100 per centexport unit status. The company,however, will be facing formi-dable competition from two In-dian drug majors, Lupin andRanbaxy, in the internationalmarkets.

Evaluation Criteria # 2: Critical mass

Critical mass is the market share, which a firm must obtain in order tobecome fully competitive on price and cost. This calls for an ability toassimilate the start-up costs and then build on direct cost base largeenough to absorb competitively the indirect costs of business. Timingis of essence in terms attaining the critical mass. It is important toreach it with in a reasonable span of time, comparable to normal


Observation

Ranbaxy clearly is ahead of thepack even in terms of criticalmass. The company has re-corded a turnover of close to$ 500 million and is half waytowards its objective of $1 billionby 2003. The company has

developmental lead-time in the relevant industry. Failure to do buildup quickly creates strong pressures even to abandon the venture itselfand may even lead to bankruptcy.

Making realistic estimates of the critical mass is indeed critical. Anumber of firms in Indian pharmaceutical industry apparently without having anticipated the very high start-up costs, the critical massrequired to sustain and the very large development, marketing anddebt servicing costs have paid very dearly. Natco’s failure to anticipatethese and to reach the critical mass quickly enough has forced thecompany to sell its established over-the-counter medicine brand in theRussian Federation to Ranbaxy and to put its most profitable domesticformulation business on the block. Orchid on the other hand, hasreached the critical mass in real quick time and has been a darling ofthe investing community almost since inception.

Here are some of the successful companies that have reached the criticalmass to be competitive in the post-GATT era. The companies arepreparing actively to progress in the strong intellectual propertyprotection regime of the future. Here are the criteria used in assessingthese companies on their race to reach the critical mass:

Reaching the Critical Mass

A. Sales turnover, growth rate

B. Rank in the industry

C. Size of the field force and total number of employees

D. Strategic routes taken to reach the critical mass – organic growth?Acquisition of brands? Companies?

Company Assessment

1. Ranbaxy High


2. Dr. Reddy’s Medium Labs

3. Cipla Medium

4. Lupin Medium

reached the critical mass in allkey areas of business and is twiceas big as its nearest rival.

DRL group turnover (includingCheminor Drugs) was Rs.3.8billion in 1997. The companyhas built world class manufac-turing infrastructure. Above all,the R&D infrastructure andcapabilities of the group areconsiderably higher than therest of the industry in India.The company’s renewed focusin domestic formulations busi-ness is yielding good results.The company has acquired twobrands from Standard Organ-ics Limited, one brand fromPfimex in 1996 and 5 brandsfrom Dolphin in its race for thecritical mass. The companyenjoys considerable reputationboth from its customers and theconsuming public.

Cipla is a dominant player inthe domestic market with asales turnover of Rs. 4.51billion in 1997. Cipla has a di-versified product-mix and aleadership position in the anti-asthmatic segment in India.Cipla has been actively pursu-ing exports through the allianceroute.

Lupin is also aiming to reachthat magic figure of $ 1 billionby 2003. The company has


achieved a turnover of Rs.5.7billion in 1997. The companyhas achieved world leadershipin the anti-tubercular market.It is also significantly ahead ofothers in India in the area offermentation technology.

Wockhardt too has beenpursuing an acquisition strategyto accelerate growth. The totalturnover, including the newlyacquired Merind sales volumefor 1997, was Rs. 3.69 billion.Wockhardt too has created amanufacturing infrastructurethat is second to none. Thecompany has also acquiredgeneric companies in the UKand US to exploit the vastmarket opportunity for multi-source off-patent products inthe difficult-to-penetrate andhighly industrialised westernmarkets.

NPIL in the short span of eightyears has achieved a sales vol-ume of Rs.5.19 billion entirelythrough acquisitions. Acquisi-tions and alliances are thepillars on which the entire edi-fice of NPIL is being built. Thecompany has reached the criti-cal mass even in research anddevelopment, which it was lack-ing, with just one stroke ofacquisition - the prestigiousR&D centre of HMR.

6. NPIL Medium

5. Wockhardt Medium


7. Torrent Medium

8. Zydus Medium

Torrent has stormed its wayinto the domestic formulationmarket by entering through aniche strategy. It has now en-tered the antibacterial marketin a big way and integratedbackwards to reach a criticalmass. Torrent’s turnover in1997 was Rs. 3.18 billion. Thecompany has also forged a fewstrategic alliances to gain accessto new markets and new prod-ucts. Its strength in exports haseroded to a large extent mainlydue to its over dependencein the Russian trade, whichwas based on rupee-roubleagreement between the twogovernments. Torrent has notcompletely adapted to thechanging market scenario asregards exports to CIS and ithas yet to gain a foothold inother international markets.

Zydus has reached a turnoverof Rs. 3.38 billion in fiscal’ 97.The company has chosen thealliance route to gain access tonew high value products. Thecompany has also reached acritical mass of target audiencethrough its one-thousand-plusfield force. Zydus has a 2.1 percent of the domestic formula-tion a market. The companyhas six strategic business unitsto promote its different busi-nesses that cover pharmaceuti-


cal formulations, bulk drugs, di-agnostics, agro-veterinary andcosmetics.

Sun Pharma has moved intothe top ten Indian pharmaceu-tical companies in less thanfifteen years. The company fol-lowed the niche strategy likeTorrent and is pretty close tothe leader in the two specialitysegments. In neuro-psychiatryit has even overtaken Torrent.Sun Pharma has very aggres-sively pursued acquisition as ameans to reach the critical massin sales, manufacturing infra-structure, process developmentand product-market diversifica-tion. Sun’s turnover, includingthe sales of recently mergedTDPL was Rs. 2.34 billion infiscal’ 97. Sun Pharma has alsobeen pursuing a strategy tointernationalise its businessrather than merely chasingexports, right from the begin-ning.

Ipca too has a strong presencein the bulk drug market. Thecompany’s turnover in the yearto March 1998 was Rs. 2.67billion. The company hasreached a critical mass in termsof its sales, investible surplus,technological competence andinfrastructure. The company’sdomestic formulations’ was lessthan one per cent.

9. Sun Pharma Low

10. Ipca Low


Kopran has become a leadingplayer in the internationalmarket for amoxycillin. Ithas built huge capacities andreached economies of scaleto be internationally competi-tive in this segment. Kopran’ssales were Rs. 3.47 billion infiscal’ 96. The company has yetto reach a critical mass indomestic formulation market.Kopran’s domestic formula-tions market share was only0.6 per cent. The company,having reached a critical massin terms of over all sales andprofits, is able to invest in itsforward integration projectsaggressively.

Having reached a critical massof Rs. 2.41 billion in recordtime, the company is integrat-ing forward into value-addedformulations of cephalosporinsas well as non-cephalosporins.

11. Kopran Low

12. Orchid Low

Evaluation Criteria # 3: The Marketing Mindset

The marketing orientation and focus of an oraganisation are crucialfor its success. Marketing orientation is synonymous with customerorientation. Understanding the needs and perceptions of the customershould be the starting point of any business.

The Marketing Mindset

A. Market share and growth rate

B. Size of the participated market


C. Degree of dominance in key therapeutic segments

D. Extent of customer franchise

E. Width and depth of distribution

F. Brand building capabilities

G. New product introductions

Company Assessment

1. Ranbaxy High

Observation

Ranbaxy has realised the powerof brand equity long ago. It hasconstantly and consistentlyfocused on brand building inboth domestic and interna-tional markets. This is evidentfrom the fact that 12 of thecompany’s brands (includingthose recently acquired andmerged companies) are amongthe top 250 brands of theIndian pharmaceutical indus-try. They contributed to over56 per cent of the company’stotal domestic formulationsales of Rs. 5.17 billion in 1997.The company is a leader in thelargest therapeutic segment inIndia – anti-infectives, whichaccounts for almost one-fourthof the total market.Ranbaxy has identified 25molecules and is aggressivelyplanning to develop a highlyintegrated strategy to buildglobal brands out of these in allits key markets.


Dr. Reddy’s group started withbulk drugs as a focus area, butquickly realised the potentialand focused on the value addedformulation business. Bulkdrugs continue to be an impor-tant area for the group asthey form the basis for thecompetitive advantage for anyintegrated pharma company.DRL’s focus on brand buildinghas paid off handsomely. Thecompany has four of its brandsamong the top 250 of theindustry. These accounted forover one-half of the company’sdomestic formulations YTDsales of Rs. 1.36 billion end May1998.

Marketing has always been acore competence at Cipla. Thecompany has been managingits diverse product-mix verydexterously . It is a clear leaderin the anti-asthmatic segmentin India. The company has builtan enviable franchise withall prescriber segments of itscustomer base with the resultthat Cipla is among the top 3companies in any given thera-peutic segment in the country.As many as ten brands of thecompany feature among theindustry’s top 250 brands.These brands account for overone half of the company’stotal domestic formulation


3. Cipla High


sales of Rs.4.42 billion in theyear-to-date sales at the end ofMay 1998.

Lupin’s marketing strategy isbased on the time tested con-cept of focus. Through its sharpfocus, the company has becomea dominant player in the anti-TB market not only in Indiabut internationally as well. Lu-pin has 8 of its brands featur-ing in the industry’s top 250brands. These brands accountfor almost two-thirds of thecompany’s total domestic for-mulations sales of Rs. 2.47 bil-lion in May 1998 on a YTDbasis. Five out of these eightbrands are in the anti-TB seg-ment. Having achieved uncom-mon success in the anti-TBsegment, Lupin is now concen-trating on the huge world cepha-losporin market, in which anumber of molecules are goingto be off-patent in a few yearsfrom now on.

Wockhardt’s therapeutic areaof focus has been pain manage-ment, from the beginning. Thecompany subsequently has di-versified into other majortherapeutic categories and re-structured its marketing its op-erations to retain focus on keysegments even after productdiversification. Wockhardt,

4. Lupin Medium

5. Wockhardt Medium


including the recently mergedcompanies (Merind and TataPharma), has 6 of its brandsamong the industry’s top 250.These accounted for over 21per cent of its domestic formu-lations sales of Rs.2.43 billionon YTD basis at end May 1998.

The company has chosen theroute of M&A and joint ven-tures to increase its marketshare. All the mergers, acquisi-tions and joint ventures of thegroup are carefully planned toenhance their therapeutic cov-erage and create synergies. Ina short time the group hasmoved in to the 4th positionmainly through alliances. Thegroup has a strong to reason-able presence in rapidly grow-ing therapeutic segments likecardiovascular, neuro-psychia-try, nephrology, critical care,oncology, opthalmic and eyecare products, foot care prod-ucts, post-surgical care productsand in over-the-counter phar-maceuticals. The combinedturnover of all group compa-nies is around Rs. 2.8 billionwith a share of 2.7 per cent ofthe domestic formulations mar-ket in India. The group has oneof the largest field forces withover 1600 trained medicaldetailmen promoting the vari-

6. NPIL Medium


ous products of the companyacross the country.

Torrent started with a nichestrategy and moved to a broadbased product strategy by diver-sifying into major therapeuticsegments like antibacterials toreach the top. The companyhas moved up to the 5thposition in the Indian pharma-ceutical industry. Torrent con-tinues to grow at a rate muchhigher than the industry aver-age. The company is a leaderin the cardio-vascular andneuro-psychiatry segments inIndia. Five brands of Torrentfeature in the industry’s top250. Nearly a third of thecompany’s domestic formula-tions sales of Rs. 2.31 billion,on a YTD basis at end Septem-ber 1998, came from these.

Zydus group of Cadila HealthCare has been focusing onbrand building right from in-ception. The company has6 of its brands among theindustry’s top 250. They ac-counted for about 46 per centof the group’s domestic formu-lations YTD sales of Rs. 1.78billion end May 1998.

The marketing orientation orthe mindset of Sun Pharma isvery high, although it is notobvious in its brand building

7. Torrent Medium

8. Zydus Medium

9. Sun Pharma High


exercise. The company’s focushas been on speciality therapeu-tic segments. While only two ofthe company’s brands featureamong the industry’s top 250,accounting for about one-fifthof its domestic formulationssales, its share of the key thera-peutic segments is very high andthe company is planning to beamong the top two players inall its focused segments. SunPharma has been the firstIndian pharmaceutical com-pany to structure its strategicbusiness units around specifictherapeutic segments with aview to offer total therapeuticsolutions for disease manage-ment. This is an emergingconcept the world over. Allresearch based pharmaceuticalcompanies have been planningto restructure to meet the chal-lenges of the disease manage-ment approach.

Ipca through a very focusedapproach has become thecountry’s leading player in theanti-malarial segment. Thecompany is planning to diver-sify into other speciality seg-ments. The company is ranked26th in the domestic formula-tion market, with four of itsbrands – lariago, tenolol, solvinand eltocin featuring amongthe industry’s top 250. These

10. Ipca Medium


four brands contribute nearlytwo-thirds of the company’s to-tal domestic formulation sales.

Kopran has essentially been amajor force in the bulk drugmanufacturing and exports.The company of late has beenfocusing on value added formu-lations both in the domesticand export markets. One of themajor achievements of Kopran,from a marketing point ofview, is the way it has goneabout building a distinct brandleader in the betablocker seg-ment of anti-hypertensives.The company has also a reason-able presence in the respiratorysegment. The company’s re-cent restructuring moves wouldcertainly help Kopran gain thenecessary marketing focus toreach the much-needed criticalmass in the formulations busi-ness. Kopran’s rank in the do-mestic pharmaceutical marketis 55th. It has a market shareof only 0.5 per cent.

Yet to demonstrate its marketingmindset. The company has donevery well in marketing bulkdrugs and intermediates globally.Branded generics is indeedthe true testing ground of acompany’s marketing acumen.Orchid has very recently en-tered the formulations business.

11. Kopran Low

12. Orchid Low


The pharmaceutical industry is technology-driven. Technologyupgradation, therefore, is essential just to keep pace with the changingindustrial scenario. To lead the change, development of technologyshould be of an even higher order. Technology gives a firm its distinctivecompetitive advantage. High labour costs, for example can be offset bysuperior technology. Take the case of Glaxo’s microprocessor controlledcontinuous process plant at Singapore for manufacturing the bulk drugranitidine, the world’s largest prescribed drug. It has very few operators.The production costs compare favorably with some of the world’s low-cost producers. Technology can increase productivity considerably.

Consider the opportunity horizon for Indian drug companies in thepost-GATT era. A number of leading drug manufacturers from Indiaare vying with each other to exploit the huge opportunity in the fastgrowing off-patent generic formulations market in North America andthe European Union. Technological upgradation to internationalstandards is a prerequisite for exporting to those markets. Theregulatory authorities from these markets allow imports only from theplants they approve. Without their approval of your manufacturingfacilities, you cannot even think of exporting your generic formulations.You have to upgrade your facilities to their standards to get the dueapprovals. Technology upgradation holds the key that can convert theseentry barriers into gateways.

To be globally competitive, you need to have world class technology.That explains why so many Indian companies are making a beeline toupgrade their plants and to get approvals from international regulatoryauthorities like US FDA. UK MCA etc.

Here are the criteria used for qualitative assessment of technologyupgradation by the front runners of the Indian pharmaceutical industry:

Technology Upgradation

A.Manufacturing infrastructure.

B. State of quality – conforming to WHO, GMP, cGMP guidelines?

C.Approvals from international regulatory authorities like US FDA,UK MCA, Canadian HPB and South African MCC etc.

Evaluation Criteria # 4: Technology upgradation


D.Investment pattern in technological upgradation.

Company Assessment

1. Ranbaxy High

Observation

Ranbaxy has been consistentlyupgrading its technology andmanufacturing infrastructureover the years. Today, thecompany has manufacturingfacilities approved by interna-tional regulatory authoritieslike US FDA and UK MCA forboth bulk actives and formula-tions. In addition, the companyhas manufacturing plants ininternational markets.

The credit of putting India onthe bulk drug map of the worldshould certainly go toDr. Reddy’s Laboratories. Thecompany has developed alter-native processes for a numberof bulk drugs and consistentlyinvested on technologyupgradation. The group hasbuilt plants for both bulk drugsand formulations that are ap-proved by US FDA and UKMCA. Cheminor Drugs, agroup company, has built astate-of-the-art formulationsplant targeting its entireproduction at the NorthAmerican and Europeangeneric markets. The group hasfive manufacturing plants inAndhra Pradesh.

Cipla has built five world class


3. Cipla High


manufacturing plants for bulkdrugs and formulations. Inter-national regulatory authoritieslike US FDA, UK MCA andTGA of Australia have ap-proved three of these fiveplants. Cipla has been a par-ticipant in number of overseasjoint ventures which couldlead to establishing greenfieldmanufacturing bases in future.Cipla’s technological prowesscan be gauged from the factthat it is the technology pro-vider in all its joint ventures.

Lupin has built a leadershipposition in the world anti-TBmarket through its technologi-cal strengths. It has, inaddition, focused on thesoon-to-be off-patent genericformulations of cephalosporinsin the industrialised countries.Its manufacturing plants areapproved by both US FDA andUK MCA. It has been invest-ing consistently in technologyupgradation.

Wockhardt’s Aurangabadplant is considered to be one ofthe finest manufacturing facili-ties for pharmaceutical dosageforms in the country. It has theapproval of both US FDA andUK MCA. The company hasbeen investing in upgradingtechnology over the years. The

4. Lupin High

5. Wockhardt High


6. NPIL Medium

7. Torrent Medium

8. Zydus Medium

company, in all, has 5 plantsin India. It has also gained ac-cess to two manufacturingfacilities in the UK and the USthrough recent acquisitions ofWallis Labs and Acumed re-spectively.

NPIL, having fueled its growthmainly through acquisitions,has built an impressive manu-facturing infrastructure. Thecompany has invested in creat-ing a facility for manufacturingformulations at Pithampurconforming to internationalstandards. The group has4 manufacturing plants forformulations and bulk drugs.

Torrent has upgraded its manu-facturing facilities tointernational standard. It hasalso developed a number ofcost effective alternative pro-cesses for various bulk drugs.

Zydus- the Cadila Health Caregroup-has built up a sizeableinfrastructure for manufactur-ing a number of bulk drugsand formulations. Thecompany has three plants atAnkaleshwar, Ahmedabad andMumbai.

Sun Pharma has built a massivemanufacturing infrastructurecomprising 6 plants for manu-facturing bulk drugs and for-

9. Sun Pharma Low


10. Ipca High

mulations through a strategiccombination of greenfield ven-tures, acquisitions and invest-ment in others. One of thegroup companies (through in-vestment), Gujarat Lyka hasUS FDA approval for a keybulk drug. M J Pharma also hasa US FDA approvable facilityfor formulations.

Ipca has built an impressivemanufacturing infrastructure inthe country, mainly for bulkdrugs. It has also expanded itsformulations manufacturingfacility and upgraded it tointernational standards. Boththe US FDA and UK MCAhave approved Ipca’s bulk drugplants. Ipca has as many as 11drug master files for its bulkdrugs.

Kopran has become one ofthe leading manufacturers ofamoxycillin in the world. It hadvery aptly identified the mol-ecule when it was showing signsof overtaking the ampicillinmarket and built up capacitiesand upgraded technology toworld class standards. Its plantat Khopoli has the approvalof US FDA and UK MCA.Kopran has three plants formanufacturing bulk drugs andformulations.

11. Kopran High


12. Orchid High Having started as a 100 per centexport unit of cephalosporins(sterile and oral forms), Orchidhad no choice other than tobuild world class plants. Andworld class plants, it did build.Its plant has approval of theUS FDA and UK MCA. Thecompany has invested in aforward integration project tobuild a formulations facilitycomplying with internationalstandards.

Evaluation Criteria # 5: Research Focus

Pharmaceutical industry, the world over is research-led.

