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Changes in business models

The recent changes in the health care industry have forced the generic companies to change the business model (H. Joshi, 2003). Business model explained by Zott & Amit (2008) “the business model is a framework that describes the organization of a focal firm’s transactions with all of its external constituents in factor and product markets. With reference to this, Cipla’s business model is a framework of activities that focus on reverse engineering to manufacture generic product at a low cost for worldwide supply. The management focused on welfare and access for life saving drug to common man (Directors speech AGM, 2010). The one of the key reason for the change in generic industry is due to the agreement of WTO regulation in 1995 restricting the generic companies of production of development and production of process patent as well as product patent from 2005 (WTO Article 65.4, 2006). The Indian government had the role to develop the pharmaceutical industry by the Jan 2005, in order for it to compete with the MNC pharma companies worldwide. Hence the government brought up laws that could encourage the R&D within the pharmaceutical industry, few of them were like recognition of pharmaceutical industry as a knowledge-based industry, reduction in interest rates for export financing, additional tax deductions for R&D expenses, reduction in the price control of pharmaceuticals. Indian pharmaceutical industry (IPI) taking full advantage of benefits offered by the government, invested in research and development of drug discovery and biotechnology (H. Joshi, 2003). There was a gradual change Cipla responded by investing heavily after 1996 on infrastructure and research. The figure 1 shows the increase in investment post WTO agreement, i.e. after 1996.

Figure 1:

Year

investment

2.8

3.11

3.23

3.23

30.54

72.82

140.41

195

222.93

Year

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

investment

143.7

126.59

180.33

18.3

22.43

117.8

94.75

81.32

265.1

Source : Cipla financial data 1994 – 2010 figure in crores

Cipla had to change its business model with the changing environment as no longer it could only rely on off-patent drugs therefore it invested in new drug discovery and development of off patent drug. According to the director’s report 2010, the total expenditure on R&D was Rs 262.68 crore of which is Rs 11.99 crore and Rs 250.69 crore are incurred on capital and recurring expenditure.

As of 2010, Cipla invested approximately Rs 900 crore in infrastructure for the factory at the Special Economic Zone, Indore, Madhya Pradesh. And investing about Rs.250 crore in a new R&D and administration facility at Vikhroli, Mumbai. Cipla investing Rs 200 crores for upgrading its active pharmaceutical ingredient (API) facility to scale up operation (Cipla annual report, 2010).

The highly educated cheap labor is a competitive advantages that IPI posse (H. N. Joshi, 2003). Cipla also invested in human resource with infrastructure. Figure 2 highlights the increasing employee cost in every two year from the year 2000.

Year

Mar 00

Mar 02

Mar 04

Mar 06

Mar 08

Mar 10

Employee cost

36.97

63.25

95.25

150.76

255.45

318.87

% change

41.94%

33.59%

36.82%

40.98%

19.88%

Figure 2:

Source: Cipla financial data 1994 - 2010

The increasing investment in research and development, infrastructure and employee express Cipla’s move to increase market share and increase product range. In 2010 Cipla decided to invest in biotech companies such as India-based Mabpharma with $40 million for a 40% stake and stake in Shanghai-based BioMab with $25 million for a 25% stake (Economic times, 2010). Globally, the biotech industry is $90-billion strong growing at a rate of over 35% annually (Economic times, 2010).

In 2009 cipla was the market leader in India with 5.42% of market share whereas Ranbaxy and GSK had 5.09% and 4.35% respectively.(Cipla news 2010). The financial performance was visible in its share price too, in early 2005 the share price was Rs 116 and in Dec 2010 the share price is Rs 356 (Google finance, 2010). So the domestic and export sales is increasing year on year and exports contribute more than 50% of total revenue with was Rs.2901 crore for the FY10 (Cipla annual accounts 2010). Since export form a major part of income, appreciation and depreciation of the Indian rupee in foreign currency exchange rates can have a significant impact on the Company’s operations and financial results. The decrease in excise duty is due to the effect of the central union budget, the reduction of excise tax of pharmaceutical industry from 16% to 8% and exception of excise on life saving drugs (IBEF 2008).

Year

Mar '05

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

Total Sales

2,400.89

3,103.62

3,656.92

4,293.95

5,295.33

5,657.85

Export

-

-

-

2101.74

2754.41

2901.00

Domestic sales

-

-

-

2192.21

2540.92

2756.85

Excise

146.37

122.27

94.93

90.66

61.04

52.16

Figure 3:

Source: Cipla financial data 1994 – 2010

The increasing export also implies that the change in business model towards focus on development foreign market due to for low cost health care demand. Africa is an important market for Cipla as 34% of exports are directed to this market (Cipla annual report, 2010).

