Indian pharma's balancing act

Among the many industries that cater to our wants and needs, pharmaceuticals has to be the most unique. For good reason: No other industry deals with human lives in such fundamental ways as pharma does. Hence, the peculiar environment in which it must operate. Costs of innovation are sky-high, potential drugs must spend years (a decade or so) getting tested before making it to the market; regulations are extremely stringent, public opinion (especially in high-cost countries like the US) is quite hostile, consumer liabilities can be devastating, and competition in products where patents have expired, fierce. It’s in this environment that Indian drug makers must compete.

So far, the Indian drug maker has got by producing basic chemicals or bulk drugs at low costs, or at the most producing formulations (or the drugs that patients consume) that are knock-offs of existing drugs. Although the degree varies, both these strategies have the same problem: profit margins are thin. In contrast, new drugs—even if not a blockbuster that does, say, a billion dollars in revenues—can rake in millions of dollars in profits for its innovator. When you are a drug maker, it’s a delicate balancing act that one needs to do between focussing on the bread and butter stuff (generic drugs) and the jam (new drugs). Tilt too much towards basic research (which is what making new drugs requires) and you burn through your cash faster than you can cure a common cold. Steer clear of basic research, and you condemn yourself to a future where margins will only get slimmer and slimmer.

So, some of the smarter drug makers in India have been doing something interesting: focussing primarily on generics (increasingly the sort where margins are relatively high), and yet taking baby steps in the area of new drugs. Typically, they are partnering with Big Pharma companies to develop and test new drugs, and sharing the upside or downside, depending on the outcome. As our cover story this issue reveals, if their gambit works, the industry could double its value on the stock market to $129 billion by 2015. What are the chances that an India-made drug will actually become a global bestseller? Fairly good. As our third edit piece points out, India is developing its own paradigm of low-cost innovation, simply because most of our companies start with a relative disadvantage of not having deep enough pockets.

Therefore, they are forced to approach innovation differently. It’s not easy, but they seem to be getting better at it. So, don’t bet against an Indian blockbuster hitting the markets some time in the future.

Consensus needed

First, politicians were chided for concentrating too much power in the hands of the Central government. Now, they are being censured for taking the principles of federalism too far. Is there a dichotomy in those two reactions? There is no unequivocal answer to that question.

The fragmenting of the Indian polity over the last two decades has meant that the Centre has been slowly losing its clout vis-à-vis the states, which are often ruled by parties on whose support the Central government depends critically for survival. This has emboldened some of them to try and push the envelope further.

The Tamil Nadu government of M. Karunanidhi has threatened to nationalise cement companies in the state, charging them with rigging up prices to the detriment of the consumer. The Digamber Kamat government in Goa has red-flagged the Special Economic Zones in the state; and the Mayawati government’s treatment of Reliance Retail in Uttar Pradesh is too well known to bear detailed repetition.

All these incidents collectively point to an official machinery— albeit of different governments—pulling in different directions, leaving businesses and observers wondering who exactly is in charge. It doesn’t take great intelligence to figure out that such do-it-and-damn-the-Centre attitude augurs ill for the country. The economy cannot bloom in an environment of political uncertainty and policy paralysis. These developments are all the more regrettable since there is a broad consensus among political parties—barring some sections of the Left— about the need for and direction of economic reforms.

Obviously, the mutually antagonistic pulls and pressures of competitive politics, and a perception of a weakening Centre, are behind this latest round of muscle-flexing by state-level satraps. Federalism, and, more specifically, states standing up to the Centre on issues that concern them, is good for democracy in the country. But the time has come to draw very clear lines that no one should be allowed to cross.

For this to happen, the Central government must necessarily consult all states before announcing policies and awarding contracts. This may be a more timeconsuming process than the one currently in vogue, but it will ensure that once announced, policies are implemented on the ground without a hitch. The US, China and Russia also have multiple-tier governments.

If they can function smoothly, there is no reason why India should be subject to petty politicking. Investors today have the whole wide world to choose from. If Indian politicians don’t mend their ways, they’ll find the hen that lays golden eggs going elsewhere to roost.

Innovation express

By the time you read this piece, you will have already seen Tata Motors’ Rs 1-lakh car (or, at least, photographs of it). Not only you. The whole world will have seen it on TV screens, computers and newspapers. Never before has a product launched by an Indian company received this kind of international attention. To say that Tata Group Chairman Ratan Tata’s smallcar project has captured the imagination of the world is to state the obvious. For a few precious moments before, during and following the launch, New Delhi’s Pragati Maidan, where the event will take place, will be the centre of the auto universe.

The situation was very different a few years ago when Tata first announced his dream. Sceptics—and they were everywhere—scoffed at the idea. It can’t be done, rival car makers claimed. But Tata has proved them wrong. Along the way, he and his team have had to revisit and revise nearly every tenet of car making, but the innovations have paid off.

The Rs 1-lakh car is the most high profile, but certainly not the first, and definitely not the last, international product to come out of India. Already, several banks are taking products developed in India, for the Indian market, to other markets across the world. Then, several pharma companies, like Dr Reddy’s Labs and Glenmark Pharma, are earning millions of dollars by developing and licensing new chemical entities (shorthand for proprietary drugs) to the Big Pharma companies of the West. This is just a pit stop en route to ultimately developing their own blockbuster proprietary drugs.

The days of one-way movement of intellectual property and cutting-edge manufactured items—from abroad to India—are over. There are any number of reasons for this. The primary among these is the country’s new found prosperity and confidence. As Indian consumers slowly climb up the financial ladder, they are discovering that imported ideas and products, while fulfilling some of their needs, don’t really fully address the need gap. This is creating a new market that prescient and nimble-footed Indian companies are best-placed to tap. Additionally, what works for India will, in all probability, work in other parts of the developing world, as well. Business Today has no doubts whatsoever that in the years to come, many more Indian companies will come out with several other innovative products that will go on to become world beaters.

But every new trend needs a talisman and a torchbearer before it can become mainstream. Tata’s small car, apart from having the potential to change the very paradigm of motoring, will fulfil another very important need—of being that torch-bearer.