Competitive API Strategies

Gurmeet SinghNovember 30, 2011

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Devising effective API

pricing strategies to

compete with domestic

and international

players and overcome

price volatility issues

Competitive API Strategies

India Shining

India Shining Story Numbers at variance

video_4.wmv

‘People think India is a land of billion problems but India is a land of billion opportunities. India is ready to take off’

- Mukesh Ambani at IES WEF Nov13-14 2011

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US DMF Filings by API Manufacturers: 2000 – 10

Source: Newport Horizon Premium™

0

50

100

150

200

250

300

350

400

450

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

India USA China Italy Japan

India : > 100 USFDA approved manufacturing sites

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Sourcing Geographies: Key Differences-APIs

Cost

Technology

API

RMI

Regulated Market Focus

Compliance

Source: UBS + IH

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Presentation Flow

Understanding the current supply-demand gap in the domestic API industry, and to identify the core reasons for recent excessive price reductions

Establishing new strategies to maintain prices whilst increasing the production yield and managing costs

Applying learnings from the strategies adopted by Chinese players to effectively compete on price and ensure sufficient ROI

Analyzing the next steps for Indian API manufacturers to sustain their market position and effectively compete on a global scale

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Demand - Supply Analysis

API supply side – Excess Capacity; Intense Competition

Capacity Increase: impacting Margins e.g 7ACA,

Cephs

EU Capacities contained – shift to Asian sub-continent

e.g Clavulanic Acid

8Over capacity pressurizing prices to soften

Company Capacity p.a (in Mts)

Livzon (Joincare) 1,800

Youcare* 2,000

CSPC 1,500

Zhuhai United 1,200 (Captive Use )

NCPC 1,000 + 2,000 (by 2011)

Fukang 1,000

Shandong Lukang 900

Harbin 750

Weiqida 1,000

Sandoz 1,000

Lihairun 1,000 (pending)

Kelun 2,000 (pending)

Tonglian 1,000 (pending)

Price in last 1 year: Oct 2010: 850 rmb+ Oct 2011: 450 rmb+

The actual cost is approx. 500-550 rmb

Strategic tie-up is the waySupply Securitization, Fair & Stable prices

7 ACA – China - a Supply Side Review

* suspended due to unfavorable market situation* suspended due to unfavorable market situation

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Potassium Clavulanate (Clavulanic Acid)

Margins slipped after the generic launch in US – 2003

Competition intense after new API manufacturers

Big opportunity in combination formulations

Innovator

Slovenia Korea Austria

PortugalChina + 4 TurkeyExited in 2009

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Understanding the current supply-demand gap in the domestic API industry to identify the core reasons for recent excessive price reductions

Establishing new strategies to maintain prices whilst increasing the production yield and managing costs

Applying learnings from the strategies adopted by Chinese players to effectively compete on price and ensure sufficient ROI

Analyzing the next steps for Indian API manufacturers to sustain their market position and effectively compete on a global scale

Presentation Flow

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Mindset Change – De-commoditize

Decision PointsConsistency

Technical SupportTimely Delivery

Sales Contact Frequency Price

API’s RMI’sAPI’s RMI’s

SteelSteel

Paper

Paper

Bulk Chem

Bulk Chem

Know your customer beyond the database

What factors ??? API Price

Innovator Market SizeNo. of API Players P/SComplex, Hz, GreenSpecs, Imp levels Recoveries Enzymatic Vs SyntheticCompeting therapies

Integration B/FAPI+ DossierTech CompetitionIP/RA edgeBasket Approach

Do NOT leave MONEY on the table

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LT API Supply Agreement – Price protection 2010: Orchid – 10 year API agreement with Hospira

Contract manufacturing for Innovator companies for NCE APIs for their Generic Launch & for branded generics

2011: Abbott licenses 24 Zydus products for EMs

2010: Torrent – AZN – Lic. & Supply Agreement

2011: Merck & Sun – Novel FDFs & Combos in EMs

Strategies to maintain prices & margins

GSK- DRL; Pfizer – Strides, Aurobindo; Mylan - Matrix

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Strategies to maintain price & margins contd..

Vertical integration e.g SMZ - Virchow Technology Barriers: Sterile API manufacturing APIs for non-conventional drugs / Niche APIs/

unmet medical needs e.g orphan drugs etc

Optimize costs through large batch manufacturing

Establishing manufacturing units in SEZ areas or make JV/ M&A in low tax countries

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Understanding the current supply-demand gap in the domestic API industry to identify the core reasons for recent excessive price reductions

Establishing new strategies to maintain prices whilst increasing the production yield and managing costs

Applying learnings from the strategies adopted by Chinese players to effectively compete on price and ensure sufficient ROI

Analyzing the next steps for Indian API manufacturers to sustain their market position and effectively compete on a global scale

Presentation Flow

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China – a formidable force

Largest API player

70% market share 1,200 API Mfrs >5,000 local

pharma Cos.