Unlike Ranbaxy Laboratories, which has established a marketing and distribution network in the US, or Dr. Reddy's, which challenges patents of innovators ahead of their expiry to get an edge over competitors, Cipla relies on partners Cipla relies on strategic alliance with US generics major such as Watson, Eon, Ivan, Morton Grove Pharmaceuticals, Pentech Pharmaceuticals for regulatory clearances and distribution of its finished medicine.

In the US, Cipla has entered into partnership for 118 products with 22 partners. We note that the number of partners have increased from 17 to 22 over the last 12 months. Of the pipeline of ~100 ANDAs filed till date, 57 have been approved (35 commercialized) while 45 ANDAs are awaiting approval (businessworldindia 2010). Cipla’s strategy for regulated markets (Europe and US) exports is built around supply tie-ups with global players (Motilal Oswal, 2010).

The high competition from both innovative and generic company has forced Cipla to look for other sources for income. Cipla started technology consultancy service that offer technology for products and processes and derives revenues in the form of Royalty, technology know-how fees and licensing (India Infoline 2004). In FY2003 it earned 6.9 crore and in FY2004, 54 crore (India Infoline 2004). It earned Rs.154 crore towards technical know-how/fees in 2009 and 153 crore in 2010 (Cipla annual report 2010)

Cipla entered a strategic partnership with Ranbaxy for marketing of selected drugs in 2000. This alliance highlights the importance of collaboration than competition in the same market as it is a win-win situation for both companies that will market the same product (Indian Express Newspapers, 1999).

PART II

The revenue fall of major drug companies as they face patent expiration of key drugs, the decline in new product introductions, ongoing cost-containment efforts in healthcare expenditures in established markets in the US and Europe, and pharmaceutical industry growth in emerging markets, have laid the foundation for innovator-drug and generic-drug companies to develop strategies to respond to these changing industry fundamentals (P.V. Arnum, 2010).

The innovative companies look for areas to cut cost so as to sell the final product at a low cost, since consumers are showing a positive sign towards lower healthcare cost. It is difficult for the innovating companies to copy the characteristics of a generic company into their existing business model. Hence the innovative companies acquire or partner with generic company to operate in generic industry under a single brand name. Innovative Companies in US and Europe have shows trends of entering generic market, as the demand for low cost.

The rise of emerging markets is another important trend as shown by shifting population trends. Although the US and Europe currently represent the largest areas for healthcare spending, (front, 2007) population patterns favor emerging markets, particularly Asia. It is noted that Asia accounts for 56% of the world’s population, Africa 13%, Latin America 9%, and the Middle East 7% (Worldometer, 2010). In contrast, North America accounts for only 5% of the world’s population and Europe 10%. As economies, particularly in India and China, continue to grow, and the middle class in those economies expand, these markets will rise in importance for healthcare expenditures, including pharmaceutical expenditures. 

Big pharma like GSK, states this in their website ‘We are diversifying our business to create a more balanced product portfolio and move away from a reliance on traditional white pill/ western markets’ (GSK, 2010). This implies the strategy to change operation from existing area to new emerging market. According to Abbas Hussain - president Emerging Market GSK, GSK has strategy to outgrow the market with having broad portfolic of products, scale and geographical reach, innovative pricing, and partnership with local players (GSK emerging market, 2009). He also mentions the acquisitions of the UCB and the BMS businesses in the Middle East, North Africa and other geographies and, importantly, the creative alliances with Indian based Dr Reddy’s Laboratories and South African based Aspen to bring a broader portfolio of medicines to emerging markets that are of high quality but affordable for patients (GSK emerging market, 2009). GSK highlights the forecasted growth of emerging market by 13% - triple traditional western market and will account for 40% of growth in the worldwide pharmaceutical market by 2020. GSK is actively seeking to unlock the potential of emerging markets and has already established a new business model within GSK and prioritised investments in capacity (GSK News, 2009).

With reference to generics companies like Cipla, the ongoing trend of entering a strategic alliance with innovative pharma companies to market and provide patent rights for various products. Cipla has signed a 10 year agreement with Akorn Inc in 2007 for supply of generic oral drug. Cipla is responsible for development, production and supply of the drug and Akorn is responsible for clinical trials, regulatory submission and marketing. And will own the generic licence for the drug and will pay Cipla fees for development cost. The Akore and Cipla will share net revenue on a 60:40 basis, respectively (Reuters, 2007).

Cipla partnered with Stempeutics Research Pvt. for the marketing rights of stem-cell-based products. Cipla is sponsoring up to Rs.50 crore, in the initial phase for research and development of these products (Stempeutics 2010). In 1997 Cipla finalised a marketing joint venture with Australia based Genpharm and US based Geneva pharmaceuticals.