Under a strong IPR regime, no pharma company can progress withoutsignificant R&D effort. Otherwise, it may end up as a supplier ofproducts and services, if it has a core competency in any relevant arealike manufacturing, marketing and distribution. The bigger firms mayeven gobble it up if it has good manufacturing capability or brand equity.

Even to assimilate and absorb the new technologies, a critical mass ofproduct and process developmental skills are needed.

Some of the more determined Indian drug majors have been steppingup their R&D investments and efforts. They are setting up world classresearch facilities and formulating focused research strategies. Somecompanies like DRL and Ranbaxy have even been successful indeveloping new lead compounds and started filing INDAs. Others likeWockhardt and Lupin have started building infrastructure requiredfor launching their drug discovery programs.

Research Focus

A. R&D infrastructure

B. Number of scientists and their qualifications


C. Areas of research focus

D. Investment in R&D as a per cent of sales

E. Collaborations in research

F. Progress or breakthroughs in research

Company Assessment

1. Ranbaxy High


Observation

Ranbaxy has set up a swankR&D centre and launcheda drug discovery program.Ranbaxy too has met with anearly success in identifying leadcompounds. The company hasrecently announced its ownnew chemical entity (NCE) –RBX 2258 for treatingbenign prostrate hyperplasia.The company will go for aninvestigational new drug appli-cation (INDA) with the Drugcontroller of India and the USFDA. The company spends 5 –6 per cent of its sales on re-search and development andplans to increase it to about 10per cent by 2005.

Dr. Reddy’s group has set up aworld class research facility atHyderabad. Having achieveduncommon success in processdevelopment, the company haslaunched a drug discovery pro-gram to achieve product devel-opment capability by the timeGATT comes into force in2005. The company has metwith an early success. In an un-precedented accomplishment,


3. Cipla Medium

4. Lupin Medium

DRF (Dr. Reddy’s ResearchFoundation) has licensed one ofits molecules belonging to a newclass of drugs – insulin sensitiz-ers, to the Danish drug major,Novo Nordisk, the world leaderin the anti-diabetic segment.DRF has filed as many as 18product patents in the US andother patent-friendly countries.

Cipla has three R&D centres.Its process development skillsare extraordinary. The com-pany has developed alternativeprocesses that are cost effectivefor over 56 molecules. Manymore are at various stages ofdevelopment. The companyhas also developed the world’sfirst oral preparation for thalas-semia.

Lupin has been investing about3 per cent of its sales onresearch since 1990. The com-pany has been a front runnerin process development oforganic synthesis and fermen-tation based products. It isexpanding its research facilitieswith an investment of Rs.200million. The company has alsolaunched a drug discoveryprogram.

Wockhardt, in creating the nec-essary infrastructure for launch-ing a drug discovery program,is setting up a modern R&D

5. Wockhardt Medium


6. NPIL Medium

7. Torrent Medium

centre. The company has con-siderable strength in the pro-cess and dosage formdevelopment areas. The com-pany has collaborative researchprograms with international in-stitutions like UNIDO, Rheinbiotek of Germany and otherorganisations.

NPIL has catapulted itself intothe big league of Indian drugfirms that are creating R&Dinfrastructure virtuallyovernight, with its acquisitionof Hoechst’s famous researchcentre. The company hasgained access to the knowledgeand experience base of 84scientists, who have got 140patents between them. Thecompany, apart from processand dosage form developmenthas decided to focus on drugdiscovery and clinical research.

Torrent is setting up an ad-vanced R&D centre with aninvestment of Rs. 750 million.Torrent spends about 6 percent of its sales on research anddevelopment and plans to in-crease it to 10 per cent in thenear future. The company isone of the foremost sponsorsof research at the universities.It has also signed up with inter-national research institutes likeWilliam Harvey Research


8. Zydus Medium

9. Sun Pharma Medium

10. Ipca Low

Institute in the UK forcollaborative research. Thecompany is confident that itcan generate revenues throughcollaborative and contractresearch.

Zydus is investing Rs. 350million in expanding andupgrading its research anddevelopment facilities. Thecompany is also planning toenter collaborative research inboth process as well as productdevelopment areas.

Sun Pharma has a well-equipped modern researchcentre – SPARC (Sun PharmaAdvanced Research Centre)at Baroda. It has two moreresearch centres, one inMumbai dedicated for develop-ing dosage forms for interna-tional markets and another atChennai, mainly for processand formulation development.The company spends 3 – 4 percent of its sales on research anddevelopment activities. It is fur-ther investing in upgradingand expanding its researchfacilities so that it can get itinto focused drug discoveryprogram.

Research effort centreingaround developing alternativeprocesses for various bulk drugsand formulation development.


11. Kopran Low

12. Orchid Low

Research focus essentially onprocess development and dos-age form development. Re-cently invested Rs.100 millionin creating a modern R&D fa-cility at Navi Mumbai.

Orchid has set up a researchfacility with an investment of$ 4million. Process develop-ment is the main thrust area ofresearch. The company is alsoplanning to diversify into all sixprocess technologies.

Evaluation Criteria # 6: Strategic Integration

In the Indian pharmaceutical industry extensive vertical integration istaking place. Bulk drug firms are integrating backwards intointermediates. At the same time, they are also integrating forwardinto value-added finished dosage forms. This very significant trend isgreatly raising economies of scale as well as the amount of capitalnecessary to compete in the industry. This in turn is erecting barriersto entry. This trend, which is likely to continue, may drive smallercompetitors out of the industry once the growth levels off. If the smallerplayers have efficient plants and processes of operations, they maybecome the prime targets for acquisitions by the larger firms, whichare on a consolidation spree.

Some of the leading Indian drug firms, Ranbaxy, Lupin, Wockhardt,Kopran, Ipca and more recently Orchid, have been actively pursuingthe strategy of vertical integration for some time. Their efforts aremore intensified now, since vertical integration offers some key benefitsand gives the firms distinct and sustainable competitive advantages.Some of the commonly cited benefits of vertical integration are:

A. Achievement of economies of scale.

B. Cost savings across the firm’s operations like coordinated production.


C. Purchasing controls and leverage.

D. Control on quality.

E. Timely availability.

Strategic Integration

A. Nature and extent of integration

B. Level of integration

C. Bulk drug portfolio

Company Assessment

1. Ranbaxy High


Observation

Ranbaxy is a vertically inte-grated organisation. Its ownbulk drugs cover almost all thecompany’s major formulations.With its strategy to develop andintegrate to build 25 globalbrands, the company is goingto be one of the major interna-tional generic companies.Ranbaxy is poised to meet itsobjective of becoming one ofthe top 3 international genericcompanies in the world by2015.

Dr. Reddy’s strength in devel-oping cost-effective, innovativeprocesses for a number of bulkdrugs is well known. The creditfor putting India on the bulkdrug map of the world shouldgo to Dr. Reddy’s Labs. Thecompany manufactures over33 bulk drugs in various thera-peutic categories and a numberof intermediates in addition.


The company backs up its for-mulations with its own bulkproduction.

Cipla over the years has devel-oped alternative cost-effectiveprocesses for over 54 bulk drugs.Its own bulk production coversabout 85 per cent of its formu-lations. This clearly indicatesthe extent of strategic integra-tion the company has achieved.

Lupin has become a leadingplayer in the world in the anti-TB segment through carefullyplanned strategic integration.The choice of the segment isalso important , as Indiaaccounts for almost one half ofall TB cases in the world.Having achieved success in theanti-TB segment, Lupin isgoing all out to become avertically integrated player inanother segment – this timethe large, lucrative and soon-to-go off-patent generic formula-tions market for oral and sterilecephalosporins in NorthAmerica and Europe. Lupinmanufactures over 12 bulkdrugs and a number of inter-mediates.

Wockhardt has achieved aconsiderable level of verticalintegration in its focussegments. It is one of theworld’s largest producers of

3. Cipla High

4. Lupin High

5. Wockhardt Medium


dextropropoxyphene, an anal-gesic drug, dextromethorphanwith the merger of Mermid ithas also become one of themajor producers of VitaminB12 in the world.

Has yet to become an inte-grated player. The strategicroute to achieve vertical inte-gration is acquisitions. Withthe spate of acquisitions likeSumitra Pharma, Roche andBoerhinger Mannheim andstrategic alliance with La Porte,Nicholas Piramal is on its wayto becoming a vertically inte-grated player.

Planning to become a fullyintegrated international ge-neric company. Backward inte-gration is aimed at controllinginput costs and forward integra-tion is aimed at moving up thevalue chain. Has achieved ver-tical integration in semisyn-thetic antibiotics.

Level of strategic integrationnot very high at the moment.The company has developedcost-effective alternativeprocesses for some importantbulk drugs. Formed a jointventure for manufacture ofPantoprazole with BYKGulden.

Sun Pharma has moved intothe top league of highly inte-

6. NPIL Low

7. Torrent Medium

8. Zydus Low

9. Sun Pharma Low


grated pharma companies inthe country in the shortesttime. The company has devel-oped innovative processes for asmany as 48 bulk drugs andmanufactures a number of in-termediates in addition. Itcould expand its bulk drugportfolio through a synthesis ofin-house development, invest-ment in other companies andacquisitions.

Ipca has through a steadystream of investments hasachieved the distinction ofbecoming an highly-integratedplayer in the Indian pharmaindustry.

Kopran has become the secondlargest producer of amoxycillinin the world , essentially be-cause of its strategic integration.The company has becomehighly competitive internation-ally due to its backward integra-tion. It is planning to extendthis advantage to other semi-synthetic penicillin based anti-biotics to become a majorplayer in the semisyntheticantibiotics segment interna-tionally.Integration limited to bulkdrugs particularly semi-syntheticantibiotics. Its backward inte-gration has given better, mar-gins than its competitors and

10. Ipca Medium

11. Kopran Low


has helped the company tobecome internationally com-petitive. It has yet to achieve thesame degree of success in termsof moving up the value chainthrough forward integration.

Orchid has about 13 per centshare of the world cephalospor-ins bulk drug market. Thecompany has achieved thisthrough a backward integra-tion strategy. It is completing aforward integration project in1998 by manufacturing sterileand oral cephalosporin formu-lations. This is part of itsstrategy to become a verticallyintegrated player in the cepha-losporins market.

12. Orchid Low

Evaluation Criteria # 7: Alliance Attractiveness

With alliances, we can do more with less, remarked a managing directorof a large corporation, known for its penchant for alliances.

That is the basic purpose of allying with some one. To do more withless. To achieve synergy. Strategic alliances will help you gain access tonew products, markets, and technology. Alliances buy time. Save costs.

Alliances will become even more important in an environment thatstrongly protects intellectual property rights. Once product patents arein place in the country, unless you are the original innovator, youraccess to new products and technologies will be limited to your currentproducts. It is only through alliances and licensing arrangements canyou get access to new products.

That is the reason why there are a spate of alliances among the leadingplayers in the Indian drug industry and some of the leadinginternational companies over the last few years.


Consider these criteria for evaluating qualitatively the allianceattractiveness of the more progressive Indian pharma companies:

Attracting Alliances

A. Alliance attractiveness

B. Number and nature of strategic alliances – marketing, manufactur-ing tie-ups, technical collaborations, joint ventures with equityparticipation finalised

Observation

Ranbaxy’s alliances are focusedon exploiting the off-patentgeneric formulations in theNorth American market. Itsalliances with Schein Pharma-ceuticals and HMS are a meansto realise the company’s ambi-tious objective of reaching thecritical mass of $150 – 200 mil-lion in the North Americangeneric market by 2000. Thecompany also has an alliancewith one of America’s leadingdrug firms, Eli Lilly for gainingproduct/market access.Ranbaxy in addition, has asmany as fourteen joint ven-tures in different countries.

Research based alliances are thedriving force of Dr. Reddy’sLabs. The group’s independentresearch arm – DRF has en-tered into two epoch-makingalliances: one with the Danishdrug major, Novo Nordisk fortaking its new molecule belong-

Company Assessment

1. Ranbaxy High



3. Cipla High

ing to a new class of drugscalled “ insulin sensitizers”through further stages of devel-opment to commercialisationand marketing in select coun-tries. Cheminor Drugs, a groupcompany has entered in to stra-tegic alliances with Pharmaceu-tical Resources Inc. (PRI) andSchein Pharma – both USbased firms. These alliances areessentially to penetrate theNorth American generic for-mulations market. Cheminorhas built a state-of-the-art manu-facturing facility that is US FDAapprovable (the company isawaiting approval). The com-pany is also planning activelyfor similar alliances in theEuropean Union.

Cipla’s alliances are based on awin-win strategy. The companyhas formed over six strategicalliances, covering the keymarkets of the world likeNorth America, China,Europe, Africa, Middle Eastand Australia, with break-neckspeed. All these alliances arebased on a sound structure.Cipla will provide products andtechnology. The alliance part-ner will provide market accessand what he knows best, mar-keting and distribution. Thealliances would graduate inphases from sourcing products


and technology to manufactur-ing of dosage forms. In somecases they would set up evengreenfield ventures for manu-facturing.

Lupin’s alliance with MerckGenerics is a made for eachother alliance. Lupin is fast be-coming a vertically integratedplayer in the cephalosporinssegment that is internationallycompetitive and Merck Gener-ics has a strong presence in thehospital segment in the US andEurope. Many leading mol-ecules in cephalosporins aregoing off-patent from now on.All these factors make thealliance an ideal match toexploit the $2 billion-largesterile cephalosporin genericformulations market oncethese molecules go off-patent.

Wockhardt has gained a foothold in the North Americanand European generic formu-lation markets with itsacquisitions. The company’srecent strategic alliance withFerrings of Denmark reinforcesits presence in these markets.The company, in addition hasa strategic alliance with aGerman biotech firm formanufacturing and marketingits hepatitis-B vaccine.

4. Lupin High

5. Wockhardt High


Alliances and acquisitions arethe main drivers of NPIL’sgrowth strategy. The group,at the last count, had aboutsixteen strategic alliances togain access to new markets, newtechnologies and new productswith leading internationalfirms. The range of strategicalliances covers the wholegamut of therapeutic segmentsliterally and figuratively fromhead to foot: starting from analliance with US based Allergenfor its eye care products to thealliance with the UK basedScholl Pharmaceuticals for itsfoot care products. The tworecent acquisitions and one50:50 joint venture withAmbalal Sarabhai Enterprises(ASE) – Sarabhai-Piramal, havecatapulted NPIL into the4th position in the Indianpharmaceutical industry with a2.7 per cent market share.These alliances, the companyjustifiably hopes, would take itto the top in the domestic drugindustry before long.

Has entered into a 50:50 jointventure with the French drugmajor Sanofi. In addition, thecompany has a tie-up withUS based Scitech forbiotechnology-based products.Torrent has also a number ofcollaborations in the area of

6. NPIL High

7. Torrent Medium


8. Zydus High

research and development withacademic institutions andresearch centres.

Zydus has entered into anumber of marketing alliancesmainly to gain access to newproducts and technologies. Thecompany has in all about twelvealliances with internationalcompanies. These allianceswould extend the company’stherapeutic coverage inimportant chronic diseaseareas in nephrology, cardiologyand haematology. Zydus hasalso entered into a strategicalliance with South Korea’sleading firm KGCC formanufacturing and marketinghepatitis-B vaccine based onrecombinant technology. Thecompany has also a number ofmarketing and distributionalliances with internationaldiagnostic companies forexclusively marketing theirproducts in India throughZydus Pathline.

Sun has a major strategic alli-ance with the Michigan basedCaraco Pharmaceuticals topenetrate the tough yet remu-nerative North Americangeneric formulations market.Caraco has a US FDA ap-proved facility. Sun through itsequity based joint venture gains

9. Sun Pharma Low


a beachhead. The company hasalso a marketing and distribu-tion alliance with Korea’sleading pharmaceutical com-pany – KGCC for marketing itsrange of immunoglobulins inIndia.

Ipca has all the attributes of anideal partner of a strategic alli-ance. Manufacturing facilitiesthat are approved by interna-tional regulatory authorities.Established brands andcustomer franchise. Strongpresence in two therapeuticareas. The company has yet tocapitalise on these to thefullest extent.

Kopran, in its race to reach thecritical mass in the domesticformulations market has en-tered recently into a strategicalliance with Glaxo, the Britishdrug major in India for market-ing its respiratory products. Thecompany hopes to sharpen itsfocus on the respiratory seg-ment with this alliance. Kopranhas also entered into an impor-tant alliance with DDSA of theUK to market its off-patentedgeneric formulations in the UKand the European Union. Thecompany is also actively plan-ning two more alliances – onein the US and another in WestAsia.

10. Ipca Low

11. Kopran Medium


Orchid has a manufacturingtie-up with two domestic firmsfor manufacturing some for-mulations. This agreementis for the short term–untilOrchid gets its formulationplant commissioned.

12. Orchid Low

Evaluation Criteria # 8: Internationalisation of Business

Internationalisation of business for Indian drug firms is no longer amatter of choice. In the product patent era, every company needs tobe research oriented. Pharmaceutical research is expensive and risky.The costs of developing a drug have gone up phenomenally. The risksand costs of developing new drugs cannot be borne by any one nationalmarket. One has to graduate from exports to internationalisation ofbusiness like Ranbaxy has.

Internationalisation of Business

A. Exports turnover and their contribution to total sales.

B. Quality of exports.

C. Number of product registrations in overseas markets.

D. Number of marketing offices abroad.

E. Number of off-shore manufacturing bases.

F. Number of employees overseas.

G. Investment in international operations.

H. Number and nature of strategic alliances abroad.

I. Number and nature of acquisitions in overseas markets.

Company Assessment

1. Ranbaxy High

Observation

Ranbaxy is way ahead of its com-petitors even in internationaloperations. It is the largestexporter of pharmaceutical for-



mulations and bulk drugs fromIndia. The company’s revenuesfrom international operationsaccounted for over half of itstotal turnover of Rs. 13.3 bil-lion in 1998. The company hasbeen viewing the world as itsmarket and operates in everymajor market in the world.The company has structured itsinternational operations in aunique manner by dividing thewhole world into four regions,each headed by a regionaldirector. There is a global mar-keting division, which providesstrategic support from its cor-porate office in Delhi. Themarketing offices and manu-facturing bases, strategicalliances, joint ventures andmarketing teams spread acrossthe world. Over 400 people ofdifferent nationalities work inthe company’s various interna-tional markets. It has trulyacquired an internationalculture.

The DRL group’s revenuesfrom exports in fiscal’ 97 wereRs. 2.56 billion. The companyhas shifted its focus from merebulk drugs exports to the valueadded activity of marketingbranded marketing of brandedgenerics in a number ofinternational markets. Thecompany has been a pioneer in


terms of exporting technologyand intellectual property as well.The company has entered intoa landmark agreement withinternational companieslike Novo Nordisk andDebio Pharma for taking theirnew molecules developedat Dr. Reddy’s Research Foun-dation (DRF) to further stagesof development andcommercialisation. CheminorDrugs has set up a new state-art-of-the factory dedicated tothe production of generic for-mulations of off-patent drugsfor the North American andEuropean markets. The com-pany has entered into strategicalliances with PharmaceuticalResources Inc. and ScheinPharma in the US for thispurpose.

Cipla has started an aggressivepursuit of internationalmarkets to exploit the oppor-tunities that the liberalisedeconomy and the post-GATTera have to offer, thoughsomewhat recently. The com-pany has recorded an exportturnover of Rs. 1.1 billionin 1998. Cipla’s strategy tointernationalise the business isthrough the strategic allianceand joint venture route withlocal partners. Cipla will pro-vide the technology and prod-

3. Cipla Medium


ucts and the foreign partnerswill be responsible formarketing.

