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International Finance 2nd Mid term Assignment(Indian MNC trend) A Brief study on

Pharma MNCs focus on branded generics in India to drive growth

Submitted By Samrat Chakraborty Roll(PGDM 024)


Multinational corporations (MNCs) in the global pharmaceutical industry have been reporting sluggish growth over the last few years, being held back by several factors including implementation of cost containment measures in developed countries, lack of strong product pipelines, and expiry of patents on existing products. Emerging markets however represent an exciting opportunity for most pharma MNCs, given that these markets are expected to achieve a size of U$400 billion by 2020; the Indian market is expected to grow to a size of US$40 billion by then. Pharma MNCs are currently launching branded generics in the Indian market via product localisation, a strategy that involves local branding, sourcing and pricing. This strategy helps them launch products at competitive prices, thereby addressing affordability issues. With localisation, the pharma MNCs operating in India have been able to improve their growth rates and this strategy is expected to yield future growth. The scaling up of field force by pharma MNCs in India to increase geographic penetration and the launch of new products in the Indian market has led to an increase in personnel costs for them. This, along with the increase in promotional and marketing expenditure on new launches, has brought pressures on operating margins, although they are still largely within the range of comfort. The margins are expected to improve once the incremental investments in marketing and sales translate into higher sales and profits. The inorganic route remains one of the preferred routes for pharma MNCs looking to enter the Indian branded generics market or expand their market share therein. Through acquisition, pharma MNCs get access to a ready product basket and infrastructure, besides management capabilities in the Indian market. While the M&A activity in the Indian market has so far involved large size deals, smaller acquisitions including licensing opportunities that could increase the market shares of the pharma MNCs and fill critical gaps in their portfolio may also be expected in future. Healthy cash flows and parent company linkage help Indian arms of Pharma MNCs to maintain a strong credit profile.


1.Pharma MNCs facing multiple challenges in the global market; growth likely to be sluggish there
Over the last few years, the global pharma industry has been facing multiple pressures arising from increasing R&D costs, the implementation of cost control measures by developed countries, issues related to pricing of patented products, and the absence of a strong product pipeline. By 2014, the top 10 innovator companies alone would face the expiry of patents on brands that generated revenues in excess of US$120 billion (2008 sales). Moreover, several countries are currently implementing strong pro-generic policies with stricter norms for reimbursement of costs. Further, established drug prices are also being subjected to increasing pressure as part of the trend towards stricter pharmaceutical cost containment policies with reference pricing schemes (regulating drug reimbursement levels using a reference price cap) being extended to include therapeutic rather than merely generic reference pricing programmes. Of greater importance to the pharma MNCs is the imposition of stricter controls on the pricing of, and insurance reimbursement for, new drugs, given that these MNCs rely significantly on revenues from new drugs to offset the impact of patent expiries. This has led to pressure coming onto R&D spends in a scenario in which product pipelines are shrinking even as the cost of bringing in a new product to the market stands at over US$800 million on an average . On the whole, all these factors are expected to restrict the annualised growth rate of the pharma MNCs to around 2.0% over the 2006-2020 period, according to various industry estimates. This situation has led to pharma MNCs shifting from the traditional model of focusing on developed markets and patented products alone, to being present across the value chain and also entering newer markets to attain better growth.

2.Emerging markets offer better growth opportunities

The growing use of generic and branded generics drugs has led to pharma companies reorganising their strategies by focusing on the generic and branded generics business in developed as well as developing countries for higher growth. While Novartis, through Sandoz, remains one of the multinationals most committed to generics among the leading pharma companies globally, players such as Pfizer and Sanofi Aventis also have in-house generic businesses (Greenstone and Winthrop, respectively). It is in this context especially that the emerging markets represent exciting opportunities as they are expected to grow at a much faster rate (CAGR2 of 15.2% during 2006-2020) than their developed counterpart (CAGR of 2.0% during 2006-2020), given their rising health awareness and increasing spending power, among other factors. The emerging markets are expected to reach a size of US$400 billion by 2020, with India being a key market. This scenario has led to pharma MNCs reorienting their strategies and resource allocation for emerging markets. Thus they are now seeking to build up a significant presence in branded generics and over-the-counter (OTC) drugs, launch off-patent products of other innovator companies, and adopt the practice of local pricing for patented drugs so as to attain volumes and capture market share.