Cipla has forged a strategic alliance with the UK-based Neolab for marketing a range of generic drugs. The alliance, while improving the Indian company's access to the multi-billion dollar European market for off-patent drugs, will also see Cipla rake in royalties on sales of products covered under the deal.

Cipla has tied up with the US-based Zenith Goldline and United Research Labs for marketing Flutamide, an oncology drug, and Felodipine, a cardiovascular drug, in the US and European markets in 2001

Signs long-term agreement with Morton Grove Pharmaceuticals Inc (MGP) of Illinois, US, for product launch in the US market in 2004

-Avesthagen forges alliance with Cipla in 2004

-Cipla ties up with Ivax for US market in 2006

In conclusion, the traditional strategic boundaries between innovator-drug and generic-drug companies have blurred out. Innovator-drug companies are seeking to diversify and build their positions in generics, which includes product positions in emerging markets. In turn, the major generic-drug companies have strengthen their market position by strategic alliance with other generic drug companies to capture the opportunity resulting from the wave of patent expiries as well as their own diversification into new drug development. It also is observed that both innovative pharma companies and generic pharma companies share a small proportional market to compete. Big pharma attracted by the emerging markets with low cost health care enters with partnership of generic companies and on the other hand generic companies tie up with institutions for research and development, patent rights and marketing. Hence there is a rise in competition within the industry and as a result the cost of drugs has lowered. The development of biotech products creates an opportunity of manufactures and consumers. the observation highlight a trend toward diversification into adjacent spaces by innovator-drug companies and generic-drug companies. Sectors that were once separated (i.e., bulk and fine chemicals, generics, branded and value-added generics, line extensions, and innovative drug development) that had clear delineation between innovator-drug and generic-drug companies are now becoming blurred

H. Joshi (2003) Analysis of the Indian Pharmaceutical Industry(2003) [online]. Available from: http://pharmtech.findpharma.com/pharmtech/data/articlestandard/pharmtech/042003/44039/article.pdf

WTO Article 65.4 (2006 ) Fact Sheet: Trips And Pharmaceutical Patents [online]. Available from: http://www.wto.org/english/tratop_e/trips_e/factsheet_pharm04_e.htm[Accessed: 10 november 2010]

Cipla news (2010) Cipla maintains No.1 position in Indian mkt [online]. Available from: http://www.cipla.com/whatsnew/news.htm#01jan08 [Accessed: 10 november 2010]

IBEF (2008) pharmaceuticals pg 27 - 28[online]. Available from: http://www.scribd.com/doc/14959074/Indian-Pharma-Industry-Presentation-010709 [Accessed: 10 november 2010]

India Infoline Ltd (2003)Cipla Ltd - Exports drive growth (2004) [online]. Available from: http://content.indiainfoline.com/wc/archives/sect/cipl.pdf [Accessed: 10 november 2010]

GSK (2009) GSK enters transformational agreement with Aspen to drive growth in emerging markets [online]. Available from: http://www.gsk.com/media/pressreleases/2008/2008_pressrelease_10086.htm [Accessed: 10 November 2010]

GSK (2009) GSK to drive growth in emerging markets with acquisition of UCB products [online]. Available from: http://www.gsk.com/media/pressreleases/2009/2009_pressrelease_10014.htm [Accessed: 10 November 2010]

GSK (2009) Annual review Growing Emerging Markets (2009)[online]. Available from: http://www.gsk.com/annualreview2009/story1.shtml [Accessed: 10 november 2010}

Reuters (2007) Akorn teams up with India's Cipla for drug development (2007) [online]. Available from: http://www.reuters.com/article/idUSWNAS448220070621 [Accessed: 10 November 2010]

Stempeutics (2010) Establishes strategic alliance with Cipla for product marketing (2010) [online]. Available from: http://www.stempeutics.com/html/Article%201.pdf

[Accessed: 15 November 2010]

Economic times (2010) Cipla: Move to enter biotech (2010) [online]. Available from: http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/Cipla-Move-to-enter-biotech-looks-opportune/articleshow/6056650.cms

[Accessed: 10 November 2010]

Google finance, 2010 Cipla Limited (Public, BOM:500087)(2010) [online]. Available from: http://www.google.com/finance?client=ob&q=BOM:500087

[Accessed: 14 December 2010]

Visual economics (2010 ) Healthcare Costs Around the World (2010) [online]. Available from: http://www.visualeconomics.com/healthcare-costs-around-the-world_2010-03-01/ [Accessed: 14 December 2010]

Worldometer (2010) population density (2010) [online]. Available from: http://www.worldometers.info/population/ [Accessed: 14 December 2010]

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