GP20 CONSULTING DIVISION
GENERIC PHARMA 2.0
CHINA AND THE ROLE OF M&A IN THE
GENERIC PHARMACEUTICAL INDUSTURY
China and the role of M&A in the
Generic Pharmaceutical Industry
March 2014
The Indian Evolution
A summary of the three
major Indian pharmaceutical
companies and how they
globalised.
Page 2
China’s Options
Future Trends
What pathways can China
take to have a significant
impact on the international
industry?
How M&A will have an
impact on the industry of
tomorrow.
Page 4
Page 6
Introduction
In recent years, the generic industry has turned its
attention to emerging markets and high-tech products;
players at the very top are evolving into specialty
pharma companies. Historically, acquisitions have
been at the core of growth, is another wave coming?
The generic pharma industry provides a powerful opportunity for consumers
to get access to pharmaceutical products that have the same chemical effect
as the original, but at a fraction of the price. As a result of the global
financial crisis and the corporatisation of global government procurement
agencies, price is playing an ever more meaningful role in pharmaceutical
procurement policy. Movement into higher margin products, including
biosimilars is the only believed future.
This extends to emerging markets that don’t have the same fiscal resources
as the established markets and yet have growing demand from the
population. Governments are building local manufacturing to protect
themselves from becoming the future hostages of expensive imported drugs.
China recently became the 2nd largest healthcare consumer market in the
world. Whilst it is already the API factory for the world, there is still a long
way to go for its industry to catch up with that of India.
What does this mean for the generic pharma industry? How can China play a
more international role? What are the effects of the global harmonisation of
regulatory systems? Is there scope for more markets to enter the production
line? And how is M&A going to play a role in this globally competitive market?
This report seeks to answer these questions and to provide a commentary on
the future direction of the market, outlining some of the opportunities
available for new and established actors in the pharmaceutical industry.
Looking to the East
This paper is a snapshot of
the global pharmaceutical
market,
paying
special
attention to the history and
step-changes that countries
have made to become world
leaders in the multibillion
pharmaceutical industry.
It also pays special attention
to the importance that
China will have to offer in
the pharma industry.
It is already speculated that
China has the manufacturing
capacity to supply the
world, so what steps do they
need to take to capture the
global market?
The Indian evolution
India’s entry into the international pharmaceutical
markets began modestly, with central government
investment in the 1960s/70s when companies such as
Ranbaxy, Lupin and Dr Reddy’s emerged.
The initial focus of much of India's manufacturing was
the development of APIs. It was during this time they
developed a penchant for reverse engineering.
Early on, Ranbaxy, Lupin, and Dr Reddy’s realised that
if they wanted to be global players, they had to
receive world-class quality approvals for their
operations. In 1988, ‘89, and ‘87 respectively, USFDA
approval was granted for their domestic manufacturing
facilities. This established baseline credibility with the
United States and around the world.
The next step in their development was partnerships
with overseas firms, in Ranbaxy’s case it was with Eli
Lilly & Co, in Lupin’s it was a joint venture in
Thailand, while Dr Reddy’s begins exporting directly.
These were all confidence-building measures, which
by design or coincidence, enhanced the credibility of
these pharmaceutical producers. With additional sales
from these partnerships, the funds were available to
start acquiring offshore companies. Ranbaxy went to
the US, then to Germany, then Vietnam. Lupin
continued in Asia then to the US. Dr Reddy’s to the US
where it became the first Asia Pacific pharmaceutical
company (outside Japan) to list on the NYSE.
Since 2000, these three companies have continued to
expand and have all exceeded revenues of $1B USD.
Lessons from India
India’s success on the global pharmaceutical stage is
well represented by the results from a poll conducted
by the IPSOS Global Reputation Centre (above).
The results of the poll demonstrate a positive level of
confidence placed in the Indian domestic Market. This
confidence exceeded that held by the Americans, the
Germans and the Chinese.
Successful Indian pharmaceutical companies created
confidence and scale in their home market, built
cross border relationships and then began to globally
expand operations.
What lessons are there for China in short-circuiting
the Indian evolution and becoming global players?
2
History of M&A in India
Dr Reddy’s
Ranbaxy
1987
1997
1997
Acquires Benzex Laboratories.
JV in Brazil.
JV in Tashkent, Uzbekistan.
1999
Acquires American Remedies Limited.
2000
2002
2005
2006
2008
2008
2009
Merger with Cheminor Drugs Limed.
Acquires BMS Laboratories ltd
Acquires Roche’s API, Cuernavaca, Mexico.
Acquires Betapharm (see below).
Acquires a portion of Dowpharma.