Lupin is the second largestexporter, along side theDr. Reddy’s Laboratoriesgroup of pharmaceuticalsfrom India. Lupin has forgeda number of strategic alliancesto exploit the exploding gener-ics market in North America,Europe and Japan. Lupin hasalso about to acquired recentlyEli Lilly’s cephalosporins’ plantin Puerto Rico as part of itsstrategy to enter the NorthAmerican generics market foroff-patent cephalosporin for-mulations. Lupin has achievedan export turnover of Rs. 1.55billion in 1997.

The present export revenues(1997) of Rs. 445 million ofWockhardt are not indicativeof its true potential and capa-bilities. The company hasmade two strategic acquisitions-Acumed in the US and Wallisin the UK to exploit the rap-idly growing generic marketfor off-patent drugs in NorthAmerican markets.

Exports contributed only sixper cent to its total sales duringfiscal’ 97. The company ispursuing the alliance route toboost its exports. The

4. Lupin Medium

5. Wockhardt Medium

6. NPIL Low


company has recently signedtwo joint venture agreements –one in the area of bulk drugswith La Porte, the Europeanfirm and the other is withSiegfried of Switzerlandfor off-patent genericformulations to enter thegeneric markets in the US andEuropean Union.

Torrent has been a majorexporter in the past mainly dueto its huge exports to theformer USSR. After the disin-tegration of the USSR and theconsequent process of liberalisa-tion of CIS countries, exportsto these markets have becomevery difficult. The companiesthat were heavily dependent onthese predominantly institu-tional markets for their exportshad found it extremely difficultto adapt to the changingmarket scenario.

Exports do not contributecurrently to total sales. Thecompany is pursuing thestrategic alliance route to boostits exports too. Its recent jointventure with BYK Gulden formanufacturing and marketingof Pantoprazole covers selectinternational markets inaddition to India. Thecompany’s new manufacturingfacility near Ahmedabad

7. Torrent Medium

8. Zydus Low


conforms to US FDAstandards. The company plansto enter the off patent genericmarkets in the US andEuropean Union once it getsthe approval.

Sun Pharma had started inter-nationalising its operations eversince its early days. The com-pany has been marketingbranded generic formulations,right from the beginning, in anumber of markets wherethere was little or no intellec-tual property protection. Itstarted bulk drug exports muchlater. Sun’s revenues from ex-ports were Rs.640 million in1997. The company has an off-shore manufacturing base inthe US for facilitating an earlyentry into the lucrative gener-ics market in North Americathrough its equity-based jointventure with Michigan-basedCaraco Pharmaceuticals. Thecompany has a marketing officein Moscow. Sun has a numberof product registrations in 27countries and many more areat various stages of develop-ment.

Ipca has a strong bulk drug ex-port base mainly to the world’shighly regulated markets, withas many as 11 drug master filesunder its belt. The company

9. Sun Pharma Low

10. Ipca Medium


11. Kopran Medium

has exported Rs.1.16 billionworth of pharmaceuticals thatcomprise bulk drugs and genericformulations. It has a supplyand marketing arrangementwith a multinational in Europefor some of its intermediates.US FDA and UK MCA haveapproved Ipca’s manufacturingfacilities at Ratlam.

Kopran’s export turnover in1997 was Rs. 1.39 billion. It hasbeen one of the leading export-ers of pharmaceuticals fromIndia. Kopran has been tryingto focus on exporting genericformulations and is planningsome strategic alliances andjoint ventures in the US, UKand other key internationalmarkets in this regard.

Orchid is a 100 per cent exportoriented unit specialising in oralcephalosporin bulk substances.The company has also devel-oped sidenafil citrate toviagarize its performance andhas received permission fromthe Drug Controller of India(DCI) to export the same.Orchid has achieved an exportturnover of Rs. 1.83 billion in1997. The company has alsobeen active in developing anti-viral drugs to diversify itsproduct portfolio.

12. Orchid Medium


Evaluation Criteria # 9: Intellectual Capital

In an open economy that is increasingly stock market oriented, onetends to look at indicators with greater relevance to day-to-dayinvestment. A company may have a high but unproductive asset base.Likewise, sales turnover alone does not mean much unless it isremunerative. Finally, the profits generated have to be perceived bythe market to be of an enduring nature. When all these factors fall inplace, the firm enjoys a high market capitalisation.

Market capitalisation assumes greater importance when a companydecides to raise finance in the global market. Accurate pricing of theshares of a company, which in turn is a function of the total marketcapitalisation of the company becomes very important in a competitiveenvironment. Moreover, the Government of India would allow onlycompanies with high economic performance and market capitalisationto approach international investors.

Intellectual Capital

A. Market capitalisation

B. Intangible assets

C. Investment in R&D

D. Investment in training and development

E. Investment in information technology

F. Profitability

G. Investor attractiveness

H. Making assets sweat

I. Status on cost leadership

Company Assessment

1. Ranbaxy High

Observation

Ranbaxy is clearly the most valu-able pharmaceutical companyin India. It is also the undis-puted leader in the Indianpharmaceutical industry. Only



in the domestic formulationbusiness, it is ranked second –next to the industry leaderGlaxo.The company has recorded asales turnover of Rs. 13.33billion in 1997–98. Its averagemarket capitalisation duringthe year has been Rs. 34.27billion. The company is one ofthe 100 most valuablecorporate houses in India,across all industries. Thecompany’s net profit margin inthe year has been stable at 14per cent of sales, one per centup over last year. Net profits,however, showed an increaseof 16 per cent over the pre-vious year. The company’sP/E multiple is a healthy21.4 per cent.

DRL has brought significantcredit to the country in its re-cent licensing agreements withtwo international firms, NovoNordisk for further develop-ment and commercialisation ofthe molecules developed at itsresearch foundation – DRF.The company has renewed itsfocus on its formulationsbusiness and growing at asignificantly higher rate-threetimes more than the industryaverage. The company’sturnover during 1997–98 wasRs. 3.35 billion. When you


factor in Cheminor’s turnoverof Rs. 1.6 billion, the totalgroup turnover would be closeto Rs.5 billion. DRL’s netprofit margin has improved by10 per cent over the last yearto 14.6 per cent during thecurrent year. Its P/E multipleof 24.5 per cent has virtuallydoubled over the last year. Itsaverage market capitalisationduring 1997–98 has beenRs.7.8 billion. The averagemarket capitalisation ofCheminor during the year hasbeen Rs. 1.56 billion. Thegroup has been steadily addingmarket value and would beamong the most valuablecorporate houses in the Indianpharmaceutical industry in themedium to long term.

Cipla has been close on theheels of Ranbaxy in the domes-tic formulations market. It isRanbaxy’s international opera-tions that create the big gulf ofdifference between the twocompanies. Cipla has been oneof the most valuable companiesin the Indian pharmaceuticalindustry. The company hasachieved a turnover of Rs. 5.38billion in 1997–98. Its netprofit margin of 18.9 per centof its sales is an improvementof 27 per cent over the last year.The company’s average mar-

3. Cipla Medium


ket capitalisation is Rs. 13.42billion during the year. Its EPSis 50.8, the highest among thepharma companies in Indiaduring the year. It has P/Emultiple of 17.9 per cent.

Lupin’s shareholder valuehas eroded during the year1997–98, though the companyis no doubt a world leader inthe anti-TB segment. But then,the segment is price controlledin India, resulting in very lowmargins. The company hasbeen aggressively planning tobecome a vertically integratedplayer in the oral and sterilecephalosporins market. Thiswould help the company to beinternationally competitiveand help improve its overallprofitability. Lupin hasachieved a turnover of Rs. 6.43billion in 1997–98. When youadd the turnover of LupinChemicals, the total turnoveris Rs. 7.35 billion, making it thesecond largest pharmaceuticalcompany in the Indian sector.The company’s net profitmargin is very low at 3.8 percent. Its average marketcapitalisation too has been lowfor its size and infrastructure atRs. 2.54 billion.

Wockhardt has been amongthe top three in terms of prof-

4. Lupin Medium

5.Wockhardt Medium


itability over the years. Thecompany’s net profit marginhas eroded by 17 per cent overthe last year, mainly due to themerger with Merind (whoseprofitability is considerablylower). Wockhardt’s net profitmargin is still high by industrystandards at 18.9 per cent.It has achieved a turnoverof Rs.3.25 billion during1997–98. The company’s aver-age market capitalisation dur-ing the year has been Rs. 7.2billion. The company, consid-ering its future plans and trackrecord, is poised to be amongthe most valuable pharma com-panies in India.

NPIL has notched up a salesturnover of Rs.5.48 billion dur-ing 1997–98. The company hasyet to reach the profitabilityrates that its size demands. Thecompany’s average marketcapitalisation during the yearhas been Rs. 7.54 billion. Its netprofit margin is however, verylow at 4.9 per cent of sales. Thecompany is currently in the pro-cess of consolidating and re-structuring its operations. Itsrecent acquisition of Hoechst’sresearch centre and the tripar-tite joint venture with two in-ternational companies formanufacturing and marketingbulk actives globally clearly in-

6. NPIL Medium


dicate the company’s determi-nation to make it to the top inthe Indian pharmaceuticalindustry. The company wouldbe able to enhance its marketvalue considerably in the com-ing years.

Torrent’s market value haseroded during 1997–98. Its av-erage market capitalisation dur-ing the year has been Rs. 1.68billion. The company hasachieved a sales turnover ofRs. 3.72 billion. Its net profitmargin is low at 10.7 per centduring the year. Its P/E mul-tiple also needs to improvefrom its present 5.7 per cent.

Zydus is still a closely held com-pany. It is planning to go pub-lic in the near future. Zydus hasbuilt a sizeable brand equity. Ithas a number of marketing al-liances and joint ventures inplace to fuel its growth objec-tives. It has built good customerfranchise. It has one of the larg-est well-trained sales teams inthe industry. It has a large dis-tribution net work of stockistsand retail pharmacies.

Sun Pharma has been a frontrunner in terms of profitabil-ity right from the start. Thecompany’s net profit marginhas, however, eroded during1997–98 by 25 per cent to 18.5

7.Torrent Medium

8. Zydus Medium



per cent. This is mainly due toits merger with TDPL, whichhas low profit margins. Sun hasachieved a turnover of Rs. 2.95billion during the year. Thecompany’s average marketcapitalisation has been Rs. 3.88billion during 1997–98. ItsP/E multiple needs improve-ment from its present 6.9per cent.

Ipca has achieved a salesturnover of Rs. 2.92 billionduring 1997–98. Its net profitmargin is low at 6.6 per centduring the year. The company’saverage market capitalisationduring the year has beenRs. 1.42 billion.

Despite a sales growth of 22 percent over the previous year,Kopran’s net profit margindeclined by 11 per cent during1997–98 to 10.9 per cent. Thecompany’s market value toohas eroded during the year. Itsaverage market capitalisationduring the year has beenRs. 2.21 billion, with a salesturnover of Rs. 3.6 billion. Thecompany has undertaken amajor restructuring exercise tosharpen its focus on the valueadded formulations business inIndia and abroad. This shouldimprove its profitability in themedium to long term.

10. Ipca Medium

11. Kopran Low


12. Orchid Low Orchid’s turnover during1997–98 has been Rs. 2.44billion. The company is a 100per cent export oriented unitfocusing only on oral and sterilecephalosporins bulk actives.The company is diversifyinginto other product areas andalso integrating forward intovalue-added formulations.Orchid’s average marketcapitalisation during the yearhas been Rs. 1.77 billion,decreased by 11 per cent fromthe previous year. Its P/Emultiple is also low at 4.3per cent.

Evaluation Criteria # 10: Operational Excellence

Implementing a strategy is as important as formulating it in the firstplace. Elementary as it may seem, the best of strategies can not produceeven acceptable results let alone the planned ones, if they are notimplemented effectively.

Operational excellence is the firm’s ability to execute its strategic plans.It spans the entire gamut of functions that a firm is engaged in.

A firm can achieve leadership position in the market place, only whenit excels in its operations. That is a cardinal principle.

Operational Excellence

A. Degree of professionalisation

B. Strength of top line and second line management

C. Acquisition of talent in all functions and in all markets

D. Performance measurement and reward systems

E. Investment in training, development and succession planning


Company Assessment

1. Ranbaxy High


Observation

Ranbaxy is doing the rightthings as well as doing thingsright. The company is highlyeffective in prioritising its ac-tion programs. It has an indus-try foresight that is head andshoulders above the competi-tion. That is how and why thecompany is more than twice asbig as its nearest competitor interms of sales as well as profits.The company has been meticu-lous in implementing its gameplans. The company also investsconsiderably in acquiring anddeveloping its managerial tal-ent. The company’s investmentin its intellectual capital is farabove the industry standard inIndia. Little wonder then, thatits managers are more in-formed than their counterpartsin other companies.

It is “first things first” at DRLnow. The company has decidedto stick to the knitting andmove out of its unrelated diver-sifications. The company hasgot its priorities clear: research,marketing and people. Thegroup has been very effectivein implementing its actionplans. Pays adequate attentionto the development of people.The company has highly quali-fied and competent personnel.


It invests in modernisation, au-tomation and information tech-nology.

Cipla too, has got its prioritiesright. It is highly task orientedand runs a tight ship. It has a flatorganisational structure. Thecompany develops its managerialtalent and competence througha series of assignments. The com-pany has got very efficientsystems in place. It has a high de-gree of implementation. Therehas been a very high turnoverof people in the recent past, butthe organisation has continuedto grow to the surprise of its com-petitors because of its proven sys-tems. Cipla is truly a performingorganisation. Quality conscious-ness and orientation are veryhigh across the organisation.The company is also known forits effective and quick decisionmaking capabilities.

Lupin has realigned its prioritiesand decided on building on itscore competencies. The com-pany has seen a very highmanpower turnover during therecent past. It invests adequatelyin developing its managerial tal-ent now.

Wockhardt has been a highlyeffective organisation. It investsconsiderable effort in humanresources development (HRD).

3. Cipla High

4. Lupin Medium

5. Wockhardt Medium


The company has successfullyimplemented all its expansionplans and projects. Thecompany’s ability to retain itstalent is very high.

NPIL has clear goals. Thecompany knows where itwants go, and knows howto go where it wants to go.Effectively implemented all itsacquisitions, mergers and jointventures. The group investsconsiderably in automation,modernisation and humanresources development. Thecompany has to improve itsmarketing effectiveness.

Torrent too has been a highlysuccessful organisation. Thecompany has moved intothe top ten of the Indian phar-maceutical industry with breakneck speed. The company in itsquest for size rather than focushas diversified into a numberof unrelated areas like power,cables and leasing etc. The com-pany has, however, been tryingto bring back its focus on itscore competence in the phar-maceutical business. Torrenthas efficient systems in place.The company is just about ad-equate in its HRD activities andinvestment.

Zydus is determined to becomea performing organisation. It

6. NPIL Medium

7. Torrent Medium

8. Zydus Medium


has set its priorities right. Bal-ances its orientation to peopleand tasks. It invests considerablyin developing its people. Its abil-ity to implement and carry outthe company’s action plans isabove the industry average.

Sun has been a highly success-ful organisation right from thestart. Sun has got its prioritiesright from a strategic point ofview. Its ability to strategise farexceeds its ability to imple-ment. The company is in theprocess of developing efficientsystems to make its operationseffective. The company paysmore attention to acquiringtalent rather than to nurturingit. The company plans to investin developmental effort.

Ipca has implemented its ex-pansion programs andupgradation programs effec-tively. It has concentrated ontechnological upgradation tillnow, as it is essential to be suc-cessful in the bulk drug businessinternationally. Havingachieved that, the company isnow refocusing on marketingformulations. Its investment inhuman resource developmentis just about adequate andneeds to be stepped up.

The company has a strongpresence in bulk drugs. The


10. Ipca Medium

11. Kopran Medium


company has been shifting itsfocus and emphasis on the valueadded formulations business.The company is right now,planning a major restructuringprocess to sharpen its focus onformulations marketing in Indiaand abroad. Kopran has beenvery effective in implementingits technological upgradationand expansion programs.

While Orchid has successfullyimplemented all its projects as a100 per cent export orientedunit of bulk drugs, its opera-tional excellence remains to betested in the fiercely competitiveformulations business. Brandedgeneric formulations business isa different ball game altogether.Apart from technological supe-riority, it requires a definite mar-keting mindset for formulatingstrategies as well as executingthem.

12. Orchid Medium

The Top ‘Twelve’

These top twelve companies account for more than half of the totalsales of the domestic sector in the Indian pharmaceutical industry andover a third of that of the total pharmaceutical industry in India. Thegame plans for competing effectively in the post-GATT era are givenadequate weightage in this qualitative assessment. The degree ofpreparedness and the ability to see the future before it arrives areimportant factors for achieving success. Here are (Table 16.1) the top‘twelve’ Indian pharma companies which are having a strenuousworkout to beat the heat out of GATT:


Table 16.1

Ranbaxy

Dr. Reddy’s Labs

Cipla

Lupin Labs

Wockhardt

Nicholas Piramal

Torrent

Zydus

Sun Pharma

Ipca

Orchid

Kopran

Table 16.2 presents the details of sales turnover and exports of thesetwelve companies for fiscal’ 97.


Table 16.2

Top twelve: annual sales and exports for fiscal 1997

Company Sales Exports Exports to totalRs. Million Rs. Million sales (%)

1. Ranbaxy 13,415.9 5,908.8 44

2. Lupin Labs 8,043.1 2,333.8 29

3. NPIL 5,346.4 316.4 06

4. Cipla 5,144.3 736.1 14

5. DRL Group 4,865.0 2,162.3 44

6. Wockhardt 4,021.8 821.5 20

7. Torrent 3,635.7 1,074.9 30

8. Kopran* 3,420.0 - -

9. Zydus 3,382.7 - -

10. Ipca 2,803.1 1,388.3 50

11. Sun Pharma 2,670.2 357.2 13

12. Orchid 2,410.2 2,151.6 89

Total 59,158.43 3,897.1

Note:

A. Dr. Reddy’s Group includes Cheminor Drugs

B. Kopran’s figures are for fiscal’ 96 – the year ending March, 1997

C. Zydus group includes Indon

The Next ‘Six’

The next ‘six’ companies that are actively preparing for competingeffectively in the coming product patent regime account for about 12per cent of the total sales of the domestic sector in the Indianpharmaceutical industry. They seem to be emulating the leading Indianpharma companies. Being followers, they have yet to reach the critical


mass in all key areas but they have started investing in all critical successfactors to build sustainable competitive advantage into their game plans.

1. Alembic

Alembic has been among the top ten companies in terms of salesturnover for almost two decades. Its prime therapeutic areas areantibiotics in general and macrolides in particular. Cough and cold isanother segment where the company has a strong presence.

Alembic has recorded a sales turnover of Rs.3.1 billion in fiscal’ 97.Bulk drugs contribute to about 14.7 per cent. Almost half of bulk drugsales are of penicillin-G. Exports account for close to 17 per cent oftotal sales.

Alembic has over the years developed very good process developmentcapabilities. I t is strategically integrated f or all its key products. Thecompany is also planning to start the manufacture of third generationcephalosporins.

Alembic has strong brand building capabilities. Seven brands, namelyalthrocin, roxid, azithral, zeet, bistrepin, glycodin and nimegesic featureamong the industr y’s top 250. These brands contr ibute to almost 60per cent of company’s total sales.

The company is planning to invest in information technology to achieveoperat ional excel lence in the highly compet i t ive market ingenvironment.

The company’s prof itability too has started looking up. The companyhas recorded an increase in net prof it in calendar year 1998 to Rs. 165million f rom Rs 74 million in calendar year 1997.