Exports> $18bn

China Exports to India> $3bn

India Exports to China

$0.5bn

Govt invst$125bnby 2020

GDP on healthcare

4.7%

MNCs investing – Long Term;MS < 2.5%

Scale - Large Capacities Pricing – is the KEY Red carpet welcome Learning attitude

Fixed-asset investment in pharma in Jun-11:$19.7 bn; ↑ 38%

3rd largest Pharma market

by 2013-14

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China – A Proactive Approach

IPR protection improving; enforcement - an issueM&As – way to move forward

Merck KGaA Beijing Skywing Technology GSK Nanjin Meirui

‘Aligning with Locals’ – a winning strategy Pfizer & Shanghai Pharmaceuticals

Two-way business investments & sourcing Shanghai Pharma –> $3 bn contracts - over 60 MNCs

Holistic strategies – entire Life Style medicationIncreasing collaboration; MNCs & local Universities

Trust is building up with local companies

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Learnings from China

Economies of Scale : Leverage on strengths

Highly Supportive Government Investment Plans - US$ 760 mn for APIs Mfrs Healthcare Reform Plan-2009 – basic medical coverage,

modernize health infra & improve grassroots healthcare Highly favorable currency exchange policy By 2020, entire population to be covered under public

medical insurance NCMS-2003 – largest public health insurance programs

New Rural Cooperative Medical Scheme – Premium sharing between household & Govt. in the ratio of 1:2

Learning Attitude

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India – China – a Comparison

Total Trade - Sino India US$ 20 bn US$ 40 bn

Export of API, Intermediate & Chemicals

~US$ 500mn US$ 3.3 bn

% of GDP spent on Healthcare 4.5% 4.7% (↑5.5%)

Pharma Sales in 2010-11 US$ 12.6 bn US$ 50 bn

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Understanding the current supply-demand gap in the domestic API industry to identify the core reasons for recent excessive price reductions

Establishing new strategies to maintain prices whilst increasing the production yield and managing costs

Applying learnings from the strategies adopted by Chinese players to effectively compete on price and ensure sufficient ROI

Analyzing the next steps for Indian API manufacturers to sustain their market position and effectively compete on a global scale

Presentation Flow

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SMZ – Largest Manufacturer ~ 10,000 TPA

Vertical Integration – JVs – Long Term Gain

Volumes – Economies of Scale – contain COGS/ OHs

Solvent Recovery – large volumes – efficient recovery

Process Development & Equipment – upgrade

Batch Size Enhancement – 20/50 KL ( China – 100 KL)

Cost Control – multi level – Techno Commercial Audits

Ethical + Cheap is NOT Sharp; Sharp + Cheap is NOT Ethical

Ethical + Sharp is Never Cheap, BUT most Effective

Only US DMF Source

Under Patent Perfect Competition Oligopoly Duopoly Monopoly

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Green Technologies – Cost Effective Opportunity

LT strategic cooperation with Shandong Xinhua 2009: Sustainable development of China Pharma

industry through Green Technology DSM India – Green Ampicillin enzymatic process

– Significant lower levels of waste

– Enzymatic Amoxicillin

DSM PureActives: Cephalexin; biocatalyses Safer, Purer, Cost-effective

DSM PureActives: Cephalexin; biocatalyses Safer, Purer, Cost-effective

2006 – Euro 1.5 bn (18% of T.O) from biotech products

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Carbon Credits: Profits – Way NeXT

Navin Fluorine

Flurochemicals HCFC22 – 8000MTA

By-product HCFC23 – Green House Gas

Kyoto Protocol – Carbon credits for reducing GH

1MT HCFC22 = $ 3500 Approx $ 25 Mn profits Y- O- Y after factoring tech payments

Innovative additional source of Profits – investment in Green Technology

Evolving Business Models

.