Table 1:-Indian operations of pharma MNCs achieve higher growth by focusing on branded generics Trend In Growth rate of pharma MNC in India Financial Year ending ABBOT NOVARTIS GLAXO SMITH KINE AVENTIS MERCK ASTRA ZENECA PFIZER 2011 14% 8% 13% 1% 22% 13% 13% 2010 12% 2% 5% 17% 24% 14% 0% 2009 16% 3% 2% -1% -5% 13% 1%

Table 2: Key Launches by Pharma MNCs Indian Operations during Last Few Years (Indicative List) Brand Xyzal M Obiglo MD Dibimet Talitex Vigocil Targit Above 5 Xparin Esblanem Molecule Montelukast+Levocetrizine Voglibose Metformin Tremadol+Paracetamol Voglibose Telmisartan Rabeprazole sodium Enoxaparin sodium Meropenem launched by UCB Abbott Novartis Novartis Astra zeneca Pfizer Pfizer Astra zeneca GSK Treatment area Respiratory Diabetes Cardiac Pain management Diabetes Cardiac Gastro intestinals Cardiac Anti infectives Innovator company MSD Takeda BMS J&J Takeda Boehringer ingelheim Eisai Sanfoi aventis Merck

3.Scale-up of marketing and sales efforts raises personnel cost; margins under pressure but still within range of comfort
With the emphasis increasing on new product launches and geographical expansion, the pharma MNCs operating in India have been scaling up their field force to attain their strategic goals. Leading companies such as GSK, Pfizer, and Abbott have invested significantly in expanding their field force to widen the reach of both their current products and the ones in their pipeline. Thus, for instance, Pfizer added 500 people to its field force in 2009, while Merck Limited had added 450 in 2008. Some of the pharma MNCs have also outsourced their sales and marketing function in remote rural areas to third parties, given that it is not cost effective for them to have their own field force in such locations. Following the expansion of field force, personnel costs have increased for the pharma MNCs, as is evident from the trend in their operating margins during the last few quarters. The cost of field force expansion apart, promotional and marketing spends on new launches have also increased, with the result that the operating margins of the pharma MNCs operating in India have shrunk, although they are still largely within the


range of comfort. The margins may improve once the incremental investments in marketing and sales translate into higher sales and profits. Chart 2: Quarterly Trends in Personnel Cost and Operating Margin for Pharma MNCs Operating in India

14% 12% 10% 8% 6% 4% 2% 0%

Dec-08 Jan-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Dec-09 Jan-10 Mar-10 Feb-09 Aug-09 Sep-09 Oct-09 Nov-09 Feb-10

Operating mergin 12.50% 11% 10.80% 11% 10% 10.50% Operating mergin

4.Pharma MNCs take the inorganic route to attain critical mass in India and drive growth Pharma MNCs have been looking at acquisitions, licensing arrangements with generic companies, and other inorganic growth options in emerging markets to gain access to large generic product portfolios and boost growth. Recent examples in this regard in the Indian space include the acquisition of Ranbaxy by Daiichi-Sankyo, of Shantha Biotech by Sanofi Aventis, and of Piramal Healthcares domestic formulations business by Abbott. The deals are expected to drive growth for the innovator companies in the Indian market, especially in the segments in which they have little or no presence, by providing them with a ready prescription base, infrastructure, distribution network, and local management capabilities. Abbott, which acquired Piramal Healthcares domestic branded generics business in 2010, has seen its market ranking improve to No. 1, while Daiichi-Sankyos acquisition of Ranbaxy has given it a strong foothold in the Indian market, besides providing it access to a large generic product basket that can be marketed in other markets as well. The pharma MNCs are also able to add value to the acquisitions by marketing their global product portfolio in India through the distribution networks of the acquired entities. While the recent M&As by pharma MNCs in India have all involved large size deals, smaller local acquisitions and licensing arrangements that could advance their market shares and fill critical gaps in the portfolio may also be expected in future. Several global pharma MNCs have also entered into licensing arrangements with Indian companies in order to be able to dip into a ready basket of generic products. For instance, GSK and Pfizer have entered into such arrangements with Indian companies like Dr. Reddys, Aurobindo Pharma, and Claris Lifesciences . These deals are likely to accelerate the launch


of products in various generic markets while offering the MNCs the advantage of cost-effective manufacture by Indian companies.