Acquires BASF Louisiana, USA.
Announces a strategic partnership with GSK.
Lupin
1989
2007
2007
2008
2008
2008
2009
2011
2011
2014
1992
2005
Set up JV with Eli Lilly & Co in India.
Set up JV in China: Ranbaxy (Guangzhou
China) Limited.
Acquires Ohm Laboratories Inc. in the US.
Acquires Bayer’s generics business in
Germany.
Acquires RPG (Aventis).
Acquires generic product portfolio from
Efarmes of Spain.
JV with Nippon Chemiphar in Japan.
2006
Strategic alliance with Zenotech.
2006
Acquires Terapia, in Romania.
Acquire the unbranded generic business of GSK
in Italy and Spain.
Acquire Be Tabs Pharmaceuticals, South
Africa.
Sign a new R&D agreement with GSK.
Bring in Daiichi Sankyo Co., Ltd. as a majority
partner.
1993
1995
2000
2004
2005
2006
JV in Thailand – Lupin Chemicals (Thailand)
Ltd.
Acquires Vadodara based Rubamin
Laboratories Ltd.
Acquires Kyowa Pharmaceutical Industry
Company Ltd.
Acquires Hormosan Pharma GmbH,from
Germany.
Acquires stake in Generic Health Pty Ltd., in
Australia.
Acquires Pharma Dynamics in South Africa.
Acquires majority stake in Multicare
Pharmaceuticals Philippines Inc.
Lupin and Medicis Enter into Joint
Development Agreement.
Lupin Acquires I'rom Pharmaceuticals through
its Japanese Subsidiary.
Lupin Acquires Nanomi B.V.
2006
2007
2008
Glenmark
2000
2002
2004
2005
2005
2005
2007
Acquires three brands from Lyka Labs.
Acquires facility from GlaxoSmithKline
Pharmaceuticals Ltd.
Acquires Laboratorios Klinger, Brazil.
Announces collaborative agreement with Napo
pharmaceuticals Inc.
Acquires Servycal S.A. a marketing company in
Argentina.
Acquires Bouwer Bartlett pty, ltd South Africa.
Acquires Medicamenta, Czech Republic.
M&A Case study: Betapharm
In 2006, Dr Reddy’s acquired German company Betapharm Arzneimittel GmbH for
480 million Euro. As Betapharm had a 3.5% share of the German market, and
Germany collectively controlled 66% of the generic market in Europe, it was seen
as a great opportunity to expand in a major global market.
Things started to go wrong a few months after the acquisition. Although there was nothing intrinsically
wrong with the company (though there was speculation Dr Reddy’s overpaid) the government changed
it’s procurement policy.
Instead of operating in its traditional model, the German Government introduced a tender based model
in their procurement policy. This change in policy saw Betapharm having to compete on price, which
derided the value from the acquisition.
Political intelligence can be purchased from lobbyist or industry advocates. This is especially important
in industries such as pharmaceuticals, where the government is the main customer. Spending a
relatively modest sum to confirm the future of the market is absolutely vital. Had Dr Reddy’s caught on
to the change in government policy, they may not have invested in Betapharm at all.
3
The increased GMP regulations is
planned to force out low quality
manufacturers, improve (at a macro
level) the overall quality of Chinese
Pharmaceutical manufacturing, and
also to stimulate consolidation.
However, China is still haunted by a
reputation of low quality products, the
result of decades of lax government
regulations. It is holding back the
countries international growth. This is
a challenge India overcame very early.
China has the capacity to produce
much of the world’s pharmaceutical
requirements. They currently have a
geographically scattered production
base, mostly simple and broadly
duplicated products, as well as
outdated technology and management
structures. There is a vast scope for
consolidation,
advancement
and
diversification.
We propose 3 areas of strategy
Chinese companies should consider:



Learn from the Indian market
Move up the value chain
Look to emerging markets
Emulate aspects of the Indian model
The Indian model provides a great
framework
for
the
Chinese
manufacturers to emulate. India
started off in a very similar situation;
a low-cost manufacturing nation with
a poor reputation for quality.
The Indian industry took 5 distinct
steps to become globally acceptable
pharmaceutical manufacturers.
1. Gain global recognition &
approval for manufacturing
facilities.
2. Build strategic partnerships
with
established
overseas
firms.
3. Acquire downstream firms to
gain a foothold in key markets.
4. Leverage success by investing
in R&D and marketing to
achieve
full
vertically
integration.
5. Rapidly establish a presence in
high growth markets.
While these steps sound prescriptive,
in a dynamic market place there is no
perfect way to succeed. The rapidly
changing political and economic
landscape requires good timing. In the
case of Dr Reddy’s acquisition of
Betapharm,
it’s
clear
market
intelligence and insight is invaluable.
