Understanding Cost Advantages Of Indian Firms Commerce Essay

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India's core competency constitutes lower costs which are estimated to be one-eighth in R&D to one-fifth in manufacturing compared to other firms. The following factors are the basis for such a cost advantage:

Fixed asset cost: The cost of building a new manufacturing facility complying with international regulatory norms is about one-fourth the cost of setting up a similar facility in the US or Europe.

Cheaper labour: The cost of an Indian based laboratory chemist is one fifth to one eight of US cost. Higher-level of Indian scientists are well trained yet they earn only about a third of their Western counterparts' salaries.

Process expertise and development costs: Low development cost has resulted in lower regulatory costs and this combined with the increasingly admissibility of Indian bio-equivalence studies in to the FDA which puts India at an advantage. With more than three decades of reverse engineering 'on-patented' drugs of process engineering has made Indian companies extremely proficient in speedy generic drug development and therefore more productive per unit of cost. Whereas on the manufacturing side, the process of continuous improvement has resulted in a highly efficient cost structure for India's bulk production.

Clinical study costs: A large population of treatment-naïve patients facilitates rapid trial recruitments into large clinical studies. Cost per patient enrolled is approximately one-tenth of the cost in that of US. However neither Indian companies nor international companies have tried to leverage the cost advantage in the materialistic sense because of Indian companies due to low graded drug discovery research and international pharmaceutical companies due to concerns over intellectual property rights confidentiality.

Cost of sales force: The average salary including all type of benefits) of a drug representative in Indian market is $4,000/year.

Effect of Change in IPR Regime: Post 2005 Era

India had to amend its patent laws in 2005 to meet its obligations under TRIPS,

Allowing :-

Both Product and process patents on any product with a patent issued after January 1, 1995.

No discrimination among the imported and domestic products in case of process patents

Patents granted for minimum period of at least 20 years

EFFECTS OF IPR CHANGES: POST 2005

Risks faced by Indian firms

Despite of India's existing competitive advantages, Indian firms have certain weaknesses and therefore face certain competitive threats, which are as follows:

1. Indian companies are relatively new in the generics business with respect to regulated markets that's why there are concern regarding their ability to manage larger product portfolios, entailing numerous regulatory filing and scaling up manufacturing, forging alliances and legal skills to win on patent litigations.

2. The US generic industry may be able to catch up with the same cost advantage as that of Indian firms through developing partnerships in India. US generics companies such as Watson, Ivax have already secured some manufacturing agreements with Indian bulk active form manufacturers which can mitigate some of the cost advantages enjoyed by fully integrated Indian companies like Dr Reddy's, Sun and Ranbaxy.

3. The research-based industry has also been increasingly interested in marketing their own generic alternatives to their patented products, spurred by the impending flurry of patent expirations and the knowledge that the majority of the profits of a generic drug are earned in the first six months post patent-expiry.

4. The impending deceleration in patent expiries post 2007 presents another risk to Indian firms.

5. There is a moral hazard/ tragedy of the commons51 problem - being the reputation risk that the entire industry will face if one player cuts corners with regard to GLP or GMP.

6. Pursuing the NCE strategy is risky, not least because Indian firms have a skills shortage in the area of patent writing. It has been suggested that many existing patents written by Indian professionals can be easily circumvented; so even where an Indian company has produced an innovation; it may not be protected in international settings. In addition, Indian firms are strong in chemistry, but they are relatively weak in biology and clinical research and development skills, and these are essential to compete in the innovative, NCE drug category.

7. There is a risk that the co-operative strategies employed by some firms could get in the way of the competitive strategies of these firms, especially if Indian firms do not negotiate reasonable contract terms with MNCs and/or fail to ring-fence their competitive advantages.

8. Risk of protectionism in developed countries market,because jobs lost from US and EU will not only be those in manufacturing but more of in skill intensive research sectors.

Strategic Approach: Towards change in IPR's

Variants in the competitive business model:-

Many firms had planned to meet the product patent challenge with a multi-stage strategy of and increasing exports to the regulated markets and moving up in the product value chain like US and Europe. Leveraging their comparative cost advantages, these firms plan to target plain vanilla generics sales to regulated markets in the near-term and to develop more difficult-to-manufacture generics for e.g. injectables, low-risk NDAs, and biologics. The most advanced firms hope to evolve into the area of proprietary drugs.

Targeting regulated markets

The major contribution of export revenues for Indian pharmaceutical companies has increased significantly over the past five years, rising by 12 percentage points in the last five years to 40% in 2003. Growth in exports is expected to continue, fuelled by the impending patent law change, and made possible by India's cost advantage, regulatory filing skills, and the large concentration of FDA approved manufacturing plants. In view of lateral growth, Indian companies are already targeting some European markets and the US, as evidenced by the surge in drug applications to the FDA - one-third of all US abbreviated new drug applications filed in 2003 compared with only five in 1997.