Table3: Capital Structure - Key financial Indicator for Pharma MNCs Indian operations and Ratings

In The Year Of 2010 Particular Total Debt Net worth Investment & Cash Moody's Rating ICRA rating Merck Nil 467.3 384.5 Baa2 LAA+ Abbott Nil 271.6 163.5 A1 GSK 5.4 1759.1 1863.6 A1 Pfizer Nil 994.3 480.4 A1

Rs , in Crore Sanfoi aventis Nil 931.8 591.1 A1

Novartis 0.3 514.7 416.5 Aa2

Astra zeneca Nil 144.5 68.2 A1

Summary Financials of Select Pharma MNCs Operating in India In The year of 2010 Particular Operating Income Growth OPBDIT Depreciation PAT Net worth Investment & Cash Merck 487.5 20% 75.9 7.5 65.5 467.3 384.5 Abbott 760.9 14% 97.3 9 77.5 271.6 163.5 GSK 1886 13% 669.8 16.4 504.9 1759.1 1863.5 Pfizer 797.6 13% 159.1 8.3 136.9 994.3 480.4 Sanfoi aventis 1028 1% 201.4 17.3 157.4 931.8 591.1 Novartis 599.5 8% 110.3 2.7 103.7 514.7 416.5 Astra zeneca 385.8 13% 78.1 6.1 57.6 144.5 68.2


16% 13% 21%

13% 10% 36%

36% 27% 41%

20% 17% 17%

20% 15% 22%

18% 17% 23%

20% 15% 45%


5.R&D Cost for Pharma MNCs in Developing a New Drug

900 800 700 600 500 400 300 200 100 0 1975 1987 2000

6.Recent M&A and Licensing Deals in the Generics segment (Indicative List) Acquirer Daiichi Sankyo Targeted Company Ranbaxy Labortories Ltd Comment Daiichi-Sankyo gets access to the Indian market for its products, and to the generic products basket of Ranbaxy for other markets Abbotts market position improves to No. 1 and it gets access to over 350 brands and trademarks of Piramal Healthcare Deal Value US$4.6 billion


Piramal Healthcaresdomestic branded generic business

US$3.7 billion

Sanofi Aventis

Zentiva (Czech Republic)

Broader level of involvement in Indian markets through possible generic launches by Sanofi Aventis

US$2.4 billion

Sanofi Aventis

Shantha Biotech

Development and launch of affordable vaccines by Sanofi Aventis

0.55 billion


7.Licensing Deals Licensor Astra Zeneca Licensee Aurobindo Pharma Comment Aurobindo Pharma will supply solid dosage and sterile products to support Astra Zenecas branded generics portfolio in Emerging Markets Pfizer acquires the right to sell around 150 generic products of Aurobindo Pharma and Claris Lifesciences GSK acquires access to over 100 generic products in markets across Africa, West Asia, Latin America and Asia


Aurobindo Pharma, Claris Lifesciences


Dr. Reddy's



GSK buys the portfolio of UCB in a few developing markets GSK acquires 16% stake in the South African generics company as part of a licensing deal between them



8.Strength & weakness of Indian Pharma Industry Strengths * Cost advantages * Large pool of highly trained manpower. * 2nd largest number of U.S. FDA approved facilities. * TRIPS (Trade Related Intellectual Property Rights) compliance. * Lower operating costs. * Growing biotechnology industry. Weaknesses * Industry concentrated at lower end of value chain. Low level of investment in R&D. * Highly fragmented industry. * Government price controls. * Low margins. * High tariffs and taxes.