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Export Oriented Business CRAMSCipla, DRL, Dishman, GVK

LICENSING – In & Out

Franchising

Partially or Wholly Owned

subsidiaries

Joint Ventures

Into IndiaPfizer, GSK, Novartis

From IndiaDishman, GlenmarkOrchid, Aurobindo

Elder – EnzymotecElder – DaiwaLupin- Ital Farmaco

Ethypharm- SolvayGlenmark – ForestGlenmark - Teijin

Novamax- CadilaNovatech – ETI Klinical

Fortis HealthcareMedicine ShoppeSource : PricewaterhouseCoopers

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Next Steps for API manufacturers – Sustainability

Dossier selling; API sales & Price stability

Benchmarking – revisit R&D, Tech & Business Processes

Decommoditize your matured/maturing products

Packaging; Large Bx Sizes – Logistics & QC edge

Novel drug delivery systems

Combination drugs – relook at old drugs

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Co-Opetition - Collaborative competition Indian Pharma collaborating on best practices Evaluate common ‘pooled’ RM purchase

negotiation to get Price efficiencies EHS becoming a critical parameter

India is ahead ; Need to consolidate – Green Tech Resource pooling - Pharma SEZs – Vizag Park Govt support on EHS front ; facilities to neutralize

Next Steps for API manufacturers – Sustainability

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Way Forward - to Summarize

Green Technologies – an Opportunity

Keep benchmarking – Tech & Business Processes

Collaborative Competition – Co Opetition

Resource Pooling

Scale & Vertical Integration

EHS – Carbon Credits

BI/CI Agility in the face of volatility

Learn to do more with less

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Competitive & Business Intelligence- Securitize WWII Poster

‘Loose Lips might sink ships’

Over 100 yearsOver 35 years

Imovation: Imitation + Innovation

‘Its smart to take an Idea & Enhance It’ – Steve Jobs

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Bibliography http://www.chemanager-online.com/en/topics/pharma-biotech-processing/pharma-sourcing-india-and-china http://saffron.pharmabiz.com/article/detnews.asp?articleid=56312&sectionid=50&z=y Tracking API demand and supply; Patricia Van Arnum, Jan. 2010, Pharmaceutical Technology Europe http://www.contractpharma.com/contents/view_expert-opinions/2011-06-01/china-vs-india-in-the-api-race-/ http://www.contractpharma.com/contents/view_expert-opinions/2011-09-19/when-the-unexpected-happens/ http://www.contractpharma.com/issues/2011-04/view_india-report/niche-play/ https://www.mckinseyquarterly.com/Energy_Resources_Materials/Chemicals/Innovation_in_chemicals_An_interview_with_Dow_Cornings_

CEO_and_CTO_2805 http://www.pharmabiz.com/ArticleDetails.aspx?aid=65147&sid=9 http://www.marketresearch.com/GBI-Research-v3759/Active-Pharmaceutical-Ingredients-API-Asia-6444687/ http://www.indiainfoline.com/Markets/News/Pharmaceuticals-market-in-India-by-2020-A-Healthy-Decade/5251255933 http://www.merck.com/newsroom/news-release-archive/corporate/2011_0411.html http://www.abbott.com/global/url/pressRelease/en_US/Press_Release_0856.htm http://articles.economictimes.indiatimes.com/2010-03-12/news/28448023_1_torrent-pharmaceuticals-torrent-group-licencing http://www.in-pharmatechnologist.com/Materials-Formulation/India-set-to-overtake-Italy-in-API-production http://www.in-pharmatechnologist.com/Product-Categories/Ingredients-excipients-and-raw-materials/AstraZeneca-plans-Chinese-manufact

uring-facility-to-meet-local-demand http://www.in-pharmatechnologist.com/Product-Categories/Ingredients-excipients-and-raw-materials/FDA-awards-35m-to-improve-US-dru

g-production http://www.in-pharmatechnologist.com/Product-Categories/Ingredients-excipients-and-raw-materials/DSM-and-Sinochem-s-anti-infective-

ingredients-JV-gets-green-light http://www.indiainfoline.com/Markets/News/Pharmaceuticals-market-in-India-by-2020-A-Healthy-Decade/5251255933 http://www.defchem.com/html_news/fine-chemical-8.html http://www.frost.com/prod/servlet/cpo/243036823 http://www.prlog.org/10970225-market-report-china-pharmaceuticals-healthcare-report-q4-2010-published.html “China’s Pharmaceutical Industry – Poised for the giant leap”; Report by KPMG http://www.chinadaily.com.cn/usa/business/2011-10/28/content_13997107.htm “The Global Generics Market,” CPHI Preconference, Frankfurt, 24-Oct-11 Discussions and inputs from Industry players and friends which include MSN Laboratories, Megafine, Virchow etc etc

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Orchid’s API Facilities, INDIAwww.orchidpharma.com

Thank You! Merci! Danke! どうもありがとうGurmeet Singh

gurmeetsingh144@hotmail.comgurmeetsingh@orchidpharma.com+ 91 95000 34345

Manufacturing - Alathur, ChennaiManufacturing - Alathur, Chennai R&D - Sholinganallur, ChennaiR&D - Sholinganallur, Chennai Manufacturing - AurangabadManufacturing - Aurangabad

Questions welcome