Pharma at Cross-Roads

Is it a different situation in your Organization? Shridhar Lolla, PhD First Draft Needs Editing With this article we extend our exploration into the Pharmaceutical Industry. Key words: Indian Pharma Industry, Pharma, Pharmaceuticals, Change Management, Business Innovation, Business Model, Operational Strategy, Describing Situation ________________________________________________________________________ 26 Dec 2011 Sitting in the jetliner, I looked out through the window into the fog at Delhi Airport. It was 9am, and outside it was 5 degree Centigrade. It was long, since I was into this level of cold. My nose was painfully dry and my throat was jammed. Probably, I had underestimated the cold and did not cover myself sufficiently, when I had taken a stroll with Siraj and Anand, the previous night. A curly haired person threw himself on the seat next to me. When I looked at him, he said Hello and introduced himself. I greeted him, and introduced myself. The gentleman was a senior executive in a leading pharma company. As we talked about the weather and the business environment, I found his voice a bit wavering. I asked him if everything was ok, and if he was comfortable. He said, as he tightened his seat belt, “Yes, … but there is a little bit growing pressure to perform.” “That’s there all the times, and the higher you rise, more is the pressure to perform (unlike the atmospheric pressure).” I said. "But in either case, when you fall, you are not safe," he said with a laughter. Then he said, “True! We are worried a lot about the rush of global big pharma companies into India and the onslaught on our market share. We went to the government to protect ourselves. “ “Did it work?” I asked

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“Yes, the policy makers were more than willing to help. But then the government put a lid on our pricing and squeezed our margins. We gonna lose a minimum of 10% of the top line, and more of the bottom line.” He said. “So what are you going to do now?” I asked. “I do not know. Even the market abroad is becoming tougher with the growing scrutiny by the regulators.” His exasperation was clear. “But I think your cost base is pretty low and at least till 2014, you are safe.” I recalled the latest news item that I had read in the Economic Times. “Patent Cliff has only been our hope. But Innovators are coming out with new strategy and entering the generic market. Their aggression is making the Para-IV filing riskier and costlier.” He said. “But, surely the pipeline is long enough.” I said. “It looks so, but low hanging fruits are already plucked. Our company is, of course, giving a little more focus on difficult to make drugs, but given our legacy and skill levels, there is not much hope. Remember that our understanding of chemistry and human anatomy is only borrowed from abroad. It may mean that deep technical competency could become a necessary condition to be in the business. ” He revealed his frustration. “But a vast majority of India is still unexplored, and you could leverage your sales strength. In fact, the next growth for Pharma is going to come from emerging economies.” I suggested, as the plane took off the runway. “Actually, we have already exploited sales too much in India, and built too bad a culture. We need to totally revamp the assumption on which we have been selling. There is a limit on how much you can indirectly influence the doctors and the KOLs (Key Opinion Leaders).” He did not mince words in doubting the viability of current marketing and sales practices. “But the reach of your sales team can still be an advantage.” I suggested further. He said, “We cannot beat the deep pockets and structured approach of the Big Pharma companies. All of them may not be new to India, and they are very systematic in the way they approach their business and they are catching up soon. If it is only about numbers of sales hands, then they can anyway build it very quickly. We need to innovate a cleaner sales model.” “The future growth is in the lower tier towns and the rural areas. But we fell into the same trap as did the IT companies in India. Most of the IT companies built their business on market abroad and neglected the local market. Now with the global factors playing in strongly, they are on the back foot. Similarly, most of leading Pharma players from India, took their sight off the Indian market and jumped after the dollar market when the
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Generic business opened up; but by then, others penetrated India gradually and are about to beat us in our back yard. Most of Innovator companies from abroad have invested hugely in understanding Indian patients and channels. And they have better insights into Indian market than several of us. Most of Indian Pharma companies have no idea about how to do business in tier-III and the rural areas. The issues are different and it needs deep capabilities to identify the core issues and come out with a robust delivery model to build a successful business there. In fact, some of prominent people in the industry feel that standalone Indian marketing companies may be better suited to make inroads into typical Indian rural areas.” He said, almost in a breath. He seemed relaxed after he spoke out. It took some time for me to co-relate what he had said. The airplane was now cruising at 30,000 ft in the clear sky. I could feel the heat of the sunrays on my palms. “How much the pressure is really on you,” I asked him after a while. “A great deal of... the margins were too good so far. But our existing R&D and Sales strategy is no more sufficient to hold our market position. Things are changing too fast from all the directions. The moment we get into taking care of one issue, the other one of entirely different nature, props up. There is a growing activism by the investors and they are getting deeper into operational issues, if we are addressing these changes swiftly. There is increasing scrutiny on how do we do things on day to day basis. The complete organization is turning into operational mode. It is now a sort of 24x7.” He went a level deeper. “Thank you!” He said, as he received the breakfast from the airhostess. I asked the airhostess to serve me the coffee first. The breakfast plate contained hot sandwich and black pepper sprinkled pudding. Quick sips of coffee and a few spoonfuls of pudding made my throat clearer. By then, we were talking so freely, as if we knew each other for years. As he took a bite of the cheese sandwich, he said, “Investors and the Board are no more satisfied with our plans of new products and sales deployment. They are asking for the type of numbers, which were never looked into before. They are forcing us to look into the productivity numbers in the plant and the inventory across the supply chain. They are asking about the variability in demand and about our delivery performance. They are asking us to be more agile. Increasingly, we are realizing that we have been doing very badly in terms of efficiencies in our plants. Our MIS now includes operational figures like, product availability, resource utilization, inventory turns, WIP etc. Actually, it is an eye opener… our return on asset is very bad.”