* Reverse engineering skills. * Largest number of Drug Master Files. * Bio-diversity. * FDI growing at 100 percent. * Strong IT skills for research data management. * Strong marketing and distribution network. * Well established network of laboratories. * It has an excellent record of development of improved, cost-beneficial chemical synthesis for various drug molecules.

* Substandard drugs and counterfeiting. * Most Indian companies are small by world standards. * Lack of experience in drug discovery. * Corruption. * Weak domestic market. * Low levels of per capita medical expenditure.

9.Domestic companies are transforming their business model to play a larger role in global pharma market
The Indian pharma industry has been able to claim a share in the global market by leveraging its strengths and enhancing its regulatory and technical maturity. Formulations manufactured in India constitute 20 per cent of the global generics market by value, and the overall share of Indian manufactured formulations is as high as 46 per cent in the generics segment in the emerging markets. However, with the onset of the patent regime, the traditional reverse engineering capabilities of Indian pharma companies are no longer helpful, as they would not be able to replicate the patented product and launch it in the domestic market. Hence, going forward, India would be required to leverage its strengths in supply of low cost medicines across the world and invest in newer areas to drive growth. Opportunities exist ranging from the lowvalue added segment, comprising of NDDS ($134 billion opportunity by 20131), super generics ($135 billion worth of product expiring between 2010 and 20152) and biosimilars ($115 billion worth of biologics expiring by 20153), to the high value New Chemical Entity (NCE)/New Biopharmaceutical Entity segment. Thus, domestic companies can look forward to pursue all these opportunities and build capabilities to conduct drug discovery and in house development. Vision 2020
Indian pharmaceutical market by 2020 (US $ billion)


Pharma MNCs to continue active participation in India After years of anaemic growth in the Indian pharma market until the 1990s mainly due to a feeble intellectual property environment pharma MNCs have recorded steroid-led growth in the domestic market. They have increased investments in the domestic market over the past few years and are now comfortably placed to capture a substantial share of the domestic market. Evidently, pharma MNCs are projected to capture a 35 per cent market share of the market by 2017, compared with 28 per cent in 20095. Over the years, pharma MNCs have adopted India-focused strategies to tap the growing potential of the countrys pharma market. Increased patented drug launched in India: The advent of the product patent regime in 2005 instilled confidence in the countrys IP regime. With renewed confidence, large pharma MNCs are now looking to launch their patented drugs in India and such product launches are expected to increase further in future. Adopting inorganic route to enhance presence: Pharma MNCs have been considering acquisitions of domestic players to gain sizeable share in the domestic market. These acquisitions have also enabled pharma MNCs to access the infrastructure, distribution networks, and management capabilities of domestic players, thereby strengthening their business operations in the country. On the other hand, licensing agreements with Indian companies have helped pharma MNCs access a ready basket of generic products. Going forward, these deals are likely to accelerate the launch of products in various emerging markets while offering MNCs the advantage of cost-effective manufacturing. Furthermore, pharma MNCs consider India as a preferred strategic outsourcing partner with services ranging from Contract Research Manufacturing (CRO) and clinical research services to sales and marketing, information technology, finance and accounting, and customer-relationship management. Differential pricing strategy to strengthen market reach: In a bid to compete with domestic generic players, pharma MNCs are launching patent-protected drugs in India at relatively low price points than those in developed markets. Simultaneously, a differential pricing strategy is helping these MNCs to enhance their market reach by addressing affordability issues. Drugs such as Diovan (Novartis), Januvia (Merck Sharp & Dohme), and Galvus (Novartis) are being sold at discounts of up to 80 per cent on global prices. Rural-centric initiatives to enhance market access: Robust consumption in the rural economy is expected to be a key growth driver. Rural India accounts for more than 70 per cent of all Indian households and close to 40 per cent of the total consumption pie. Henceforth, a large number of companies are organising their efforts to derive a major portion of their overall sales from this untapped market. Additionally, pharma MNCs are looking to implement new and effective business models in India and improve the health of patients. Delivering patient health outcomes implies getting involved in the cycle of care, rather than just delivering drugs to a health care system. Few examples include: Sanofi-Aventis Saath 76: In 2009, Sanofi-Aventis launched the Saath 7 programme in India, in which certified counsellors help diabetic patients understand their diseases and provide personalised consultation through home visits.