Nation Branding
China has thousands of pharmaceutical
manufacturers, many still owned by
the government. However, a number
of the pharmaceutical companies are
struggling to meet the government
plans to introduce global Good
Manufacturing Practices (GMP).
Nation branding aims to measure, build and manage the reputation of countries. Some approaches applied,
such as an increasing importance on the symbolic value of products, have led countries to emphasise their
distinctive characteristics. The branding and image of a nation-state "and the successful transference of this
image to its exports - is just as important as what they actually produce and sell".
The options for Chinese pharma
4
“From 1986 – 2006,
Chinese firms have
independently
developed only 40 new
chemical medicines,
most of which are not
patented”
Move up the value-chain
China is the world leader in producing PhD students.
However, the average that is spent on R&D is only 2% of
revenue – far lower than the 14-18% of leading global
pharmaceutical companies.
Between 1986 – 2006 Chinese firms independently
developed only 40 novel chemical drugs, most of which
are not patented. China has the expertise and the
financial resources, with the powerful backing of the
government, to become a major player in R&D.
The limited number of patents being granted and novel
drugs launched should shock China into action. To
short-circuit the Indian model, Chinese pharmaceutical
companies should be looking to bring together
internationally experienced R&D teams and combining
them with the massive local PhD talent pool.
The few companies that have invested in R&D have
another challenge; commercializing these products
outside China. A connection to the market is required
to direct product pipelines and engage marketing
partners. This is where Generic Pharma 2.0 provides an
invaluable service.
Indian companies quickly moved from licensing and
partnerships to setting up their own direct-to-market
operations. China lacks the confidence to undertake
such projects currently, so M&A is expected to play a
key role.
Look to emerging markets
Emerging markets are an opportunity for China to
leverage their low cost production. The advantages of
emerging markets for China is three fold:
Less strict regulatory regime: lower hurdles for Chinese
firms to overcome. Less onerous cGMP approvals for
the relatively inexperienced quality and regulatory
teams to negotiate.
Basic requirements: the market demands are much
more basic, so there will be a few years buffer on the
demand for high tech generics.
Already providing aid: China is already spending $200B
on aid in developing markets, giving China an excellent
governmental vehicle to enter these markets.
Accessing emerging markets should be a key strategy
for any high growth company. Generic Pharma 2.0 has
consultants on the ground in many emerging markets to
assist with market entry strategy.
- D. Jiang and J. Zhang
Summary
Nation branding has been a big problem for China,
who are perceived as low cost, low quality suppliers,
which may have been true in the past, but there are
quality manufacturers today tarnished by this brush.
Indian companies spent much of the 1980’s getting EU
and USFDA approval for their facilities; helping
establish a reputation for globally accepted quality
standards and opening up high value markets. China
only has a handful of finished dose facilities with such
approvals and is yet to convince global markets of its
ability to consistently meet quality standards.
China needs to look to the Indian model of confidence
building steps and global acquisitions to expand their
businesses. China has the capacity to supply the
world’s demands for pharmaceutical products.
However, at this stage, they do not have the
coordination or international networks to take the
next step.
Predictions
We believe China will miss out the contract
manufacturing step than Indian firms took in their
evolution and move directly to licensing of high-tech
generics. The few firms with fully formed R&D and
regulatory divisions will show others the path to
growth in global markets.
We expect some significant acquisitions of
international marketing firms during the coming 12-24
months; stimulating a new confidence that will
encourage Chinese firms to spend big overseas.
5
The future
The dynamic nature of the global Pharmaceutical industry makes it hard for
anyone to provide an accurate forecast of what’s to come. If a cure to cancer
were discovered tomorrow or cost effective genome specific medicines
introduced, multi-billion portfolios would become redundant and small
molecule generics would have no value. However, there are some general
trends that should be noted, especially with their impact on M&A:
Biopharmaceuticals
Global harmony
As borders open up, trade
routes expand and globalisation
begins
to
take
a
more
meaningful role in commerce,
it’s fair to assume that rules
constraining global trade will
begin to harmonise.
In the pharmaceutical context
this may mean that an enhanced
WHO approval for manufacturing
become the recognised world
standard. This would remove
the
power
of
politically
motivated activities of the US
FDA
and
EMA.
Removing
complexity and barriers to
entry.
With a global quality standard,
country branding and specific
market approvals will be less
important.
This would reduce the cost of
market entry, expand the
number of competitors in every
market and drive down the price
of pharmaceuticals. This will
benefit payors and patients, but
will have materials impact on
profit margins for manufacturers
across the globe.