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“It looks like the life in pharma would not be the same again.” He commented, as he sipped black tea. “I see. So you are damn unsatisfied?” I put a personal question. He said, “Unsatisfied! I am not though. Value creation has not been straight forward in Pharma Industry; and it was natural that some time, it opened up, bringing the transparency in the way value is added and business is done. It seems to be coming to a better way of doing things. We are getting into a more competitive market, significantly removed from the mystic way each pharma company has been making money.” He continued, “So far, whatever we did, there has not been much exceptionally great about it. We were just lucky to be in India, were well protected by Indian trade and IPR regulations, and tax concessions, we had low cost structure, nobody ever scrutinized our margins, market was green field with a lot of low hanging fruits around for everybody who betted into it…you had to just walk around, put more money and make more money… just like trading business. So that was not a matured business landscape, anyway. There was no pressure to do a breakthrough in R&D nor innovate the business process. We simply copied, reengineered and did a bit tweaking to earn a lot of money under government protection.” It was amazing to know his conclusion. “You mean that you are looking forward to the things favorably, as they unfold.” I asked “Yeah! I know that there is a little pain, but I would like to enjoy the journey, of running my organization in an operational centric way. This is an entire paradigm shift. Here onwards, Operations is going to be a new dimension in Pharma. The reality is that thus far we were blinded by the high margins in our business; and driven it based on "R&D and Sales" centric model. We perhaps, gave a damn step child treatment to Operations. Now, we realize that operational efficiencies in pharma companies is shamelessly low, compared to all other industries. Which means that we have a huge hidden capacity in our plants, that is waiting to be realized. And we have a lot to catch up with.” He said. “How are the business leaders reacting to the situation?” I pushed him to the strategic layer. He said, “Actually, things are not that smooth. We see some major changes. Some of the first generation entrepreneurs are hanging up their boots, just at the time when the competition is picking up and low cost advantage and local incentives are ebbing out, and all other factors are disrupting the business. I am not sure if it is a coincidence. Though, this is partly creating a way for consolidation in the industry and it may not be a bad idea to exit at a good valuation.” He continued, “In other cases, where the business is being passed onto the heir apparent, it is causing much uneasiness to the second generation that has taken over, for they are born in a different era and pharma may not be the high octane business that it used to be. And so, you see the rigor, the first generation entrepreneurs brought into the business, dilutes a bit.” He said.
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“With so much of opportunities around in a growing economy, this is quite possible.” I said. Then, I asked, “But do not you have local companies that are health care centric, and say actually bent upon giving healthier lives to India. I mean those who are purpose built to provide healthier lives through better medicines. And perhaps, that might create an innovative local company.” Our talks were so engrossing that I did not realize how time passed, till the cabin crew announced landing preparation. He said, as the plane started descending, “The days of building pharma companies with the emotional and philanthropic objective of providing healthy lives are over. Getting into something like that needs innovation, you would find deliberate health care purpose companies in Bio-Pharma, Critical Therapies, Medical Devices and Diagnosis. In Chemistry led Pharma Industry, it is mostly, pure business sense and opportunity to make money that drives businesses. Although, there are still some of the organizations that are hell bent emotionally to bring better medicines, make them affordable and accessible; a vast majority of the existing pharma companies are opportunity based, running themselves as chemical companies (bulk drug) or drug suppliers (formulation). I could count on fingers, the companies that are trying (though struggling) to get into the Innovator Club, where they are seriously attempting to push the boundary of cure, to provide new and more effective medicines.” The plane landed smoothly at Hyderabad airport, and as we walked out of the airport, we shook hands, and wished to meet again. As I walked towards the taxi stand, it just appeared to me as if I received bulleted status of pharma industry in India, and wondered how things are going to unfold for Pharma, from 2012.

Clet:01-12

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