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Mercks Sparsh7: In 2009, Mercks Indian subsidiary, MSD Pharmaceuticals, launched

Sparsh, a multilingual helpline for diabetics on its drugs Januvia and Janumet to provide diet, exercise, and adherence advice.

J&Js Mobile Health for Mothers8: In September 2010, Johnson & Johnson (J&J) launched a mobile health initiative for expectant mothers in India. Mobile Health for Mothers provides free text messages on prenatal care, appointment reminders and calls from health coaches. Pfizer-ITC 9: In July 2011, Pfizer collaborated with FMCG major ITC to enhance its product sales in the rural markets. According to the agreement, Pfizer will sell its over-the-counter products through ITC channels in rural areas. Such noble initiatives can be expected to help pharma MNCs further augment their brand awareness in the domestic market and help tap the segments growth potential. Shifting disease burden in India

Adequate government support to further boost the domestic market In the last 10 years, the Government of India (GoI) has aggressively adopted prudent strategies to boost the countrys healthcare industry. From granting 100 per cent Foreign Direct Investment (FDI) in the drugs and pharma sector to establishing various pharma SEZs across the country, a range of initiatives have further strengthened the Indian pharma industry. Moreover, the GoI is providing incentives to encourage investment in the pharma sector. In August 2010, the GoI announced its plans to set up a $639.56-million venture capital (VC) fund to give impetus to drug discovery and strengthen the countrys pharma infrastructure. Both domestic and MNC pharma players are expected to leverage these initiatives to expand their operations in the country9. The Department of Pharmaceuticals has prepared Pharma Vision 2020, aimed at making India one of the leading destinations for end-to-end drug discovery and innovation. It envisages meeting this objective by building top-notch infrastructure for talent and research, encouraging public-private partnership (PPP) models, offering financial incentives to encourage and incubate innovation and shaping a favourable regulatory environment2. The GoI also aims to position India among the top five pharma innovation hubs by 2020, with one out of every five to 10 drug discovered worldwide by 2020 originating from the country.

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The GoIs long-term vision is to provide quality and affordable health care services to all classes of Indian society. Consequently, the GoI plans to cover at least 50 per cent of the countrys population under health insurance by 2020, compared with the current average of 15 per cent10. 10.FDI in Pharma Industry THE recent spate of merger and acquisition of Indian pharmaceutical companies by foreign multinational companies (MNCs) has become a cause of serious concern because if this is allowed unbridled, the domination of MNCs in the Indian medicine market will take us back to the worst situation of preindependence era. About a year ago, the Department of Industrial Promotion and Planning (DIPP), under the Ministry of Commerce and Industry, has circulated a note expressing concern that the foreign multinational companies are speedily buying up a number of large Indian pharmaceutical companies. The purpose for circulating the note was to gather suggestions from the public to arrest such takeover of Indian companies. This process of acquisition is termed as brown field investment since the acquiring company does not invest anything for production, establishment of offices or any new activities other than using the already existing facilities of the acquired company. This issue was subsequently taken up in the high level committee. MNCs INCREASING MARKET SHARE Only 16 countries in the world have at least some arrangement of medicine production among which comprehensive infrastructural development is found in not more than half a dozen countries. The quantum of medicines manufactured by pharmaceutical industry in India is fourth largest in the world. Near self-reliance in medicine production has been achieved due to the policy of the government in encouraging domestic industry to grow. Even in the post TRIPS (Patents) era, Indian companies are capable of producing all essential medicines in the country. Therefore, the foreign MNCs have no significant role to play in medicine production in our country.