It might still be a number of
years away, but the motivation
and rationale for a global
systems
is
increasing.
Competition
should
breed
innovation and global access to
medicines; finding profits might
be the biggest challenge.
Industry analysts predict that by 2016 biopharmaceuticals will account for 23%
of the global market, up from 17% in 2009. The cost of market entry is
significantly greater than small molecules; so partnerships and collaborations
have been established to offset risk. We believe that once clinical,
manufacturing and regulatory confidence reaches a certain level; the
acquisition of R&D companies will become the defacto strategy to build
portfolio scale.
Economics
Following the global financial crisis there has been scrutiny on central
government and payor expenditure around the world. This has led to
significant price pressure and a shift of focus to economic benefits versus
incremental improvements in efficacy. Economies of scale and supply chain
simplicity will help reduce supply prices; providing incentive for both offshoring to large facilities and on-shoring for more complex drugs. R&D focus
will continue to focus on the reinvention of older molecules with reduced
approval costs and timetables. Consolidation is still likely at all levels.
Emerging markets
Emerging markets are less likely to drive demand of biosimilars in the short
term; instead, high-tech small molecule generics are seen as key to growth. As
many emerging markets desire to have local pharmaceutical production,
acquisitions or JV’s will continue to be the model for market access. On the
other hand, successful local players will seek inorganic growth in international
markets to spread risk and build economies of scale to boost local profits.
The Virtual Model: R&D + Patient Services
In order to stay ahead of the game in a globally competitive market, the
“virtual manufacturer” strategically outsources all of its production to a
well-chosen partner in order to focus on what they do best R&D. In
addition, doubling-down on efforts to provide a wraparound service to
engage and keep patients. Becoming service innovators they can build
supply chains that are flexible enough to focus on individual patient
requirements from end-to-end. Consolidation of the contract
manufacturing sector will be inline with this trend set to cover all sector of
the pharmaceutical industry; including the most advanced generic players.
New operations strategies for mass market products
Successful mass-market producers fall into two key categories. Low cost,
and profit centre. The low cost providers will offer the no frills service,
after rationalization of their supply chain and overheads. The profit centre
will undertake the same supply-chain analysis to provide flexible and
localised production facilities near the client base. The creation of regional
hubs for contract manufacturing services are expected.
6
`
The Middle East: A Future Giant?
The Middle East is not known for doing things by half measure.
Consider Dubai’s investment in tourism to help replace the future loss of
oil revenues. Now widely recognised as the “Hong Kong of the Middle East”
nobody is questioning the wisdom of this decision. Abu Dhabi is already hot
on its heels and the whole region is investment in industrial diversity.
“One of the main
characteristics
that
differentiates
Dubai
from other commercial
centres is its openness
to innovation and its
freedom its people
and institutions to
operate”
- Abdul Aziz Al Ghurair
If an Emirati were to decide to enter the international pharmaceutical
market in the way it disrupted global air travel with Emirates, few would
doubt the ambition to create a “perfect” pharmaceutical company.
Given the ‘money no object’ attitude, one can imagine the intent to
secure the best PhDs, the best facilities, and the best management. Few
travelers would have considered hubbing via the Middle East 10 years ago,
now its premium service and infrastructure make it a top choice.
Whilst few Middle Eastern pharmaceutical companies currently have
international success (e.g Hikma), one can safely speculate that this is a
region ready to create the next global player.
Leading pharmaceutical companies should be looking to secure strategic
partnerships that position it favorably as the regional plan takes shape.
Final Thoughts
The generic pharma industry has seen incredible change in recent years. Consolidation in traditional markets,
diversification into specialty products, retreat from emerging markets, the increased power of payors and
distributors and the improved understanding of the biosimilars challenge.
Whilst M&A has long played a key role at the top, we expect to see the trend extend to tier 2 and 3. These
companies have been forced by market conditions to carve out niches; formulation technologies, manufacturing
capabilities, sales channels and value-add portfolio’s. Their challenge is to fund expansion and achieve sufficient
scale that will enable them to prosper as payor power and inevitable competition increases. We believe the market
needs the integration of these niche players to provide competition to those above.
As this report has suggested, we see heavy investment from Chinese players once confidence levels are sufficient
for above-market prices to be paid. As happened with India 10 years ago, the impact of China could be dramatic in
the US, Europe and beyond.
2014-15 will be seen as pivotal years for the generic pharma industry.
Asa Cox
Founder & CEO, Generic Pharma 2.0
Masters of Marketing & Business Development
London, England – Toronto, Canada – Wellington, New Zealand
genericpharma20.com