In order to gain a foothold, Several Indian companies have already made acquisitions in Europe,. The three markets that is under-penetrated with respect to generics (France, Italy and Spain) are expected to be especially important targets for Indian companies in the next two to five years.

Moving up the product value chain

About $60 billion worth36 of blockbusters will open up to legitimate generic competition between now and 2007, and Indian firms are expected to actively participate in supplying generic versions of these blockbusters. However, Indian firms are also looking for ways to maintain revenue growth after patent expirations peak in 2007. Because of Indian companies' strong reengineering skills, the branded prescription drug products often viewed as invulnerable because of manufacturing complexity (e.g. injectables) and regulatory hurdles (e.g. biogenerics) are increasingly likely to become targets of Indian companies, in the medium term, as are other specialty generics - e.g. reformulated older molecules that leverage new drug delivery technologies (Cipla is a world leader in CFC free inhalers), value-added formulations and newer polymorphs/salt versions of existing chemical entities. Dr Reddy's and Wockhardt are examples of firms having in their pipeline new drug delivery technologies to develop life cycle extensions of existing molecules.

Strategic choices for Indian firms

Compete

• Plain vanilla and specialty generics

• Develop lower risk NDAs

• Develop follow-on biologics

• Challenge IPRs on regulated markets

• Invest in R&D for proprietary NCEs

Co-operate

• Provide contract manufacturing for MNCs

• Supply API to MNCs

• Partner with MNCs for their sales channels

• Provide clinical outsourcing for MNCs

• R&D collaboration

Longer-term strategy: Proprietary drugs

Because of TRIPS compliance in 2005, large number of Indian companies is investing a large sum in R&D product and research. Currently R&D stands for 6% sales of Ranbaxy and Dr Reddy's lab. Both companies are trying to bring their R&D expenditure up to a level of 10%. Ranbaxy has already indicated that its R&D focus will be on pediatrics, dermatology and urology. This nascent R&D effort in India is already beginning to pay off the investors. There are currently 37 research leads for NCEs, 28 of which are already in pre-clinical development phase, and 9 in Phase I or II trial phase. However, more has to be done in such scenario as overall of two-thirds of Indian R&D spend is towards the API and formulation work with only one-third dedicated to only new chemical entities.

Quality

IP Change has caused many firms in India to increase their focus in regulated markets which has created the dearth need for greater compliance in GLP and GMP both, with India which has now more FDA approved plant than that of any other country(except the US). This is going to make market more competitive with standardizing the minimum acceptable quality level on the domestic markets and the firms which begin to implement quality enhancing tools and systems to be in competition with other companies.

IP Access to new medicines

Application of product patents has caused an increase in incentive to develop new product portfolios, which has improved significantly the quality of new drugs to treat health related problems. But the effect might differ from developed to developing countries firm prospect. From the perspective of developed countries firm, various economic models like Chin and Grosman, Deordorff 1992 show clearly that profits which are coming from the newly available IPR in lesser developed countries are as such only incremental to profits which coming from other patent protected markets, that's why the additional innovation from big MNCs arising from product patent introduction in developing country markets, is very much negligible only.

Evolving R&D expenditure

In Indian pharma sector only a slight growth has been registered with respect to R&D which is not a significant increase in spending, as a percentage of sales also. Over all R&D expenditure of 6-8% of net worth generics markets is less than the 15% spent by the MNCs. Indian companies having a very lower cost-base should have the relatively higher productivity of the R&D investment relatively higher than that of MNCs.

Level of innovation

Overall, the R&D pipeline of Indian firms has principally addressed established rather than new drug targets, and has concentrated on imitating and adapting pharmaceutical products developed in foreign countries. So the quality in the terms of degree of innovation of Indian R&D spend as well as types of 'discoveries' (as indicated by the number of DMF and ANDA filings but a dearth of NDA filings) is disappointing.80 However, the larger Indian companies (Ranbaxy and Dr Reddy's) that are keen to move up the value chain are investing increasing sums in novel product R&D. Dr Reddy's and Ranbaxy are targeting proprietary drugs and new drug delivery systems and NCE approvals in the mid to longer term (5-6 years). Current R&D stands at over 6% of sales for both of these companies with the goal of each being 10% over the next five years.

Strategic Advances by various companies

Indian companies have adopted different strategies in order to penetrate regulated generics markets. Some of them are as follows:-

Some companies have entered these markets through partnerships with established in generic Companies

Some have set up their own sales and marketing units either through partnership or through acquisitions.

A number of companies have gone one stage further and acquired manufacturing bases in their target markets.

Ranbaxy has acquired Ohm Laboratories in the US in 1995which provided the company with an entry into the US market.

Jubilant Organosys has acquired US generic company "Cadista Pharmaceuticals" (formerly known as Trigen Laboratories) in 2005.

Aurobindo Pharma has acquired an FDA compliant formulations and manufacturing plant in New Jersey, 2006.

Dr. Reddy has acquired MHRA approved manufacturing facilities in the UK

Wockhardt has acquired manufacturing facilities in the France, UK and Ireland.

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