2. Aurobindo Pharma

Aurobindo Pharma although started as yet another bulk drug companyin 1986, was not to remain at that level. It has in just thirteen yearsbecome the country’s largest producer of semi-synthetic penicillinproducts. The company has achieved a sales turnover of Rs.2.95 billionin fiscal’ 97 and a whopping Rs.5.4 billion in fiscal’ 98. The company isseriously pursuing a strategy to defend its leadership position throughproductivity enhancement and Total Quality Management (TQM).


Exports accounted for a third of the company’s total sales duringfiscal’ 97. Aurobindo Pharma is currently exporting its products to morethan 55 countries. The company is setting up two wholly ownedsubsidiaries in the US and Hongkong to increase its presence ininternational markets.

Having established in bulk drugs, Aurobindo Pharma is now focusingon formulations.

3. Cadila Pharmaceuticals

Cadila Laboratories, one of the top three domestic drug companies inthe early nineties has split into two companies in 1995 – Cadila HealthCare (Zydus) and Cadila Pharmaceuticals. Rajiv Mody, the managingdirector of Cadila Pharmaceuticals has formulated a vision of becominga leading pharmaceutical company and aims to become a significantglobal player by 2005.

In the year of the split (1995–96), the company had achieved a salesturnover of Rs.2.05 billion. In the following years (1996 &1997) CadilaPharma has registered a turnover of Rs. 3.57 billion for the eighteen-month period.

The company’s game plan is similar to that of the winning companies.Focusing on key therapeutic segments. Aggressive new productintroductions (as many as forty new product formulations are in thepipeline) to reach the critical mass. Upgrading technologically tointernational standards. Integrating strategically to achieve control oncosts and quality. Forging alliances with internationally renownedcompanies to gain access to new products, technologies and markets.The company has already entered into two-way strategic alliances withthe US-based Mallinckrodt, specialising in diagnostic and radio-imagingagents and medical devices, and with Murdock Maudus Schwabe formanufacturing and marketing herbal products. More collaborationswith companies in France, Germany, Australia and Africa are on theanvil.

Cadila Pharma has also created a strong marketing infrastructure withthree marketing divisions comprising a 1000–strong medical detailingforce and 1800 stockists covering 130,000 pharmacies.


4. J B Chemicals & Pharmaceuticals

J B Chemicals & Pharmaceuticals manufactures and markets both bulkdrugs and formulations. It is a dominant player in the anti-amoebicmarket with its metronidazole bulk drug as well as formulations. ItsMetrogyl (brand of metronidazole) is a leader in the segment. Thecompany has recorded a sales turnover of Rs. 1.89 billion in fiscal’ 97,an increase of eighteen per cent over the previous year.

Exports drive the performance of the company, contributing to about45 per cent of its total sales during fiscal’ 97. The company has astrong presence for its over-the-counter cough and cold preparation –Doktor Mom – in the Russian market. In fact it is the second largestselling cough and cold preparation in the Russian market.

The company’s small volume parenteral manufacturing facility at Panoliin Gujarat conforms to US FDA standards.

The company is exploring the possibilities of entering into strategicalliances to tap overseas markets.

5. Unichem Laboratories

Unichem has merged its smaller group companies like Unisearch andUnichem Exports to consolidate its position in the industry. It hascompleted a major restructuring program to enhance productivity. Ithas closed down its plant at Jogeshwari in Mumbai by offering VoluntaryRetirement Scheme (VRS) to about 720 employees and undertookmodernisation and upgradation of its facilities at Ghaziabad(formulations) in Uttar Pradesh, Roha (bulk drugs), Baddi (antibioticformulations) in Himachal Pradesh and Goa (non-antibioticformulations). The company is also planning to offer its excess capacitiesfor toll manufacturing to some leading multinational companies.

The company is also aggressively planning to increase its market shareby focusing on fast growing therapeutic segments like cardiac care,psychiatry, gastro-enterology and gynaecological disorders. The companyhas created separate marketing divisions to stay competitive in thesesegments. Three of its brands – ampoxin, trika and unienzyme areamong the industry’s top 250.


Unichem has an impressive bulk-drug portfolio too. It has cost-effectivealternative processes for more than twenty-three bulk drugs. Thecompany is planning to enter the rapidly growing and lucrative off-patent generic formulations in the US, UK and the branded genericmarket in South Africa. Unichem’s plant at Roha meets US FDAstandards. The company is working on Abbreviated New DrugApplications (ANDAs) for four products in anti-amoebic and anti-hypertensive categories.

Unichem has achieved a sales turnover of Rs. 1.59 billion for fiscal’ 97.Bulk drugs accounted for 12.4 per cent. Exports are not significant atthe moment but can gain momentum once the company’s facilitiesare approved by international regulatory authorities like US FDA andUK MCA.

6. Morepen Laboratories

Morepen Laboratories too, like Kopran, concentrated on the bulkdrug segment. The company today is a major manufacturer of semi-synthetic penicillins like amoxycillin, ampicillin and also of the keyintermediate – 6 APA. To improve margins the company is integratingbackwards into a 300 tpa Dane salt (an amoxycillin intermediate) projectwith Japanese collaboration.

Morepen has strong in-house process development capabilities. It hasreverse engineered some of the latest drugs like paclitaxel (anti-cancer),loratidine (anti-histamine) and cisapride (gastro-intestinal), which arestill under patent. The company exports its products to a number ofcountries in Europe, Latin America, Middle East, Africa and SouthEast Asia.

The company is planning to acquire a manufacturing facility in the USfor manufacturing off-patent generic formulations and over-the-counterdrugs. It has a bulk drug plant at Solan in Himachal Pradesh and aplant for herbal drugs (paclitaxel) at Gurgoan in Haryana.

Morepen has achieved a sales turnover of Rs.1.85 billion for fiscal’ 97.Exports contributed to about 31 per cent of total sales. Bulk drugsaccount for two-thirds of the total turnover and formulations for theremaining one-third.


The Next ‘Six’ – How are they faring?

The next six companies account for about 12 per cent of the total salesof domestic sector of Indian pharma industry. The details of salesturnover and exports pertaining to these six companies are presentedin Table 16.3.

Table 16.3

Competing for post-GATT era: The next ‘Six”

Company Gross sales Exports Exports to(03/98) total

sales(%)

1. Alembic 3,118.5 492.3 15.8

2. Aurobindo Pharma 2,953.1 939.9 31.2

3. Cadila Pharma 2,380.0 - -

4. J B Chem & Pharma 1,875.3 736.1 39.2

5. Unichem 1,589.3 60.5 03.8

6. Morepen 1,846.2 255.6 13.8

Total 13,762.43 2484.4 18.1

Survival of the Fittest!

How do you describe a competitive situation like this ? 16,000 companiesfighting for a share in a market that is Rs 160 billion large. That it isfierce? A rat race? A dog-eat-dog type? Before using any of these labelsconsider these facts:

The Indian sector accounts for about 70 per cent of the market andmultinational sector the balance 30 per cent


The top twelve Indian pharma companies account for half of theIndian sector’s turnover

When you take the next ‘six’ companies, these eighteen companiesaccount for almost two thirds of the Indian sector’s total sales

If you take twelve other Indian companies (Alkem, Aristo, ASE,USV, Micro Labs, Lyka, Elder, FDC, Biological E, AmericanRemedies, Intas, Panacea Biotec) - these thirty companies accountfor close to three-fourths of the Indian sector’s total turnover.

During the last few years a number of companies like Roche India,Boerhinger Mannheim, Biddle Sawyer, M J Pharma, Gujarat Lyka,Sumitra Pharma, Merind, TDPL, Natco’s entire prescription drugportfolio, Milmet, Crosland Research Labs, Gufic’s leading brands,SOL’s leading brands, Dolphin’s leading brands and many othershave been acquired by or merged with predator companies. Veryrecently two more companies – Dee Pharma and pharmaceuticalcompanies have been declared ‘sick’ and referred to BIFR.

Why do some companies survive and grow while others stagnate andperish? It is the balanced power of both brain and brawn. The powerof strategic thinking and the ability to execute the action plans. Inother words, it is intellectual capital that has always been a decisivefactor in the rise of civilisations, organisations and people. RichKarlgaard, editor of Forbes ASAP, puts it so succinctly in his forewordto Leif Edvinsson and Michael S. Malone’s book on intellectual capital:

“For at least 60,000 years our ancestors, the Cro-Magnons, lived sideby side with the Neanderthals. Then, about 30,000 years ago, theNeanderthals disappeared.Why did one species survive and the other perish? Both used toolsand language, but the Cro-Magnons had a lunar calendar. Soon theycorrelated the passing days with the migratory patterns of bison, elkand red deer. This insight was dutifully recorded on cave-wall paintingsand in sets of 28 notches on reindeer antlers.Hungry for meat, the Cro-Magnon was taught all that he had to dowas wait at a river crossing on certain days, spear in hand. In themeantime the Neanderthals appear to have unwisely scattered theirmen and their scarce resources in search of random encounters. Theyallocated their resources poorly. They perished”.


Industry experts predict that the number of companies in the post-GATT era will dwindle considerably. Industry will consolidate itselfduring this period. Some would even suggest that the number ofcompanies operating in the Indian pharmaceutical industry would bearound three hundred by the time dust settles. While it is difficult tosay how many companies would win, how many will survive and howmany will remain as mute spectators, watching these rapid changes,the portents are clear that the consolidation phase has commencedand will continue. It is also difficult to predict who will be predatorsand who will be the prey. Today’s predators can as well be tomorrow’sprey to some other larger, more powerful predators, who will be onthe prowl.

Fiercely competitive or not, the market place is ruthless and merciless.In such an environment only the fittest survive.

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Executive Summary

The marketing environment of the pharmaceutical industryin India is undergoing a radical change. The transitionfrom the process patent raj to the product patent regimehas not been smooth. About eight companies either havebeen already acquired or merged with predator companiesduring the last four years. More recently two more companiesare up for sale as they have been declared sick. Close toone hundred brands and generic products have changedhands during the same period. The predators continue tobe on the prowl, this time more for brand acquisitionsrather than for company acquisitions.

Competition continues to be at its fiercest for a marketwith a size of about $3 billion, growing to $6 billionwithin the next four years. 16,000 companies are battlingit out for staking a share. Less than three hundredcompanies out of these form the organised sector, whichaccounts for almost ninety per cent of the industry’stotal sales. That is the equation of competition for you.

The twelve companies discussed in the previous chapterare at the top of the heap. How did they do it? What arethe strategies they have adopted to reach the top in sucha fiercely competitive industry? How are they preparingfor the future?

17TOP OF THE HEAP


Twelve case studies profile each of these companies andhighlight the basic strategic approaches that thesesuccessful companies have been following to staycompetitive even in the post-GATT era. There are manyinvaluable lessons for the discerning reader in these,whether he is an executive who is shaping the future ofhis company, an analyst studying the corporate performanceor is a management student in pursuit of understandinghow companies achieve sustainable superior performance.

Here are the success stories of companies who have reachedthe top of heap...

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1. Ranbaxy: No tail lights ahead, No head lights behind!

Ranbaxy is the only Indian pharmaceutical company with a truly globalout look. It has many distinctions to its credit. Consider these forexample:

Ranbaxy has moved into the top 100 pharmaceutical companies’league in the world. It is the first Asian company to achieve this.

Ranbaxy is one of the top 50 Asian companies that are best preparedto excel in the global market place of the 21st century, according to asurvey of 4500 listed companies from 14 Asian countries by ArthurD. Little and Asia Inc. The survey ranked Ranbaxy in eleventh place:one of only 5 Indian companies in the top 50 and the onlypharmaceutical company in the top 25.

Dominant Player

Ranbaxy has achieved a consistently high growth rate since 1988. Itssales have grown from Rs. 18 billion in 1988–89 to over Rs. 13.3 billionin fiscal 1998, a compounded annual growth of around 25 per centover a ten-year period.

Ranbaxy has also become, during this period, India’s leadingpharmaceutical exporter, accounting for about 15 per cent of thecountry’s exports of pharmaceutical substances and finished dosageforms. Exports, which accounted for less than 20 per cent of company’stotal sales in 1998–99, currently account for over one-half of thecompany’s total sales.

17TOP OF THE HEAP


The company is a leading player in the domestic market, with anundisputed leadership position in the anti-infective segment, whichaccounts for almost a quarter of the Indian drug market. Ranbaxy hasachieved a dominant leadership position in the domestic market. It ismore than twice as big as its nearest Indian rival. Ranbaxy’s totalturnover in fiscal 1998 is over Rs. 13.3 billion, whereas the secondlargest player in the Indian sector – Cipla has recorded total sales ofabout Rs. 5.6 billion during the same period. Ranbaxy’s sales frominternational operations alone are more than the total sales of otherpharma majors in the Indian sector.

Strategic Vision

How did Ranbaxy achieve all this? The company has a clear vision. Ithas clearly defined its goals, milestones and inflexion points in its journeyto the top. The company reformulated the goals once it reached themilestones. Consider for example the vision of its chairman Dr.Parvinder Singh, when he reformulated the company’s goal to beamong the top three generic drug companies in the world almostimmediately on making it to the prestigious list of the world’s tophundred pharmaceutical companies. He had clearly seen the futurebefore it arrived. On becoming an international generic drug company,he has reset and articulated the mission for his company that it shouldbecome a research based international pharmaceutical company. Andit did become a research based international pharmaceutical companywith its recent discovery of a new molecule for the treatment of BPHand its licensing arrangement with an international drug major.

Ranbaxy has realised the importance of achieving cost leadership inorder to be globally competitive and has achieved this through acombination of planned technological upgradation and backwardintegration. The company’s manufacturing plants for bulk actives aswell as formulations have the approvals of international regulatoryauthorities like US FDA, UK MCA etc. The company has an enviableportfolio of bulk actives and intermediates making it a verticallyintegrated drug firm. This dual strategy has helped the company inachieving a competitive position internationally. It has helped thecompany in achieving world class quality and predictable control on itscosts, quality and timely delivery of inputs. Barring Teva, the rapidly

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growing generic drug firm from Israel, there are not many internationalgeneric drug firms that are as vertically integrated as Ranbaxy.


Ranbaxy is a market-driven company. Three of its brands are amongthe top ten of the Indian pharmaceutical industry. The company has12 of its prescription brands among the industry’s top 250. In additionto its brand building activity in the domestic market, Ranbaxy has alsobeen investing in a global brand building exercise. It has identified 25molecules that are going off-patent before 2005. The company isplanning to channelise its integrative power and manufacturinginfrastructure at home and abroad to achieve synergies in buildingthese into 25 global generic brands.

Structure is another area where Ranbaxy is distinctly different fromother pharmaceutical companies in India. It is trying to shed the typicalheadquarters mentality of management and has created four well-thought out regional headquarters to manage its far-flung businessoperations. The four regions are the Americas, with Raleigh asheadquarters, Europe, CIS and Africa with London as headquarters,India and the middle East with New Delhi as headquarters and AsiaPacific with Hong Kong as headquarters.

Harnessing the Alliance Power

The company is very well poised to exploit the big opportunity of thegeneric markets in the West, particularly the US. It already has approvalsfor two products. Ten more ANDAs are awaiting approval. The companyis planning to file ten ANDAs every year and is likely to have an optimumproduct portfolio of 35 to 40 generic formulations by 2003. Ranbaxy isconfident of generating a sales turnover of $ 150 million out of these by2003. To achieve this ambitious objective the company has alreadyacquired a generic company in the US and has formed, in addition,strategic alliances with Schein Pharma and HMS to market its genericformulations. Ranbaxy is already preparing to have a full-fledgedmarketing team in the US by the year 2003.


Important Initiatives

1. Ranbaxy has been building on its core competencies over the years.The company has been investing on both acquisition and nurturingof talent. It has a more competent and better informed managementteam in place, compared to most other Indian drug companies.

2. Ranbaxy is the first Indian drug firm to have invested in sophisticatedenterprise resource planning (ERP) systems. Ranbaxy is planningto implement five modules of ERP: sales and distribution, materialsmanagement, production planning, finance and costing. Thecompany is investing about one per cent of its turnover oninformation technology. The company is planning to digitalise itsoperations across all its markets in the next three to four years bycreating an ubiquitous digital net work to be competitive externally.

3. Another significant strategic differential that Ranbaxy has chosenis creating value through communication. The company is planningto achieve this through e-mail, intranet and web site. It is planningto use intranet extensively. The company regularly puts up thechairman’s messages on the intranet. All employees can down loadcorporate presentations made anywhere in the company from theintranet. The company is also planning to target potential employeesusing infotech.

4. Ranbaxy is implementing this project to bring in a perceptible culturechange in its management team. To implement this project called‘Project Diamond’ , the company has put up a team of 30 youngpeople with diverse backgrounds from within Ranbaxy and fromits consultancy firm – Price Water House Coopers. This team, aptlycalled ‘Team Diamond’, acts as a change agent to usher in an eraof digital culture.

5. Ranbaxy is planning to build communities of physicians, medicalstudents, consultants and final users from different therapeuticsegments around its web site. The company is also building a databaseof doctors to create an eclectic club. It has already set up variouscentres across the country in hospitals and medical colleges thathave access to Medline International.

6. Ranbaxy is also planning to use information technology for electronic

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dossiers. The company has more than 900 different dossiers forclearance of different products in different countries with differentregulatory regimes. This will facilitate faster clearance and take theproducts quicker to the market.

7. Further the company is planning to use infotech in combinatorialchemistry and high-throughput screening in the area of new drugdiscovery research. The companies which are using informationtechnology in research area are talking about screening thousandcompounds a month as compared to one hundred a year in the past.

Winning Combination

Ranbaxy has clearly emerged as a winner in Pharma industry not justfrom the subcontinent but from the entire Asian Continent. Apartfrom all its winning moves and strategic initiatives, what seperatesRanbaxy from others is its winning combination of strategic visionand executional capabilities. A leading international strategic consultantobserved that he found in Dr. Parvinder Singh, the Chairman andD.S. Brar, the president of Ranbaxy a world-beating combination. Dr.Singh is a visionary and Brar is impeccable in execution.

2. Dr. Reddy’s Labs: It’s time to dream again!

Dr. K. Anji Reddy had a dream in the mid-eighties when he foundedDRL – to put India on the bulk drug map of the world. He has helpedmany of his scientists master the reverse engineering of processtechnology and has achieved phenomenal success in developing cost-effective processes for many of the new molecules.

Research Focus

Now that DRL has reached the critical mass and GATT is becoming areality, Dr. Anji Reddy has another dream. This time it is to put Indiaon the drug discovery map of the world. He founded Dr. Reddy’sResearch Foundation, a world class research and development centrein 1994 and started the drug discovery program. And he did put Indiaon the drug discovery map of the world with the historical agreement


between DRF and the Danish drug major Novo Nordisk for takingthe new insulin sensitizing molecules through further stages ofdevelopment to commercialisation.

DRF has already filed for as many as 20 patents. This is what puts theDRL group in the forefront of the Indian pharmaceutical industry –not its present size or performance but its future potential. Its presentperformance too is nothing short of spectacular, with a growth ratethat is three times faster than the average for the domestic industry.The company is confident that it would be able to grow at least twice asfast as the industry in the coming three to four years – at 25 per cent.

Critical Mass

The company has been on a brand acquisition spree to maintain a highgrowth rate. The company has acquired two brands – riflux and clampfrom SOL Pharma and Becelac brand from Pfimex in 1996. Recentlyit has acquired five brands – styptovit, styptomet, styptochrome, doxtand trichodol from the Calcutta based Dolphin Laboratories.

These brand acquisitions are aimed at consolidating the company’sposition in the therapeutic segments of focus and also in extending thetherapeutic coverage.