HIGH RATE OF EARNINGS The growth of domestic market in India has by no means been spectacular. Some studies indicate that Indian pharmaceutical industry witnessed only marginal growth in sales and operating profits during 2010-11. The net sales increased by 13.1 per cent to Rs 1,03,500 crore ($22.8 billion) during 2010-11 from Rs 91,518 crore ($20.3 billion) in 2009-10. The net sales growth of almost similar set of companies was just 11.6 per cent in 2009-10 over the previous year. Only slight growth could be registered in exports also, despite stiff competition, conditions of economic crisis and cost-cutting measures in the US.

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The earnings before depreciation, interest, tax and adjustments (EBDITA) of 100 listed pharmaceutical companies increased by 21.9 per cent to Rs 23,317 crore from Rs 19,133 crore in the previous year. The EBDITA margins improved to 22.5 per cent from 20.9 per cent. These companies recommended handsome dividend to shareholders and created healthy reserve position during 2010-11. This market study includes sales in both domestic and exports, of which nearly 40 per cent is domestic sales. Therefore profitability in domestic market also further attracts the MNCs.

STAGNATION IN INVESTMENT he present trend in imports is also a cause for concern where the MNCs are leading. After increasing sharply in the late 1990s, import stabilised a bit. But they began to rise since second half of 2000. The Indian companies and agents are also involved in such import of finished drugs. Those MNCs which are not operating in India are entering into marketing alliances to sell their products here. Indian companies which act as authorised agents for imported formulations include Elder, USV, Emcure, Cadila Healthcare, Piramal and Ranbaxy. Thus Indian companies are functioning as traders of the MNCs. Foreign Investment Promotion Board (FIPB) is mandated to play a role in the administration and implementation of the governments FDI policy. However as seen from above instances, FIPB route has limitation in addressing these concerns. For example MNCs may enter into informal agreements, by way of strategic alliances, to bypass the explicit restrictions. Similarly, section 5 of the Competition Act sets a very high threshold for Competition Commission of India (CCI) to act. As per Section 5 9(i) (A), CCI can intervene only when the asset value in India is more than Rs 1000 crore or turnover is more than Rs 1500 crore. There may be many deals below this threshold which together can cause domination by the MNCs either in one or multiple companies listed in different countries by the same MNC.

11.Macro factors pushing the industry

The Growing Indian Economy The Indian economy is growing fast, and is valued at US$1.430 trillion in 2010 GDP growth, calculated on a Purchasing Power Parity basis has reached 9.66% in the year 2010, and the International Monetary Fund (IMF) expects it to remain consistently above 8% till 2015. Furthermore, Indias share in the world GDP has been steadily increasing, and is expected to reach 6.28% in 2015, up from 4.17% in 2005. Growing middle class with higher purchasing power Indias population is currently just over 1.1 billion and is projected to rise to 1.6 billion by 2050 a 45.5% increase that will see it outstrip China as the worlds most populous state.Besides, India has a huge middle class population (households with annual incomes of US$4762 to US$23,810 at 2001-02 prices), which has grown rapidly, from 25 million people in 1996 to 153 million people in 2010. If the economy continues to grow fast and literacy rates keep rising, around a third of the population (34%) is expected to join the middle class in the near future. The middle class population is rapidly acquiring the purchasing power necessary to afford quality western medicine due to an increase in disposable income. The Indian population spent 7% of its disposable income on healthcare in 2005; this number is expected to nearly double, to 13%, by 2025.

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12.Conclusion With the pressure of increasing healthcare costs serving to drive up volumes in the generics business across markets, this segment is becoming increasingly relevant for all players in the industry, including the large innovator companies. In this context, markets like India are especially attractive, given their potential for higher growth. The pharma industry in India has over the last few years have seen some large inorganic investments by pharma MNCs, and these acquisitions are likely to play a significant role in expanding the generic footprints of the MNCs concerned both in India and in other major markets. Going forward, most pharma MNCs are likely to maintain their focus on the Indian market, strengthening their product basket and sales network.

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1.WWW.ICRA.IN (Indian credit rating agencies) 2.Moodys investor service 3.WWW.ORGINDIA.COM 4.WWW.PWC.COM (Pricewaterhousecoopers)

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