Marketing Focus

DRL has changed its focus to the value-added formulations businessfour years ago and has aggressively pursued a brand building strategy.This has paid off handsomely. It has achieved the highest growth rateamong the top 30 Indian pharma companies over the last two years.In addition, three of the company’s brands have become leaders intheir respective categories. Four of the company’s brands are amongthe industry’s top 250 and these contribute to 54 per cent of thecompany’s total formulations’ sales.

Technology Bias

Dr. Reddy’s Labs has built an impressive manufacturing infrastructurethat is comparable to the best in the world. All its plants either conformto international regulatory standards or they have been approved. The

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company has also developed highly cost effective alternative processesfor a number of bulk drugs, making DRL one of the most integratedamong the Indian pharma companies.

International Operations

Dr. Reddy’s Labs is one of the leading exporters of bulk drugs fromIndia. The company has 204 product registrations in various countriesat the last count and many more are under process. DRL has a strongpresence in CIS markets, including a joint venture.

The company is actively processing joint ventures for penetratingimportant international markets in Latin America and China. In Brazil,it has entered into a marketing alliance with Biochemico. DRL hasachieved the distinction of becoming the first Indian pharma companyto enter Venezuela. It launched six products in Venezuela.

The Right Move

DRL is planning to merge two of its group companies – Dr. Reddy’sLaboratories and Cheminor Drugs. The merger will help the group inoptimising their resources and eliminating redundencies. Above all, itwill push DRL to the 6th position among the pharma companies inthe domestic sector. DRL, after the merger, will be the third largestexporter of pharmaceuticals from India. It is indeed the right move!

3. Cipla: Capable! Confident! Committed!

If there is one word to describe Cipla’s performance over the yearsthat is consistency! With a turnover of Rs. 6.16 billion in fiscal 1998,Cipla has consolidated its coveted position as the third pharmaceuticalcompany in the Indian market.

Marketing Focus

The company’s product portfolio of bulk actives as well as formulationshas both width and depth. They cover a very wide range of therapeuticsegments and disease areas virtually from A to Z – from Asthma to


Zollinger-Ellison Syndrome. In each therapeutic segment the companyoffers a range of molecules from conventional to the most modern andis better suited to offer almost total solutions for a disease managementapproach.

The company has an enviable customer franchise in all key prescribersegments. It has also one of the most efficient and effective distributionnetworks with the company’s own depots, stockists and retailers. Asthe company is one of the front runners in terms of prescriptiongeneration in the Indian pharmaceutical market, it enjoys considerablefranchise even in the trade.

Cipla has a dominant leadership position in the anti-asthmatic marketin India, way ahead of even the industry leader – Glaxo. It also has asizeable share of the antibacterial and anti-infective segment. Thecompany is among the top seven in the cardiovascular segment. Ciplahas eleven of its brands among the industry’s top 250. All these factsamply demonstrate that Cipla has been carefully nurturing its brandsand building brand equity steadily in a strategic manner. The companydefends its market share in all its key therapeutic segments with regularpromotion and appropriate new introductions.

Technological Capabilities

Cipla’s technological capabilities in process development are exemplary.This explains as to why the company is among the top three Indiancompanies which have successfully copied or reverse engineered anumber of newer molecules and brought these to the market. Thecompany has also demonstrated its product developmental capabilitieswhen it introduced the world’s first oral drug for treating ‘thalassaemia’.Its technological capabilities can also be gauged from the fact that inalmost all of its alliances with overseas partners Cipla provides thetechnology and products.

The company over the years has built a world-class manufacturinginfrastructure. Three out of five of its plants are approved byinternational regulatory authorities like US FDA, UK MCA, AustralianTGA and the South African medicine control council (MCC).

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Internationalisation

It is only recently that the company has begun exploring the foreignshores. During the last two to three years the company has made rapidprogress. It has already achieved an export turnover of Rs. 730 millionin fiscal 1998 and is aiming for an ambitious two-fold increase toRs. 150 million by the turn of the century. What is the secret of Cipla’srapid progress in such a short time? The company has successfullyharnessed the power of win-win strategic alliances in all its overseasforays. The company has sealed as many as nine alliances that includemarketing arrangements, technical collaborations and even equity-basedjoint ventures. The structure of these alliances is clearly defined and isaimed at achieving synergies. In all these alliances Cipla provides theproducts, technology and the overseas alliance partner will provide themarketing, market knowledge and the distribution support. As thealliance progresses, the joint venture company may set up amanufacturing base to produce formulations sourcing the bulk actives andintermediates from its Indian partner – Cipla. If the joint venture companyreaches the critical mass it may, in certain key markets, start manufacturingthe bulk actives with technical support from Cipla. The company aims toset up at least one manufacturing base in each of the key regions.

Operational Excellence

Cipla is strong on systems. Considering the high turnover of employeesduring the last few years, one tends to think that it is more task-orientedrather than people oriented. Even the high turnover did not effect thecompany performance, which only proves its relentless focus on tasksand objectives. The company’s move to de-layer the managementstructure may have caused some amount of insecurity and reducedmotivation levels among its ranks, but it does not reflect in itsperformance. Overall, the company is very well managed. It is systems-driven. Decision-making is swift. There is empowerment andaccountability and strict budgetary control. Processes are well defined.

Achievement – A Way of Life!

Cipla has achieved a turnover of Rs. 616.8 million in fiscal 1998. Exportshave grown by 60 per cent to Rs. 116 million. The company’s net profittoo has gone up by 12.8 per cent to Rs. 115 million.


Cipla’s performance indicators over the years have been among the bestin the industry. In fiscal 97, the company’s operating margins were23.2 per cent, net margin 19.8 per cent, ROI 36.2 per cent.

Cipla has built up an enviable customer franchise, as a result of whichit is among the top 3 companies in all key therapeutic segments. AtCipla, achievement truly has become a way of life!

4. Lupin: Leapfrogging into the top league!

Started with the small change of an investment of five thousand rupeesin 1968, Lupin has leapfrogged into the top league in the nineties.With the recent proposed merger of its group company – LupinChemicals with the flagship company Lupin Labs, the company willbecome the second largest company – next only to Ranbaxy – in Indianpharmaceutical industry.

Strategic Vision

Lupin has entered the market with a clear focus on the anti-tubercularsegment. The segment was perceived by multinationals and otherleading Indian drug companies to be unattractive as margins were verylow. Lupin has found an opportunity in this segment as India accountsfor about fifty per cent of the tuberculosis patients in the world. Thecompany has rightly chased volumes, integrated backwards to achievecost efficiencies and has become a leading player in the world anti-TBmarket.

Having tasted the success of a focused strategy, Lupin has once againfollowed a focused strategy – this time on the high-margin cephalosporinsegment. Lupin’s expansion strategy literally pivots aroundcephalosporins. The reasons are not difficult to understand. Considerthese for example:

The world cephalosporin market is estimated to be around $ 10billion.

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A number of major molecules in the sterile cephalosporin segmentare going off-patent in the next few years.

There are only three to four integrated players in the worldcephalosporin market.

Alliance Power

Lupin has spotted a big opportunity and has become a fully integratedplayer in this segment. It is also using strategic alliances to gain access tothe difficult-to-penetrate generic markets for off-patent formulations inthe industrialised West. The company has acquired Eli Lilly’scephalosporin plant in Puerto Rico and has entered into a joint venturewith the US-based MOVA for marketing these generic formulations.It has also entered into a strategic alliance with Merck Generics, whichhas a strong hospital presence in Europe for marketing the same.

Winning Moves

Lupin is determined to become a $ 1 billion company by 2003. Thecompany has been aggressively planning to sharpen its focus. Here aresome of its recent winning moves.

1. Lupin is working out a blue print to merge its group company – theRs. 1.1 billion Lupin Chemicals with itself. The merger will makeLupin Labs India’s second largest pharma company behindRanbaxy.

2. To fuel its growth plans, Lupin has stepped up its acquisition fundof $ 10 million to $ 30 million to acquire companies internationally.

3. Lupin is also scouting for a multinational partner to take minoritystake in Lupin Labs.

4. The company has very recently finalised a deal to take over a pharmacompany in Ireland.

5. Lupin is planning to acquire a pharma facility in China.

Lupin has what it takes to be competitive and more importantly to staycompetitive even in the coming product patent regime.


5. Wockhardt: Working Hard!

Wockhardt and hard work may not be synonymous in a semantic sense,but they do have phonetic similarities. The ‘sounds’ of ‘Wockhardt’and ‘work hard’ are pretty close!


Wockhardt has a diversified product portfolio. In the domestic marketit concentrates on formulations. Its top five brands account for half ofthe company’s domestic formulations’ sales. Currently, Wockhardt hasa strong presence in the pain management and wound care segments.The company has restructured its domestic marketing operations toincrease thrust on fast growing therapeutic segments such as cardiaccare, paediatric care and gynaecology. The company has plans to increaseits presence in oncology and gastroenterology segments as well.

Wockhardt has strong presence and ranks second, next only to CoreHealth Care, in the ‘parenterals’ market. The company is mainlycompeting in the branded intravenous fluids segment.


Wockhardt has invested consistently in upgrading its technology overthe years. As a result it has both its bulk drug and formulationsmanufacturing facilities approved by US FDA and other internationalregulatory authorities. It has also created manufacturing bases overseasthrough acquisitions in the US and the UK.

Focused Research

Wockhardt has prioritised biotechnology research and plans tointroduce atleast eight biotechnology based products in the next threeyears. These include insulin and erythropoietin (the secondrecombinant product from the company, the first being hepatitis-Bvaccine). Erythropoietin is now in phase III clinical trials and will belaunched as soon as these are completed. The company also plans tomarket erythropoietin in the emerging markets.

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Integration Power

Bulk drugs are mainly for captive consumption and the balance isexported. It is amongst the world’s largest manufacturers of the analgesic– dextropropoxyphene and one of the few global manufacturers of theanti-hypertensive captopril, which went off-patent in February 1996.The recent acquisition of Merind has made Wockhardt one of themajor producers of vitamin B12 in the world. Overall, the companyhas an impressive bulk drug portfolio, paving the way to become oneof the vertically integrated generic manufacturers who areinternationally competitive.

Internationalisation Strategies

Bulk drugs have been providing the thrust for exports all these yearsfor Wockhardt. The company’s manufacturing facilities are approvedby international regulatory authorities like US FDA and UK MCA.Forty seven per cent of its bulk drug exports are to industrialised marketsin the West.

Wockhardt has spread its global network with subsidiaries in the US,UK and joint ventures in China, Saudi Arabia and Egypt. It has one ofthe early entrants in the captropril generic market in the US.

Wockhardt! Work smart!

Wockhardt has recorded a turnover of Rs. 4.02 billion in fiscal 98. Itsexports have grown by about 22 per cent to Rs. 820 million.

Wockhardt has chalked out a blue print for succeeding in the post-GATT era. It has made many right moves, be it focus on selecttherapeutic segments, technology upgradation, stepping up of R&Deffort, export thrust and internationalisation process except one:unrelated diversification to reach the critical mass in terms of turn over.

The company with a view to regaining focus on its core business isdemerging. This demerging will sharpen its focus on pharmaceuticalsand help the company stick to the knitting.

Wockhardt is one of the five Indian pharma companies who are wellprepared to meet the challenges of the post-GATT era. Wockhardt’smotto? Wockhardt! Work smart!


6. NPIL: Taking over to overtake!

Ajay Piramal entered the Indian pharmaceutical industry in 1998 ratherquietly through the acquisition route. He acquired Nicholas Laboratoriesof Sarah Lee Corporation for Rs. 16 million. No one would havevisualized that this small step would mean a giant leap into the topleague of the Indian pharma industry. But, that is precisely what he didin about ten years time. He steamrolled into the industry’s prestigioustop five by 1998. How did he achieve this? By doing what he knows bestand what he does best, taking over three more companies and a famousresearch centre between 1993 and 1998. Here are the details:

Year Acquisitions

1987 Nicholas Laboratories1993 Roche India1995 Sumitra Pharmaceuticals and Chemicals1996 Boerhinger Mannheim India1998 R&D Centre of Hoechst in India

With this spate of acquisitions, Nicholas Piramal has reached the criticalmass of Rs. 5.42 billion in the fiscal 1997 from a mere Rs. 250 millionin 1988. The company has also reached the critical mass in terms ofmanufacturing infrastructure for bulk actives as well as formulationsand has an R&D infrastructure that is among the best in the country.

Powered by Alliances

Strategic alliances is another approach Nicholas has been banking on.In a short span of three to four years, the company has forged as manyas fifteen alliances with leading players in the world. Alliances are thequickest way to gain access to world class products, technology, know-how and even markets. Most of these alliances, however, are marketingalliances. The company would like to pursue the alliance and thelicensing route with MNCs for manufacturing and marketing theirproducts in India. The strategy seems to be working well for them.Consider these facts:

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First half results of fiscal 1998 indicate that over one-third of itsturnover has come from these alliances. The company aims to achieve 50per cent of its total turnover from alliances within the next two years.

The company has introduced as many as 12 new products of Rochein India since the acquisition.

Boots Plc and Reckitt & Colman, who are competitors internationallyhave both chosen Nicholas Piramal as their partner in India.

The key differential in Nicholas Piramal’s strategy is its alliance-bias. Itis based on sound logic. The first premise is that when multinationaldrug companies are excited about the future prospects of the Indianpharmaceutical market, why can’t Indian companies exploit it? In thecoming product patent regime, alliances and licensing arrangementsare necessary to gain access to new products. The second premise isthat even in the post-GATT era, there will be a number ofmultinationals which would not like to set up a full-fledgedmanufacturing and marketing infrastructure in India. Nicholas Piramalwants to tap that segment of the market.

The company has clearly understood that to be an attractive suitor forall the alliance partners-to-be, you need to have certain qualities andqualifications. The company has been preparing to create:

Marketing infrastructure comprising one of India’s largest sales forces.

Penetrating the distribution network of C&F agents, stockists andretailers.

Manufacturing infrastructure for bulk actives and formulations thatmeet international standards.

World class R&D facilities.

All the acquisitions have extended the therapeutic coverage of thecompany to about 60 per cent.

Size Does Matter!

Ajay Piramal, chairman of Piramal Enterprises in his presentation at aseminar on corporate restructuring organised by the Federation of


Indian Chambers of Commerce and Industry (FICCI) said, “size doesmatter. The organic growth of their pharma group has been at acompounded annual growth rate of around 50 per cent.”The pharmaceutical group of Piramal Enterprises is expected to achieve9.86 billion in sales and Rs. 790 million in net profit for fiscal 98.

Piramal Pharma group is the most integrated pharmaceutical companiesin India. It has a strong either already presence or building one in allrelated areas like pharmaceutical formulations, bulk drugs andintermediates, OTC pharmaceuticals, research and development,penetrating international markets and clinical research. It has alsobeen steadily investing in building a strong sales and distributionnetwork. The sales force has increased from 191 in March 1990 to2000 in March 1999 (including JVs like Sarabhai Piramal, Reckitt &Colman.

Ever since Piramal has entered the pharma business by acquiringNicholas Laboratories from Sarah Lee Corporation of the US in 1988,the pharma group has grown at a compounded annual rate of 52.1 percent in PAT and 42.9 per cent sales.

What is the secret of this success? The Piramal prescription for successis: Build state-of-the-art technology, invest in research and development,boost sales and distribution network, rope in international partners,seek international listing, get access to global funding.

7. Torrent: Torrential Still!

Marketing Focus

Torrent Pharma is focused on formulations with a bias for specialitytherapeutic segments such as cardiovascular (23%), neuropsychiatry(19%), gastrointestinal (12.5%) and antibiotics (11%). Five of its brands(dilzem, alprax, quintor, domstal and listril) are among the industry’stop 250. Torrent has been experimenting in structuring its marketingoperations for the past three years and recently carved out three strategicbusiness units.

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Focus on Research

Torrent is working out plans to make R&D a profitable proposition.It has signed up research collaboration agreements with internationalresearch institutes like William Harvey Research Institute in the UK.The company is confident that it can generate at least one-third of R&Drevenues from collaborative research.

The company has set up a state-of-the-art R&D centre with an investmentof Rs. 750 million, where more than a hundred scientists are workingon various product and product development projects including a drugdiscovery program.


The quest for greater economies of scale is the driving force at Torrent.Torrent Gujarath Biotech Limited (TGBL), the joint venture companyof the group has invested Rs. 750 million to double the capacity ofpenicillin-G. Doubling the capacities cost only Rs. 750 million whereasa green field project may have cost around Rs. 2 billion. The companyplans to bring down the fixed cost per unit of penicillin to an extentwhere it can be internationally competitive with this capacity expansion.

In addition, Torrent has developed an impressive bulk drug portfolio,which reflects its process development process.

International Operations

Torrent is one of the country’s leading exporters of pharmaceuticalformulations. Exports account for close to 40 per cent of the company’stotal turnover. Torrent has 668 product registrations in 70 countriesat the last count. The company is planning to create manufacturingbases as a part of its programme for internationalising its business incertain key geographical regions like Africa, East Asia and EasternEurope either through acquisitions or green-field ventures.

Structuring for Success!

Torrent too in its chase to reach the critical mass in terms of size hasgone into unrelated diversifications. It has lost its leadership position


in Neuropsychiatry to Sun Pharma. Its pharmaceutical business havinggrown at a torrential rate has started showing signs of exhaustion. Thecompany realised it quickly enough and started refocussing andrestructuring. The Company to maintain its competitive edge in domesticmarket has once again formed three SBUs – Prima, Vista and Psychonato cater to different speciality segments. Torrent seems to be determinedto stick to the knitting. It’s structuring for success once again!

8. Zydus: The A to Z of Alliance Power!

What is commendable about the Zydus group (Cadila Health Care) isthat it has been able to return to the top five league (a position held bythe undivided Cadila in 1995) in the Indian pharmaceutical industry,within just four years. The first thing that they have done is to give adistinct identity to their group. This was absolutely necessary since boththe companies after the division wanted to use and capitalise on thecorporate brand equity of the ‘Cadila’ name. Cadila Health Care grouphave chosen the name of the Greco-Roman god – ‘Zeus’ – and spelt itas Zyus due to proprietary reasons. They have added a ‘D’ in betweensignifying the ‘dawn of a new era in health care.’ That is how the newidentity ‘Zydus’ was created by, for and of the Cadila Health Care group,to paraphrase Abraham Lincoln.

Strategic Vision

Pankaj Patel and his team got their act together immediately after thedivision and outlined a clear strategy to be competitive in the post-GATT era:

1. Achieve an organic growth of at least 20 per cent every year.

2. Acquire businesses and brands to reach the critical mass of Rs. 10billion by 2002.

3. Harness the power of alliances. Enter into strategic alliances andjoint ventures with leading international companies to gain accessto new products, technologies and markets.

4. Step up R&D effort and conduct focused research on niche segments.

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The Silk Route

What is the silk route to growth and prosperity of pharmaceuticalcompanies in these changing times? Acquisitions and alliances of course!Zydus has chosen this proven path to reach the critical mass faster. In1996 it took over the loss making Indo Pharma, turned it around andmerged it with the group in 1998, catapulting the Zydus group into thetop 5–6 companies in the Indian pharmaceutical industry. The companyhas earmarked Rs. 1.5 billion for acquiring businesses and brands.

Alliances are the engines of growth at Zydus. The company has enteredinto thirteen strategic alliances of various types, shapes and sizes at thelast count. Its alliances cover a wide spectrum of areas includingmarketing, manufacturing, technology transfer and research in bio-pharmaceuticals, bulk drugs and dosage forms with leadinginternational companies.

Marketing Thrust

Zydus is changing and sharpening its focus on the fast growingtherapeutic segments such as cardiovascular, gastrointestinal, bio-pharmaceuticals and anti-infectives. The company has restructured itsmarketing divisions into independent strategic business units (SBUs)to remain focused on different therapeutic segments and manage itsdiverse product portfolio effectively.


Zydus is creating a world class manufacturing facility with an investmentof Rs. 1 billion at Moriaya in Ahmedabad. This probably is one of thelargest investments at a single-location in the Indian pharmaceuticalindustry. It will conform to international regulatory standards andfollow cGMP.

Stepping up R&D

The company is setting up a swanky R&D centre adjacent to its newplant with an investment of Rs. 300 million. The mission of this centreis to create intellectual property rights for the group in select therapeutic


areas. The company is planning to launch its own drug discovery in thenear future. R&D will be a major driving factor determining the bottomline. Zydus is planning to scale up their R&D spend to about 5 per centof their turnover in the next two to three years, from the present 2per cent.

Performing Organisation

The Zydus group is determined to build a performing organisation.The company wants to create the performance on the foundation ofthree solid building blocks – the 3 E’s which are Enrich, Empower andExcel. The company has chosen five key result areas where it wouldlike to benchmark the best practices and excel at. These are marketshare improvement, exports, technology (upgradation and transfer),human resources development and cost leadership.

Focus on Performance

Zydus is both clear-headed and level-headed as an organisation. Clearabout its goals. Level-headed because it knows where it stand, what itneeds to do and knows that it cannot be complacent.

The company is confident of achieving a turnover of Rs. 4.34 billionand a post-tax profit of Rs. 314 million in the year ending March 1999.It is aware that its current operating margins at 12 per cent are poorcompared to Cipla’s 23.5, Dr. Reddy’s 23.2 per cent and Ranbaxy’s14.8 per cent. Its net margins too are low at 5.6 per cent compared toCipla’s 19.8 per cent, Dr. Reddy’s 14.7 per cent and Ranbaxy’s 15 percent. The high incidence of finance changes at 4.5 per cent (of turnover)is the major reason for this low net margins. But its return on investment(ROI) is reasonably good at 23.1 per cent compared to Cipla’s 36.2 percent, Dr. Reddy’s 15.9 per cent and Ranbaxy’s 11.6 per cent.

The Company’s cash flows are reasonably well managed with inventories at56 days and receivables at 61 days putting the total at 117 days compared toan industry average of about 150 days. The company plans to benchmarkthe best performers and is not complacent with better than industry averages.

Zydus understands that success is not only the vision and the strategyto achieve the goal but it is also about who is in a better position to

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implement it.

At Zydus, the focus is clearly and sharply on performance.

9. Sun Pharma: The Rising Sun!

From a turnover of less than Rs. 1 million in 1982, Sun Pharma hasachieved a sales turnover of Rs. 2.6 billion in 1998. This is indeed aspectacular achievement by any standard.


Sun Pharma has been a master of Niche Craft. The company haschosen the path of least resistance (as Dilip Shanghvi, its ebullientmanaging director would like to call it) to enter the Indianpharmaceutical industry in 1982. The road of speciality segments likepsychiatry, neurology, cardiology and gastroenterology, which was lesstravelled in the late seventies and early eighties has become the most widelytravelled by the late nineties.

Sun Pharma has been a sort of trail blazer in structuring its marketingoperations around select therapeutic and prescriber segments. Thetrend that it has started in 1993 has become today almost an industrystandard. Many companies are making a beeline to start specialityfocused marketing divisions. Sun Pharma is more focused in its specialityorientation than any other Indian drug firm. It has eight SBUs with afocus on fifteen different specialities.

SBU Focus segments

1. Synergy Psychiatry, Neurology

2. Symbiosis Psychiatry, Neurology

3. Aztec Cardiology, Diabetology

4. Sun Gastroenterology, Orthopaedics

5. TDPL Gynaecology, Paediatrics, Dermatology

6. Solares ENT, Orthopaedics, Respiratory

7. Inca Anaesthesia, Oncology, Critical Care

8. Milmet Opthalmology, ENT


Sun Pharma, as a result of its very sharp speciality focus, has been able toachieve leadership position in neuro-psychiatry, a second place in cardiology.The company aims to be among the top two companies in its focus segments.

Critical Mass

Sun Pharma has chosen the aquisition route to reach the critical massfaster. The company was ranked 34th in the Indian pharmaceuticalindustry in 1994. It has moved into the top ten with (monthly rank of8 in 1998) at breakneck speed since then. It has merged TDPL (annualsales of Rs. 600 million) and has taken over the entire prescriptionbrand portfolio of NATCO (annual sales of Rs. 520 million)

Acquisitions have fuelled growth and helped Sun Pharma reach thecritical mass even in manufacturing infrastructure, process technologyand strategic integration.


Although Sun Pharma has created a huge manufacturing infrastructurethrough greenfield ventures and acquisitions, it is yet to receive anyapprovals from international regulatory authorities.

Export Thrust

To tap the North American generics market, Sun Pharma has acquireda controlling interest in Michigan based Caraco Pharmaceuticals, withan investment of $ 7.5 million and a transfer of technology for 20generic drugs.

Ignites the SPARC

What separates Sun Pharma from its peers is that the company has setup a modern research centre – Sun Pharma Advanced Research Centre(SPARC) – with a capital of Rs. 50 million in 1992, when the company’sturnover was only around Rs. 200 million. Sun Pharma was also oneof the first companies to set aside 4 per cent of its turnover for R&D.

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Will the Sun Continue to Rise?

Sun Pharma’s structure of domestic operations should ensurecontinuous success. At the same time, it is not going to be as smoothand as easy. More and more companies with a similar or even greaterresource bases are entering the speciality segments. Competition in thesegments is intensifying.

Although Sun Pharma has been growing rapidly over the years, itsproductivity is not in tune with its growth.

If Sun Pharma can focus on consolidation without being complacentand concentrate on the productivity side of the equation it can continueto rise and rise. It does not have to see the sunset!

10. Ipca: Improving Constantly!

Ipca has achieved a dominant and formidable leadership position inthe domestic anti-malarial market – both in formulations as well as inbulk drugs. It has a 40 per cent share of the chloroquine bulk drugmarket but margins are low mainly due to price controls and the highlevel of competition.

Expansion Strategy

Ipca has been expanding its product portfolio of formulations as wellas bulk drugs from anti-malarials to anti-emetics, cardiovascular,antibiotics and bronchodilators. Its top 4 brands contribute to two-thirds of its domestic formulations’ sales. It has significantly increasedits new product introduction over the last two years. The company hascreated a separate marketing division to reinforce its position in thedifficult-to-penetrate and highly competitive cardiovascular segment.The company has a marketing team of 660 medical representativeswho cover approximately 120,000 medical practitioners in the country.

Manufacturing Infrastructure

Ipca has created an enviable manufacturing infrastructure over theyears through a steady stream of investments. The US FDA has


approved Ipca’s bulk drug facility at Ratlam in Madhya Pradesh. Inaddition, UK’s MCA and Ministry of Health of Germany have approvedIpca’s formulation plant at Athal in Gujarat.

Power of Integration

Ipca enjoys considerable scale of economies and is more integrated thanmany other firms. In volume terms Ipca consumes close to 40 percent of its total bulk drugs and intermediate production for itsown use.

Exports

Exports drive the growth at Ipca. The company’s exports have notched40 per cent growth in fiscal 97. Formulations account for almost 45per cent of exports. The product mix for exports is extremely diverse.Ipca manufactures some formulations exclusively for exports to suitthe requirements of buyers and agents in 65 countries in addition toits popular domestic brands. Formulation exports of products underpatent are mainly to developing countries. Ipca also carries out contractmanufacturing for SmithKline Beecham, UK. The company is steppingup its efforts to increase exports to US, China, Japan and Australia. It isalso actively pursuing contract-manufacturing alliances with overseasPharma MNCs.

Research and Development

Ipca has set up three R&D centres (each with a team of 37 people) atMumbai, Ratlam, and Indore which are recognised by the Departmentof Science and Technology. The company has spent Rs. 31.8 million infiscal 98 on R&D.

Moving up the Value Chain

Having established an impressive manufacturing infrastructure Ipcahas achieved the status of one of the most attractive alliance partnersin India for international suitors.

The company is now focusing on formulations business and move up

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the value chain. Ipca has a long way to establish in formulations businesswhich is a different ball game altogether. If the company can demonstratethe same degree of determination which it has shown in upgradingtechnology and manufacturing, Ipca can move up the value chain. Andto stay competitive in the post-GATT era it has to!

11. Kopran: ‘Koping Up’ with the Changing Times!

Kopran has emerged as one of the world’s leading manufacturer ofamoxycillin. The company has been traditionally focusing on semi-synthetic, penicillin-G based antibiotic bulk drugs such as amoxycillin,ampicillin etc. Amoxycillin accounted for two-thirds of the company’sbulk drug sales in fiscal 97. Although Kopran is a highly integratedplayer in the amoxycillin segment and the molecule is expected to growat a CAGR of 10–12 per cent over the next five years, two factors, thelarge number of players and over capacities leading to a pen-G glutworld wide, are pulling the prices and margins down. Kopran’sprofitability consequently has been adversely affected.


Kopran has set up two plants (one dedicated to penicillin-G basedproducts) at Khopoli and got them approved by US FDA and UK MCA.

Changing Focus

Kopran with economies of scale and backward integration has beencompetitive in international markets for its main product amoxycillin.However, due to the recent down trend in pen-G and amoxycillinprices, the company’s profitability has been adversely affected. As thecephalosporin and quinolone antibiotics start going off-patent and theirprices fall, it might lead to a fall in off-take of the older generationantibiotics like amoxycillin.

Kopran has been expanding its bulk drug portfolio with some of theblockbuster molecules like atenolol, omeprazole, roxythromycin,fluroquinolones and cephalosporins etc.

With rising competition and consequent lower margins in the price-


sensitive bulk drug segment, Kopran is sharpening its focus onformulations. The company has achieved brand leadership in the beta-blocker segment with its ‘aten’ brand of atenolol.

Coping with Challenge of the Change!

Kopran has a formidable task at hand. Its margins have come undersevere pressure due to drop in international prices of one of the majorraw materials and intensified competition at home and abroad.

Kopran is actively working out plans to cope with its changing businessenvironment as a bulk drug company and is preparing to meet thechallenges:

1. Moving up the value chain with renewed emphasis on formulation.The company has in all created three marketing SBUs to focus onspecific speciality segments.

2. The company is planning a major restructuring of its business. It isseparating bulk drug and intermediaries, pharmaceuticals and R&D asindividual businesses to achieve sharper focus.

3. The company is entering into a number of strategies alliances toexploit marketing opportunities in domestic as well as internationalmarkets.

Kopran has indeed shown true grit in meeting the challenges of thechanging business scenario.

12. Orchid: In Full Bloom!

Orchid Chemicals & Pharmaceuticals, in a short span of time, hasgarnered a 13 per cent share in the global bulk cephalosporin market.Orchid starting off as a 100 per cent export oriented unit with aninstalled capacity of 90 tonnes, has consistently added capacities to reachthe current capacity of 450 tonnes.. This year it will add another 20per cent.

The company exports most of its production and has a wide reach in40 countries. The bulk drug market, being highly price sensitive, forcesthe company into a volume game to maintain growth.

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Changing Gears

To stay competitive over the long haul and to reduce dependence on asingle bulk drug segment like cephalosporins, the company is followinga two-pronged strategy. Firstly, the company is expanding its bulk drugportfolio to other major block buster drugs in anti-virals, macrolidesand anti-ulcerant segments. Secondly, the company is following aforward integration strategy of manufacturing and marketingformulations of the bulk drugs in these segments.

The company’s strategy is to select products with good potential whichare currently under patent, but would go off-patent by 2005, so that itcan continue to manufacture and market these even in the ensuingproduct patent regime. The company would reverse engineer thesedrugs with a high technology content which creates an entry barrierinto the segment.

To maintain a technological edge and international competitiveness,the company has already taken initiatives for getting US FDA approvalsand ISO 14000 certification for its plants.


The company is integrating forward into formulations. It is setting up amarketing team of 250 medical representatives. The company isintroducing six formulations during the launch phase and will addanother ten products in the antibiotic, anti-viral and anti-ulcerantsegments within a year. Orchid is also planning to tie up withmultinational pharma companies for possible licensing or manufacturingarrangements, once the marketing team is in place.

The Financials

Orchid has recorded a sales turnover of Rs. 2.42 billion and a netprofit of Rs. 340 million in fiscal 97. Will Orchid achieve the samedegree of success as it has in cephalosporin bulk actives? It is difficultfor any late entrant in the branded generic markets. Much dependson the company’s ability to create the much-needed differentiation inits products and services. On its abilities to create and communicate


value addition to its customers. And more importantly in making themperceive the differentiation and value addition!

The company is looking at various options like private placement orraising funds through offering a stake to a foreign partner, to reducethe heavy interest burden of Rs. 300 million (estimate for fiscal 98).

Prescription for Success

A detailed analysis of all these successful companies reveals the basicelements of a winning game plan. The strategic approaches of all thesecompanies are similar. The differences exist only in terms of:

A. Relative emphasis on certain strategic elements

B. The stage of evolution at which it currently is

C. The levels of knowledge, skills and core competencies

D. The point from which they started the business and strategicintegration process and above all

E. The capabilities to execute and implement the strategic action plans

What is the prescription for success in the post-GATT era? First thingsfirst. It is important to have a clear objective of where the organisationwants to be in the foreseeable and in the distant future. Then draw upa blue print for reaching where it wants to reach. Here’s the prescriptionfor success or the winner’s ‘know-how’ and what other companies areeager to ‘know how’ the successful companies have been doing it!

1. Reach the Critical mass: Do not just sit there on your laurels. Dosome thing to improve market share, sales and above all profits.Grow organically. Buy businesses. Buy brands. Buy facilities in Indiaand abroad. Do something. Do anything to reach the critical mass.Do it now!

2. Make yourself an attractive partner: To be an attractive alliance partner,one needs to have a strong marketing infrastructure, a strongpresence in more than one therapeutic area, world classmanufacturing facilities, wide distribution network and goodcustomer franchise. Once you have all these, it is easier to license-innew products and technologies from multinationals currently nothaving any representation in India. You can keep your new product

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pipelines flowing freely with new products even in post-GATT era.Remember: new products are the lifeblood of any business. Theyare not only essential for growth, they are vital even for survival.

3. Increase your R&D effort and investment: It is important to enhancethe process and product development skills of your organisationeven if you want to retain your current position. To accelerate growthand stay ahead of the competition, the R&D effort has to be at amuch higher level. Process development capabilities can help theorganisation achieve a higher level and degree of strategic integrationinto bulk drugs and intermediates. This, in turn, will enable thefirm to achieve greater control on costs, quality and even strategy.An international generic firm needs to achieve cost leadership inorder to be competitive. Product developmental capabilities will helpcreate the much needed product differentiation, which is crucialfor success in the fiercely competitive market place. The organisationneeds to have a clear strategy for research to graduate into analogueresearch and its own drug discovery program before the window ofopportunity is closed.

4. Step up exports and draw a blue print for internationalisation:Exports can bring in higher price realisations even in the currentera of cost containment strategies practised by various nationalgovernments. It is important to draw up a clear strategy to graduallymove up the value chain in exports, from exporting bulk drugs andintermediates to generic and branded generic formulations and toeven innovative products over time. Moving up the value chainwill also involve a movement from markets with weak or no IPRprotection to highly industrialised, hard currency countries withvery strong IPR protection and stringent regulatory requirements.Again, all this has to be achieved in compressed time if one is startingnow. Buying up a manufacturing facility or an existing genericbusiness overseas is an alternative to the creation of a beachheadthrough a green field venture in these difficult-to-penetrate markets.

5. Use benchmarking as a strategy to excel at operations: Successfulorganisations the world over no longer set goals. They benchmarkagainst the best practices of firms across the board. One needs toexcel in all departments of the game in order to win. Today the basicknowledge about what strategies should be adopted to succeed in


the post-GATT era is widely known. The degree of insight andunderstanding may differ from firm to firm, but the basic strategy isclear to all. When the strategy is common and broadly understoodwhat is the most crucial success factor? Operational excellence.Implementation capabilities. It is the ability of an organisation toexecute its strategy effectively that determines its success or failure.It is the vital difference between winning and running a race.

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Executive Summary

It would be hard to find out a company that can dobusiness in the ‘product patent regime’ as it did in the‘process patent raj’.

A few companies have responded effectively. Many are notable to respond adequately. One reason for the ineffectualresponse is that business leaders simply have notappreciated the rate and pace of change - how the ‘hasbecome’ is becoming.

The key to success is in anticipating change before itarrives, and evolve, plan strategies to ride it, tomaster it.

The winners’ checklist is about asking some of theimportant questions that should signal to a company howthe change is taking place and how much ‘it’ needs tochange.

The major drivers of change are in areas like:

A. Information technology

B. Global perspective for global markets

C. Ethical corporate behaviour

18WINNER’S CHECKLIST


D. Responsibility to society at large, not just shareholders

E. Total customer solutions

Here then, are twenty key questions every business leadershould ask (and answer). Here’s the winners’ checklist.Check it out!


The rate of change in the Indian drug industry is so high thatincremental improvements will not work, let alone maximise yourpotential. Gone are the days when you could gain a competitive edge bydeveloping a slightly better way of doing things. The pace of change isso rapid that it is almost like a gale force wind. If you aim to take a smallstep or two you will probably end up going backwards. You need to takea big step into the teeth of the gale merely to hold your position. Tomove forward you have take more than one big step at a time. Thechange has to be revolutionary, not evolutionary.

Consider what Gary Hamel said while talking about strategy asrevolution:

“Let us admit it. Corporations around the world are reaching thelimits of incrementalism. Squeezing another penny out of costs, gettinga product to market a few weeks earlier, responding to customers’inquiries a little bit faster, ratcheting quality up by one or more notch,capturing another point of market share – these are the obsessions ofmanagers today. But pursuing incremental improvements, while rivalsreinvent the industry is like fiddling when Rome burns.”

When the usual is no longer usual, a business-as-usual approach is sureto fail. Moreover, the rate of change offers opportunities for competitionto exploit if you fail to do so. John O’ Keefee, group vice president,Proctor & Gamble, in his highly stimulating and thought provokingbook on ‘Business Beyond the Box – Applying Your Mind forBreakthrough Results’ says that, “ too many organisations use the pastas a sofa. The past should be used as a springboard and not as a sofa”.

18WINNER’S CHECKLIST


The key question to ask is – how does your organisation use the past –as a sofa or as a springboard?

Here are twenty such questions, which act as a checklist for arriving atthe big steps that are needed to move forward in this era of cataclysmicchange. All the successful companies have found answers to these andplanned their strategies accordingly. Here is the winners’ checklist:

1. Do we have a well-defined Mission (not just statement) that isunderstood by all team members? Do our senior management teammembers see themselves as revolutionaries or evolutionaries in ourindustry? Are they contented with the status quo? Or do they wantto re-write the rules for the industry? What is our leadershipquotient? What is our industry foresight?

2. Do we have a clear vision and a detailed blue print for action as tohow we are going to achieve what we want to achieve? How detailedare our action plans? Do they indicate responsibility centres andtime lines for each key objective?

3. Do all our employees share the organisational optimismand aspirations? Do they have a clear sense of urgency foraccomplishment? Do they have a sense of ownership of ourorganisational goals and objectives?

4. Is our top management allocating as much time for pre-marketcompetition as to market competition? How much of their timegoes into running and managing current business as compared tothat spent to visualise, anticipate changes and plan for futurebusiness opportunities? How much time do they spend inmaintenance as opposed to building our business?

5. Do we have a clear and collective agenda for building corecompetencies in all key areas and key markets?

6. What is the stretch involved in our aspirations? What is our currentlevel of performance? Where do we stand right now? Where do wewant to go? What do we need to reach where we want to reach?How do we bridge the gap? What is our action agenda for acquiringthe resources we need and for building the infrastructure that ourgrowth plans require?

7. What is our manufacturing infrastructure? Do our plants conform


to international regulatory requirements? How many of our facilitiesfor manufacturing bulk actives and formulations are approvedalready by international regulatory authorities like US FDA, UKMCA and others? What is the level of preparation required and bywhat time frame can we have our facilities approved?

8. What is our R&D infrastructure? What is our investment onresearch and development? How does it compare with our majorcompetitors with the industry average? What are the areas of ourresearch focus? What is the quality of our scientific talent andtemper? What is our acquisition agenda for scientific talent?

9. Global markets require a global perspective and posture. What isour stance towards IPR? Do we respect IPR protection even beforeit is fully implemented in India? Or do we want to wait till the year2005 when the product patent regime comes into effect? Companieslike Nicholas Piramal, Ranbaxy, Wockhardt and Zydus, who areactively seeking strategic alliances with prospective partners overseasare already entering into licensing and co-marketing arrangementsfor gaining access to new products, markets and technology.

Attitude towards intellectual property rights and their protectionis vital to form strategic alliances and build relationshipsinternationally. One cannot have two different sets of rules – onefor the domestic market and another for overseas markets, when acompany wants to go global.

10. How have we embraced information technology? Corporations inthe new millenium will increasingly reorganise around informationtechnology. To be competitive, companies must use high-tech toolsof information technology like ERP (Employee Resource Planning),digitalisation of communication across its units in all its operatingmarkets and strategic databases of customers. The key questions toask are:

What is our investment in information technology? In hard ware?In software?

What is our investment in training and development of our teams?

Are we planning innovative strategies to reach our customers byexploiting the revolutionary developments that are taking placein information technology?


What are our plans to graduate into electronic marketing anddatabase marketing?

11. Can we thoroughly introspect our leadership and style ofmanagement? Has it changed over the past ten–twenty years? Orhas it remained pretty much the same? If there is change, is thechange marginal, moderate or radical? Have we accepted the idea ofchange frequent if not constant?

Here is what Lawrence A. Bossidy, the chairman of Allied Signalspoke on ‘Reality Based Management’, at The Economic Club ofWashington in June 1996:

“Today’s leaders take nothing for granted. They know that greaterthe market share and their margins, the harder other people areworking to take it away from them. Their only hope is a perpetualsense of insecurity that inspires them to try to discern winds ofchange in the market, to come out with new and improved prod-ucts and services and try to stay two or three steps ahead of theircompetition”.

12. Are we providing a climate for nurturing innovation and entre-preneurship? The large organisation needs to be more innovativeand entrepreneurial. Do we have employees who can make decisionsand accept responsibility? More importantly, do we allow them totake decisions? Do we empower them?

13. Successful organisations world wide are realising the need to haveless hierarchical, flatter and cross-functional structures. They areadopting the matrix model of organisation. What is ourorganisation structure? Are we like a big pyramid? Are we a morehorizontal organisation? How many layers does our organisationstructure have?

14. What do our employees really think of our company? Are they proudto work for our company? Do they feel that they are in control oftheir professional lives? Do they feel they have it within their powerto make a difference in the success and failure of the organisation?Are they able to balance the demands of their careers with those oftheir personal lives?

15. What is our level of integration? How far are we from becoming a


fully integrated pharmaceutical company? Vertical integration doesgive sustainable competitive advantage to a drug firm. It gives thefirm the much-needed control on costs, quality and strategy.

16. Where do we stand in the process of internationalising our business?Are we still exporting only pharmaceutical substances, drugintermediates and generic formulations? Do we have a clearly laidout strategic action plan for graduating from exports tointernationalisation in the next three to five years?

17. How attractive are we as an alliance partner for the prospectivesuitors from overseas? Successful companies world wide are switch-ing from competition to a collaboration mode. Successfulpartnership is both a science and an art. To be an attractive alliancepartner, one needs to have:

A dominant presence in more than one therapeutic segment

Manufacturing facilities approved by international regulatory authorities

Strong customer franchise

Product and process development capabilities

Wide distribution network

Competent medical detailing force

What is our strategy to build and acquire these in the next three tofive years?

18. How responsive are we? What is our speed of response? Andrew S.Grove, the chairman of one of the world’s most competitivecorporations, says that, “ultimately, speed is the only weapon wehave”. In the international generics business, speed is the criticaldeterminant factor for success. The ‘first mover’ advantage is vitaleven for survival. A 1996 report by Lehman Brothers notes that,in the US, the first generic entrant can sell at a 30 per cent discountto the innovator brand, compared to a 75 per cent discount for thelater entrants.

19. How do we benchmark? What are our benchmarking practices?Whom do we benchmark against? Within the industry? Or acrossthe industries?


20. How sharp is our customer focus? Are we structuring ourselvesaround the customer or we still hierarchical? The winningcorporations today are organising around customer, not thehierarchy. In today’s fiercely competitive market, it is the customerwho calls the shots. Companies, which can create customersolutions and total good experience only will succeed. Ted Levitt ofHarvard Business School advised us as long as forty years ago throughhis landmark paper ‘Marketing Myopia’ that a thoroughly customer-oriented management can keep a growth industry growing, evenafter the obvious opportunities are exhausted.

Winning Leadership for an Era of Change

Lawrence A. Bossidy suggests four action steps for making a company awinner in an era of change through effective leadership:

One, determine the task at hand by honestly assessing where youstand with customers, employees and competitors.

Two, articulate a vision of where you want to be and values for howyou want to behave. Set aggressive goals and keep everyone focusedon achieving them.

Three, fill your company with people who are bursting with energyand creativity; people with diverse talents, who nonetheless can worktogether in a team setting. Give people constant, candid feedback,and let them know that their highest career aspirations can be fulfilledat your company.

And finally, create a culture that is obsessed with customers, andbuild your organisation and incentive systems around the interests ofthe customer.

Notes 385

Notes

Chapter One Pharmaceutical Industry – A Global Perspective

1. George M. Taber, Remaking of an industry, TIME, September 4, 19952. Baring Securities: Global Health Care, Express Pharma Pulse, July 27, 19953. M.P. Vinod Kumar, B. Ram Kishore, Pharmaceutical industry: The Count

down begins – Chartered Financial Analyst, September, 19954. Bigger Companies for Better Drugs? Lancet, September 2, 19955. Jerry Hone, The Rise and Pull of CRO Partnerships, Scrip Magazine,

September, 19946. Robert Sallance, Ja’nos Pogany and Helmut Forstner, ‘The world’s

pharmaceutical industries – An International Perspective on Innovation,Competition andPolicy’ (Prepared for the UNIDO), Edward Elgan PublishingLimited, England, 1993

7. Dr. S.M. Karandikar, ‘Indian Drug Industry after GATT’, MVIRDC, WorldTrade Centre, Mumbai, 1994

8. Anne Darbourne,Top Companies in R&D, Scrip Magazine, January, 19959. Jerry Yoram Wind, Jeremy Main, ‘Driving Change: How the best companies are

preparing for the 21st Century – The Wharton School’s ground breakingresearch on the future of management’, The Free Press, A division of Simon andSchuster Inc., New York, 1998

Chapter Two IPR:Folklore and Facts

1. Subhash K. Bijalani, Grant Patent and Grow, The Economic Times,September 28, 1995

2. ‘GATT Agreements – Final Text of Uruguay Round 1994’, MVIRDC, WorldTrade Centre, Mumbai

3. T. Thomas, Drug Industry heading towards an era of consolidation, Speechdelivered at the AGM of Glaxo India, 1996

4. Barrie G. James, ‘The Business War Games’, Penguin books, 19855. I.A. Modi, Patent Issues in TRIPS, International conference on Patent

Regime proposed in Uruguay round, New Delhi, September, 1993


6. N.B. Zhaveri, ‘Patents for Medicine’, Indian Drug Manufacturers’Association, Mumbai, 1998

7. Prabuddha Ganguly, ‘Gearing up for patents’, Universities Press (India)Limited, Hyderabad, 1998

Chapter Three GATT – A Third World Perspective

1. ‘Industrial Development – Global Report’, 1995, Published by OxfordUniversity Press for United Nations Industrial Development Organisation

2. Dr. S.M. Karandikar, ‘Indian Drug Industry after GATT’, MVIRDC, World TradeCentre, Mumbai, 1994

3. Robert Sallance, Ja’nos Pogany and Helmut Forstner, ‘The world’spharmaceutical industries – An International Perspective on Innovation,Competition and Policy’ (Prepared for the UNIDO), Edward Elgan PublishingLimited, England

Chapter Four Life after GATT in Indian Pharmaceutical Industry

1. Ajay Piramal, GATT and TRIPS are beneficial to pharmaceutical industry Extract from a speech delivered at the AGM of Nicholas Piramal India

Limited, July 13, Express Pharma Pulse, July 13, Pulse,19952. N. Chandra Mohan, GATT and After, Business India, 3–6, January, 19943. Jeannie Subramaniam, Taking GATT in its Stride, Business India,

September 26–October 19944. Arvind Nair, Unleashing the Indian pharmaceutical industry, Scrip

Magazine, March, 19945. Rajesh Garg, Gautam Kumra, Asutosh Padhi, Anupam Puri, Four

Opportunities in Indian Pharmaceutical market, The McKinsey Quarterly 1996, Number 46. ORG – MARG, ‘Milestones – Book of Papers’, Pharmaceutical Client Conference, Mumbai, April, 19987. ORG – MARG, ‘Milestones – Book of Papers’, Pharmaceutical Client Conference, Mumbai, April, 1999

Chapter Five Game Plans for Post-GATT Era: The Indian Example

1. Gary Hamel, C.K. Prahlad, Competing for the Future, Harvard BusinessReview, July–August, 1994

2. Dr. Heinz Redwood, ‘New Horizons in India – The consequences ofPharmaceutical patent protection’, Old Wicks Press, CBS – Suffolk, UK

3. India’s Pharmaceutical Market: Extract of the study by Oppenheimer & co, Express Pharma Pulse, May 11, 1995

Notes 387

Chapter Six Strategic Vision

1. Gary Hamel, C.K. Prahlad, ‘Competing for the future’, Harvard BusinessSchool Press, Boston, Massachusetts, 1994

2. Igor Ansoff, ‘Corporate Strategy’, Sidgwick & Jackson, London, 19863. Marcel Corstjens, ‘Marketing strategy in the pharmaceutical industry’,

Chapman & Hall, London,19914. Burt Nanus, ‘Visionary Leadership’, Jossey–Bass Publishers, San Francisco,

California5. Vinay Kamat, Ranbaxy: Moving into Top Gear, Global, September, 19946. Indranil Ghosh, Namrata Datt, The making of a Multinational, Business

India, June15–28,19987. Rajeev Dubey, Can Ranbaxy Survive, India’s Business Houses: The

Ranbaxy Group, Business Today, 19988. Derek F. Abel, ‘Managing with Dual Strategies: Mastering the present.

Preempting the Future’, The Free Press, A Division of Macmillan Inc., 1993

Chapter Seven Reaching the Critical Mass

1. Robin Davison, Hectic year for pharma M&A/R&D partnering, ScripMagazine, January,1995

2. Jefferey C. Hooke ‘M&A – A Practical Guide to Doing the Deal’,John Wiley & Sons Inc., New York

3. Namrata Datt, A Suitable Match, Business India, January 27–February 9, 1997

4. Indranil Ghosh, Just what the Doctor Ordered, Business World,August 21– September 3, 1996

5. Meenu Shekar, The predator’s New Avatar, Business World, 15–28,June, 1994

6. T. Surender, Piramal Patents a Formula, Business World, 7–21, July, 19987. Igor Ansoff, ‘Corporate Strategy’, Sidgwick & Jackson, London, 1986

Chapter Eight The Marketing Mindset

1. David A. Aker, ‘Managing Brand Equity’, The Free Press, A division of MacmillanPublishing Company, 1991

2. Marcel Corstjens ‘Marketing strategy in the pharmaceutical industry’,Chapman & Hall, London, 1991

3. Al Ries, Laura Ries, ‘The 22 Immutable Laws of Branding’, Harper Business,A division of Harper Collins Publishers, New York, 1988

4. Rahul Joshi, Till Brandom Comes, Corporate Dossier, The Economic Times,25 September– 10 October 1998


Chapter Nine Upgrading Technology

1. P. Hari, This time it’s the real thing, Business World, 1–14 , June, 19952. Samar Halarnkar, Reaching for new frontiers, Business World, 4–17,

October, 19953. Shobha Ramaswamy, Lupin raises the stakes, Business Barons, April 30, 1997

Chapter Ten Focusing on Research

1. Shivanand Kanavi, The Know Business, Business India, 9–22, October, 19952. The Business of New Drug Discovery, 15–28, June, 19983. Dibyendu Ganguly, Torrential growth, Corporate Dossier, The Economic

Times, 3–9, May,19964. Devina Dutt, Brave New World, Business India, November 17–30, 19975. Anne Darbourne, Top Ten companies in R&D, Scrip Magazine, January, 19956. Kopran Limited – Backward Integration in the offing, Express Pharma

Pulse, May 4, 19947. Rachna Burman, Prescribing the right pill, Q&A: Interview with Dr. Parvinder

Singh, Business India8. B. K. Sudhakar Reddy, Mega mergers will cut down health care costs: Interview with

Dr. K. Anji Reddy, The Economic Times, 20 October 1998

Chapter Eleven Integrating Strategically

1. Michael E. Porter, ‘Competitive Strategy: Techniques for Analyzing Industries and Competitors’,The Free Press, A division of MacmillanPublishing Co Inc., New York

2. Moira Dower, Integrating to Survive? Scrip Magazine, June, 1994.3. Indian Pharmaceutical Industry sourcing Directory, Compiled and Presented

by Indian Drug Manufacturers’ Association, 1996–97

Chapter Twelve Internationalising the Business1. Kenichi Ohmae, ‘The Borderless World’, Collins, London, 19902. Indranil Ghosh and Namrata Dutt, The Making of a Multinational, Business

India, June15–28, 19983. Shobha Ramaswamy, Lupin raises the stakes, Business Barons, April 30,

1997

Notes 389

Chapter Thirteen Attracting Alliances

1. Rosabeth Moss Kanter, Collaborative Advantage, Harvard Business Review, July–August,19942. Brain Carvalho, A New Prescription for Prosperity, Business World, 6–19,

March, 19963. Bharat Ahluwalia, A Pucca Firm’s New Zest For Life, Business World,

January 7, 1998

Chapter Fourteen Intellectual Capital

1. Leif Edvinsson and Michael S. Malone, ‘Intellectual Capital’, Harper Business,A division of Harper Collins Publishers Inc., New York

2. D.N. Mukerjea, Managing Intangible Assets, Business World, 22 November–6 December, 1998

3. Rahul Joshi and Seema Shukla, It’s All in The Head, Corporate Dossier, TheEconomic Times, 11–17 September, 1998

Chapter Fifteen Operational Excellence

1. Ronald G. Quintero, Financial Tools for Strategy Evaluation, ‘Hand Book ofBusiness Strategy’, Ed. Willium D. Guth, Warren, Gorham, Lamont, Boston,New York, 1985

2. Seema Shukla, The Cut above the rest, Corporate Dossier, The EconomicTimes, 20–26 November, 1998

3. Andy Neely, ‘Measuring Business Performance: Why, What and How’, TheEconomist Books, Profile Books Limited, London

4. Sumantra Ghoshal and Meeta Sengupta, Managing Radical PerformanceImprovement: Sweet ‘n’ Sour, Corporate Dossier, The Economic Times, 17–23 July, 1998

5. Sumantra Ghoshal and Meeta Sengupta,When Bigger isn’t Better, CorporateDossier, The Economic Times, 17 – 23 July, 1998

6. Chris Argyris, Empowerment: The Emperor’s New Clothes, HarvardBusiness Review, May–June, 1998

7. Lawrence A. Bossidy, Reality-based Leadership, Lecture delivered at TheEconomic Club of Washington, Washington D.C. June 19, 1996

Chapter Sixteen Winners and Spectators

1. BS 1000 – India’s corporate giants – A Business standard Research Beareaustudy, November, 1997


2. James C. Collins and Jerry I. Porras, ‘Built to Last: Successful Habits ofVisionary Companies’, Century Business Books, Random House UK Limited

3. T. Surendar, Shopping for Bargains, Business World, 7–21 December,1998

4. Meera Shenoy, The Changing Face of DRL, Corporate Reports, BusinessIndia, 14 – 27 December, 1998

5. P.S. Anantharaman, High on Pep, Low on Pills, The Economic Times, 4–10September, 1998

6. Nitin Srivastava and R.Sriram, He Can Conquer, But Can He Rule? TheStrategist, Business Standard, November 17, 1998

7. T. Surendar, Piramal Patents a Pharma Formula, Business World, 7–21 July,1998

Chapter Seventeen Top of the Heap: Select Company Profiles

1. Sarah Abraham, A star Performer, Business India, July 31–August 13, 19952. P. Hari, The race for new drugs hots up, Business World, 7–21 July, 19983. P.S. Anantharaman, Strategies: Let’s get those molecules in, Coporate

Dossier, The Economic Times, 20–26, November,19984. Nitin Shrivastava, R. Sriram, He can conquer, but can he rule? The

Strategist, Business Standard, November, 19985. Roy Pinto, Tonic for Growth: Corporate Reports, Business India, October

19–November 1,19986. Palakunnathu G. Mathai and T. Surender, Pharma Drama, Business World

7– 21 April, 19997. The idea is to build digital ubiquity: Interview with R. Vasant Kumar by

Vidya Viswanathan of Business Standard, January 15, 19998. K. Suresh, Be as local as possible: Interview with K. Satish Reddy, A&M, 15

February, 19989. Cover story: Ranbaxy: The Truly Indian Multinational and interviews with

D.S. Brar and Sanjeev Kaul, Pharma Trendz Today, November–December, 1997

Chapter Eighteen Winner’s Checklist

1. Jerry Yoram Wind, Jeremy Main, ‘Driving Change: How the best companiesare preparing for the 21st Century – The Wharton School’s groundbreaking research on the future of management’, The Free Press, A divisionof Simon and Schuster Inc., New York, 1998

2. Lawrence A.Bossidy, Reality-based Leadership, Lecture deliveredat The Economic Club of Washington, Washington D.C., June 19, 1996

3. Gary Hamel, C.K. Prahlad, ‘Competing for the future’, Harvard BusinessSchool Press, Boston, Massachusetts, 1994

4. Theodore Levitt, Marketing myopia, Harvard Business Review, July–August,1960

Index 391

A

Abbott 54, 232Acquisition Route

94, 98, 99, 104, 119, 141, 277, 358Action Agenda 67, 68, 378Acumed 204, 295, 317Aerocort 121Ajay Piramal 74, 123, 358, 359Alembic 49, 336, 340Alfred P. Sloan 238Alkem 341Allegra 219Allergan 227Alprax 125, 360Althrocin 336Altiva 219Alza 10Alzheimer 19Alzolam 127Amaryl 229American Drug Stores 15American Home Products 5, 7American Remedies 235, 341Ampoxin 338Analogue 156Analogue 156, 157, 170, 244, 373Analytical R&D 165ANDA 137ANDEAN 41Andrew S. Grove 381Andy Neely 257, 265Anji Reddy K. 74, 79, 99, 145, 165, 349Anti-dumping 181Antibiotics 223, 235

APEC 41Aqua Vet 233Aristo 341ASE 311, 341ASEAN 41Asthalin 121Asthalin Inhaler 121Astra Merck 17Aten 128Aurobindo Pharma 336, 337Azithral 336

B

Bactrim 124Barriers

52, 69, 81, 134, 136, 137, 177, 194, 217, 292, 302Bayer 15, 107, 126, 155, 200, 206, 232Bevent 234Bharat Biotech Int. 151Biddle Sawyer 57, 341Bio Sidus 231Bio-pharmaceutical Industry 19Biochemie 184Biochimico 221Biological E 341Biological Leads 164Biotech 151, 186Biotech 19, 150BiotechnologyBiotechnology 10, 19, 82, 140–142,

217, 226, 231, 244, 311, 356Bistrepin 336

Index


Blockbuster Drugs 18Boerhinger Mannheim

104, 105, 305, 341, 358Boots 117, 225, 228, 230, 359Brand Building 82, 85, 88, 113, 115–

117, 120, 125, 129, 130, 131, 191, 244,277, 285, 286, 289, 336, 347, 350

Branded Generics 45, 46, 60, 84, 206, 291,315

Brar D.S. 349Bristol Myers Squibb 7Bulk Drug Portfolio 181, 182, 185–190, 303, 306, 357, 361, 369, 371Burnol 117Business Performance 257, 263, 265Butalex 233BYK Gulden 107, 142, 206, 233, 318

C

Cadila125, 126, 151, 154, 171, 187, 231, 232

Cadila Pharmaceuticals 337Calmpose 118Capacity Utilisation 85Capital Markets 71Caraco

109, 142, 206, 218, 233, 312, 319, 366Carloc 220, 224Caslot 220, 224CBT 160CCMB 160CDRI 154, 160, 161, 217Cefaclor 138, 164, 181, 184, 198,

200, 219, 225Ceff 122Cefprox 220, 224Centeon 231CEPH 225Cepodem 220, 224CERI 160Cetrine 221

CFTRI 160cGMP 139, 292, 363Cheil 184Chembio 232Cheminor Drugs

100, 201, 221, 280, 293, 309, 316, 335, 351Cherana 117China Science Resources 233Chiral Chemistry 167Ciba 155, 213, 240Ciba-Geigy 213Cifran 118Cifran-CT 118Cimap 160Cipla

16, 49, 55, 56, 68, 70, 79, 80, 101, 120, 121, 130, 131, 133, 135, 139, 154, 158, 166, 176, 177, 182, 183, 187, 194, 202, 216, 218, 220, 222–224,

236, 246, 250, 267, 274, 280, 286,293, 294, 299, 304, 309, 316, 323,330, 334, 335, 346, 351–354

Ciplox 121Ciplox-TZ 121Ciprobid 125Clamp 50, 99, 117, 350Clarimec 232Clinical Trials 10, 147, 148, 152–153,

157, 164, 215, 229Collaboration 50, 51, 58, 151, 167, 212, 216, 218, 227, 228, 298, 308, 311, 337, 339, 353, 361, 381Combutol 122Common Strategic Language 76Competitive Advantage

68, 70, 71, 144, 180, 185, 191, 192, 197, 198, 212, 223, 228, 237, 242, 243, 254, 255, 270, 286, 292, 302, 336, 381Competitive Differentiator 262Confrontation 51

Index 393

Consolidation4, 18, 26, 97, 223, 244, 271,

302, 342, 367Core Competencies

3, 71, 72, 79, 215, 250, 274, 330, 348, 378Cost Containment Programs 3Critical Success Factor 250, 336CRO 10Crocin 117Crosland Research Labs 341CSIR 159, 160, 161, 166, 230Custom Synthesis 46, 58, 233Customer Base 65, 94, 131, 286Customer Capital 240Customer Focus 115, 382Customer Franchise 101, 108, 114, 116,

120, 131, 244, 285, 313, 326, 352, 354, 372, 381Customer Reach 119Customer Satisfaction 239–241, 243, 256, 263, 265, 267Customer Service 67, 69, 126Customer Surveys 75, 77Cytran 205, 227

D

Daichi 226David Norton 257DCI 164, 320Debio Pharma 316Decontrol 56Deng Xao Ping 29Depin 125Deshbandhu Gupta 74Design of Experiments 158, 267Dettol 117, 228Diasys 232Dilip Shanghvi 74, 126, 365Dilzem 125, 360Disease Management

16, 106, 123, 126, 127, 219, 290, 352Disprin 117, 228

DMF 134Dolphin 100, 117, 119, 280, 341Domstal 125, 360Doxt 119, 350DPCO 25, 47Dr. Reddy’s Laboratories 9, 16, 31, 32, 34, 55, 59, 79, 89, 94, 99, 117, 119, 129–131, 139, 154, 156,

157, 161, 165, 174, 181, 187, 191, 201, 209, 216, 218, 220, 246, 266, 267, 273, 274, 280, 286, 293, 298–

299, 303, 308, 315–317, 322, 329, 334, 335, 351Duke University 145, 148, 154Duphar Interfran 117

E

E Merck 49, 224Economies of Scale 177–179, 186, 194, 197, 217, 302, 361, 369Elan 10Elder 341Eli Lilly

7, 54, 71, 138, 139, 162, 164, 198, 200, 216–219, 225, 308Eltocin 189, 128, 290Empowerment 242, 253, 262, 263, 265, 353EMR 173Enam 119–121ERP 267, 348, 379Esgipyrin 124Ethyl Corporation 181Euglucon 229European Union

16, 52, 56, 98, 144, 206, 207, 225, 292, 309, 313, 318, 319EVA 266Evaluation Criteria 271, 272, 278, 284, 292, 297, 302, 307, 314, 321, 328Expansion Strategies 97, 100, 102, 104, 106,

107, 109Extinction Effect 261


F

Fact 270Falcigo 233Fast Track 174, 255FDC 341FDI 29, 33Ferring Labs 205Financial Risk 147Folklore 21–31Fran Tarkenton 260Funnel of Discovery 162

G

Gamani Corea 43Game Plans 55, 63, 68, 72, 74, 78, 329Gary Hamel 67, 73, 237, 377Gateways 52, 134, 137, 194, 217, 292GATT 13, 14, 21, 25, 30, 35–42, 45, 47, 48, 52, 56, 63, 65, 66, 68, 72, 81, 96, 131, 142, 156, 174, 208, 231, 233, 245, 249, 269, 270, 272, 273, 278, 279, 292, 298, 316, 333, 340, 342, 344, 349, 357, 359, 362, 369, 372–374GATS 38Generic Explosion 14Generic Versions 56, 137Genetech 9, 55Geneva Pharma 56, 218, 222Genomics 19Glaxo Wellcome 6, 7, 49, 54, 55Glycodin 336Gray Market 25GRD 125Green Field 141, 186, 187, 223, 361, 373Gufic 98, 117, 341

H

Habil F. Korakhiwala 81Harvard Business School 257Harvard University 263

Health Care Costs 2, 14, 18, 52, 214Heinz Redwood 32, 48Helio Pharma 222Henry P. Conn 259Hepatitis-B Vaccine 55,

82, 167, 185, 226, 231, 310, 312, 356Histac 118Histamitsu 226HMO 3, 14, 137H M R

53, 57, 123, 168, 219, 229, 230, 281HMS 198, 200, 219, 308, 347Hoechst Celenase 233Hoechst Research Centre 82, 228HPB 69, 136, 292Human Capital 240

I

Ibugesic Plus 121ICH 33IDMA 45, 50Imitative Firms 8INDA 297, 298Indian Patents Act 48, 50, 63, 65Indo Pharma 231, 363Industry Foresight 329, 378Infotech 244, 267, 348, 349Innovative Companies 8Insuman 229Intangible Assets 321Intas 341Integrated Corporation 9Integration

Backward Integration 179Forward Integration 70, 178, 179,

186,190,235,278,284, 297, 305, 307

Strategic Integration 70, 272, 273, 302–306, 361, 366, 371–373

Vertical Integration 175–177, 179, 180, 185, 191, 302,

305, 381

Index 395

Intellectual Capital 240International Generic Company

73, 80, 88, 91, 93, 176, 192, 305International Regulatory Authorities

85, 101, 144, 197, 202, 206, 270, 292–294, 313, 339, 346, 352, 356, 357, 366, 379Ipca 85, 110, 127, 128, 130, 131, 142, 143,

172, 176, 177, 189, 191, 206, 207, 233, 234, 246, 267, 277, 283, 290, 296, 301, 302, 306, 313, 319, 320, 327, 332, 334, 335, 367–369IPR 1, 2, 9, 13, 21–28, 32–34, 46, 51, 58, 59, 65, 144, 156, 204, 206, 269, 297, 373, 379Ivax 209, 266

J

J B Chemicals & Pharmaceuticals 338J.M. Khanna 138Jack Welch 261, 267John O’ Keefee 377John Wyeth 49Joseph H. Boyett 259

K

K D Pharma 234Kaizen 252, 266Keflor 118KGCC 107, 109, 142, 232, 312, 313Knoll 49, 108, 109, 187Kopran

86, 110, 128, 130, 131, 133, 143, 172, 173, 176, 177, 189–191, 207, 234, 235, 246, 267, 277, 284, 291, 296, 302, 306, 313, 320, 327, 332–335, 339, 369–370Kresp 234Kyorin 174

L

La Porte 185, 205, 228, 305, 318Lariago 128, 189, 290Lawrence A. Bossidy 380, 382Lehman Brothers 137, 381Leif Edvinsson 245, 341Lupin 16, 31, 32, 49, 55, 56, 59, 68, 70, 71, 74, 80, 81, 89, 91, 94, 95, 101, 102, 121, 122, 130, 131, 146, 154, 156, 157, 166, 167, 176, 177, 184, 191, 194, 203, 216–218, 224, 225, 236, 266, 274, 278,

280, 287, 294, 297, 299, 302, 304, 310, 317, 324, 330, 334, 335, 354, 355Lupin Chemicals 324, 354, 355Lyka 108, 109, 188, 296, 341

M

M J Pharma 108, 109, 296, 341Mallinckrodt 233, 337Mark Brown 258Market Access

13, 194, 197, 204, 214, 215, 216, 217Marketing Mindset 64, 69, 113–116, 120, 126, 127, 131, 271, 284, 291, 333,

347, 356, 365Marketing Orientation

113, 115, 118, 119, 284, 289Max 184Max-GB 184MCA 108, 140, 136Mckinsey 56, 57, 81MCO 14, 15Medpro Pharmaceutica 222Merck Generics

56, 71, 102, 140, 184, 203, 216–218, 224, 225, 275, 310, 355MERCOSUR 41Merind 103, 185, 281, 288, 325, 341, 357


O

Ocid 125Odaxil 122Ohm Laboratories 98, 198, 200Omez 119, 120Operational Excellence 64, 67, 71, 249– 252, 257, 265, 266, 272, 328, 333, 336,

374, 353OPPI 45, 50Optineuron 122Orchid 86, 92, 111, 128, 130, 143, 173, 177, 178, 190, 207, 235, 246, 267, 278, 279, 284, 291, 297, 302, 307, 314, 320, 328, 333, 334, 335, 370, 371Oriprim 125Orthogonal Arrays 158OTC 15, 83, 98, 106, 117, 226, 228, 360Oxalgin-DP 125

P

Panacea Biotec 341Pankaj Patel 84, 362Paraxin 124Parkinsons 19Parvinder Singh 73, 78, 173, 192, 346, 349PBM 3, 14, 15, 137Peptide Synthesis 172Perinorm 128Perinorm 189Peter Drucker 113Pfimex 100, 117, 119, 280, 350Pharmacia Upjohn 7Pharmaco-economic Studies 15Positive Reinforcement 250, 253, 259–261,

264Post-GATT Era 56, 81, 96, 131, 142, 208, 245, 249, 270–273, 279, 292, 316,

333, 340, 342, 344, 357, 359, 362, 369, 372–374

Metrogyl 338Michael Porter 179Michael S. Malone 245, 341Micro Labs 341Milmet 108, 109, 341Mission 75, 77–79, 80, 87, 255,

273, 346, 363, 378MNC 48, 49, 56, 57, 60, 66, 71, 159, 208, 209, 215, 216Monotrate 127Morepen 339, 340Mother & Child Care Division 226Mova 102, 225, 236, 355Mylan 209, 266

N

NAFTA 41NCE 79, 83, 100, 145–146, 157, 164– 165, 170, 172, 220, 298NCL 140, 167NDDS 157, 158, 244Nextar 228Nicholas Piramal

56, 57, 71, 74, 82, 95, 104–106, 117, 130, 133, 141, 157, 168, 169, 185, 186, 205, 209, 211, 227–230, 235, 244, 305, 334, 358, 359, 379NME 8Norflox 121Norflox-TZ 121Novaclox 121Novamox 121Novartis 15, 49, 54, 55, 213, 240Novo Nordisk

9, 59, 74, 100, 202, 216, 220, 221, 274, 299, 308, 316, 322NPIL 68, 123, 135, 169, 216, 227, 228, 230, 275, 276, 281–288, 295, 300, 305, 311, 317, 325, 331, 335, 358

Index 397

Prahalad C. K. 67, 73Prescriber Segments

85, 101, 109, 120, 131, 286, 352, 365PRI 100, 102, 221, 309Process Innovation 43, 181, 191Process Research 154Proctor & Gamble 226, 377Project 1035 150Proliferation 7, 47, 66Protec 1, 101Protective Armour 63Proxyvon 123

Q

Quality Improvement Consultants 158Quintor 125, 360Quovadis 264

R

R R Medi Pharma 103R.S. Chalapati 158Radical Research 154Ranbaxy 16, 31–32, 34, 46, 49, 55, 59, 73, 78, 79, 89, 91, 94–99, 101, 117, 118, 129, 130, 131, 133, 135, 138, 146, 151, 154, 156–159, 161–164, 176, 177, 180, 181, 187, 191–193, 196–201, 208, 209, 216–220, 223–236, 244, 246, 250, 266, 278, 279, 285, 293, 297, 298, 302, 303, 308, 314, 321, 323, 329,

334, 335, 345, 346, 347–349, 354, 355, 364Ranbaxy–Guangzhou China Limited 198Randall L. Tobias 162RBX 2258 164, 298Re-engineering 32, 57, 75, 77, 97, 99, 255Reckitt & Colman 106, 117, 228, 359, 360Reckitt–Piramal 228Red Category 39Rema Pharmaceuticals 199

Renaissance Strategy Group 257Rennie 228Revital 118Rich Karlgaard 341Richard Sykes 163Riflux 99, 117, 350Robert C. Holmes 17Robert Kaplan 257Roce 229, 266Roche

5, 7, 53, 54, 104, 105, 155, 185, 305, 341, 358, 359Rotan 221Rotane 219

S

San Carlo 232Sandoz 53, 155, 240Sanofi 18, 106, 231, 311Saridon 228SBU 86, 107, 109, 362, 363, 365, 370Schein Pharma

15, 100, 198, 201, 217, 218, 221, 308, 309, 316, 347Schering Plough 15, 54Scholl 227, 311Scitech 231, 311SCM 254, 255Shantha Biotech 151Shri Dhootpapeshwar 228Sidmak 104, 205, 217, 218, 226, 227Siegfried 56, 205, 230, 318Silvirex 118Sintofarm 110SmithKline Beecham 49, 117, 234, 266, 368Solumix Piramal Limited 228Solvay Pharmaceuticals 16Solvin 128, 290SPARC 172, 301, 366Spasmoproxyvon 123SPC 52Sporidex 118Stamlo 119, 120


Standard Organics 119, 280Strategic Advantage 184, 204Strategic Objective 81, 83, 85, 208, 272Strategic Options 156Strategic Vision 63, 68, 73, 77, 79, 80, 82, 84–86, 89, 99, 269, 271–273, 346, 349, 354, 362Strepsils 117Structural Capital 240Styptochrome 119, 350Styptovit 119, 350Sumantra Ghoshal 253, 265Sumitra Pharmaceuticals 104, 105, 141, 185, 305, 341, 358Sun Pharma

16, 55, 59, 74, 83, 84, 85, 89, 95, 107, 117, 124, 126, 129–131, 172, 187, 188, 206, 233, 236, 246, 277, 283, 289, 290, 295, 301, 305, 319, 326, 362, 365–367Sunrise Scenario 45, 50Sunset Scenario 45, 50Swati Piramal 169Sweetex 117, 228Synpac 110, 207, 234, 235Syntex 5Synthelabo 18

T

Tariff Quotas 38Tarivid 219Tata Pharma 122, 185, 288TDB 150, 151TDF 150, 151TDPL 108, 109, 187, 283, 327, 341, 365, 366Teva 110, 175, 198, 209, 227, 234, 266, 346TGA 202, 223, 294, 352Theo-asthalin 121Tie-ups 80, 86, 136, 140, 168, 202, 205, 217, 218, 308

Tofa 209, 266Torrent 32, 49, 59, 68, 70, 83, 89, 106, 124, 125, 130, 131, 133, 141, 156, 157, 170, 171, 186, 187, 205, 209, 216, 231, 246, 276, 277, 282, 283, 289, 295, 300, 305, 311, 318, 326, 331, 335, 360–362TQM 266, 337Trika 338TRIMS 38Triomed 15TRIPS 32, 38, 51Tufts University 154

U

UK MCA 69, 142–144, 202, 223, 270, 292–294, 296, 297, 320, 339, 346, 357, 369, 379Unichem 204, 225, 338, 339, 340Uruguay 37, 39, 40, 41US FDA 55, 59, 69, 108, 134, 136–144,

200, 202, 222, 225, 233, 270, 292–294, 296–298, 309, 312, 319, 320, 338, 339, 346, 356–357, 367, 369, 371US Surgicals 228USV 341

V

Value Addition23, 139, 162, 178, 198, 372

Value Chain 191, 192, 198, 254, 255, 305, 307, 368, 369, 370, 373Value Creation 116, 245Vent 234Vicks Inhaler 226Vicks Sinex 226Vision 2020 87Volini 118Vorin Labs 97, 180

Index 399

W

Wallis 103, 204, 225, 295, 317Whisper 226Wockhardt 16, 31, 32, 46, 55, 59, 68, 70, 81, 89, 94, 95, 102–104, 122,

123, 130, 131, 133, 135, 140, 146, 154, 156–158, 167, 168, 176, 177, 184, 185, 191, 194, 203–205, 209, 216–218, 225–227, 236, 246, 266,

267, 275, 281, 287, 294, 297, 299, 302, 304, 310, 317, 324, 325, 330, 334, 335, 356, 357, 379Wokadine 123Wyckoff 52

Z

Zanocin 118, 219Zedex 123Zhejiang Autokang Pharmaceutical Company

222Zydus 49, 59, 71, 84, 89, 106, 107, 125, 126, 130, 135, 142, 171, 187, 205, 206, 211, 231– 235, 246, 276, 282, 289, 295, 301, 305, 312, 318, 326, 331, 335, 337, 362, 365, 379Zyrop 231

Contents

Introduction vii 1. Pharmaceutical Industry – A Global Perspective 1 2. IPR: Folklore and Facts 21 3. GATT – A Third World Perspective 35 4. Life after GATT in Indian Pharmaceutical Industry 45 5. Game Plans for Post-GATT Era: The Indian Example 63 6. Strategic Vision 73 7. Reaching the Critical Mass 91 8. The Marketing Mindset 113 9. Upgrading the Technology 13310. Focusing on Research 14511. Integrating Strategically 17512. Internationalising the Business 19313. Attracting Alliances 21114. Intellectual Capital 23715. Operational Excellence 24916. Winners and Spectators 26917. Top of the Heap 34318. Winner’s Check List 375

List of Abbreviations 383 Notes 385 Index 391

Game Plans for POst-GATT Era

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Transcript of Game Plans for POst-GATT Era