Asias impact on the global biotechnology and pharmaceutical industry is accelerating. From quality supply of active pharmaceutical ingredients (APIs) to discovery of new chemical entities (NCEs), this sector is finally coming of age. The challenge, of course, lies in whether the Asian chrysalis will metamorphose profitably through innovation or will choose the less risky pathway to grow beyond generics through contract manufacturing and other services to make its presence felt worldwide.
Drug discovery may be feasible but, just like U.S.-based small cap biotechnology companies, Asian companies will have to look for partners to help bring any successful innovation to market. This realization has already spurred acquisitions, alliances between the Asian and global pharmaceuticals in R&D, and outsourcing of services and clinical trials.
The key to the success of Asian pharmaceutical companies is their ability to retain their cost advantage while matching the quality standards of the west. But lower costs alone cannot be enough. Availability of skilled manpower and a favorable regulatory environment that assures compliance with global norms are the other two legs underpinning success.
The service sector in particular is witnessing robust growth. India and China have established their competence as service providers in IT and now the same model is being emulated in the biopharmaceutical sectoran outsourcing opportunity that is expected to be worth $48 billion as early as 2007.
With a growing skill set and capacity in contract research (from combinatorial chemistry to high throughput screening to assay development and validation to clinical trials) and contract manufacture, Asian companies are increasingly becoming preferred partners for western biopharmaceutical companies seeking to bring their products to the market in a timely and cost-effective manner. India already boasts more U.S. FDA GMP-approved API facilities than any other nation other than the U.S.
The opportunity for Indian companies to leverage their success in the generic segment can not be over-emphasized. Despite $126 billion worth of branded drugs going off patent in the next ten years, investors are disenchanted with the prospects for western generic companies due to intensifying price competition.
In their domestic markets, Indian and Chinese companies are successfully serving countries with high GDP growth (89%) and large populations (1 billion+ people each) while selling drugs at prices that would give most pharmaceutical executives a coronary.
Yet Indian companies are still able to churn out operating margins often comparable to those of western-branded pharmaceutical companies. Obviously, the Asian managers are changing the very business model that has defined success for western companies during the past century.
But when it comes to innovation driven by new science, the challenge for the Asian companies is clear: How do you transform yourself from a company that successfully copied someone elses innovative products cost effectively into a true innovator?
Continuing to do what now amounts to a commodity business has been a good springboard, but only successful R&D can turn this nice but modest base into a sustainable global presence over the long haul.
Remember, Asian firms are not only competing with their more developed counterparts in the U.S. and EU, but also with each other, especially in their bread-and-butter generic business. Chinese API manufacturers, for example, are just coming into their own, and will likely pressure the Indian companies pricing options even further.
And as if these concerns were not enough, over a dozen well-qualified Indian companies are all keen to enter the developed western countries with their generic products, setting up an intense battle in markets with the promise of exceptional margins (as compared to the domestic Indian market), leading to longer term returns from these capital-intensive initiatives likely being lower than these Indian companies expect.
Of course, discovery research is not only risky but requires skills and infrastructure that the Asian companies have not inherited, and must cultivate de novo. The initial discovery programs at Ranbaxy (Haryana) and Dr. Reddys Laboratories (Hyderabad), the two leading R&D-focused Indian companies, have not been successful.
While this outcome should not be surprising to anyone, it underscores the challenges that these companies face, especially as they can only invest relatively modest sums in R&Djust double digit million of dollarsa fraction of what a typical unprofitable biotech company in the west spends year after year to fulfill its dream of new science-driven success.
Fortunately or unfortunately, as Pfizer and others are finding out, money alone cant buy success. Fully aware of this dichotomy, Asian companies are on a steep learning curve with great hopes that their smart, alert and diligent efforts will find an optimal path despite their limited financial resources.
With a relatively clean slate due to a lack of prior investment in the area, Asian companies can move forward with a sense of freedom and adventure, unbound by any organizational tradition, especially as it becomes easier to motivate their successful citizens in the west to return home with their skills and experiences.
Researchers in Korea, Singapore, and India are capitalizing on opportunities in stem cell research and therapeutic cloning, and some of their discoveries may even provide some breakthrough leads needed for developing practical applications from the new science. The recent announcement by South Korean scientists of the cloning of personalized stem cells could be an achievement with far reaching implications.
These new science-anchored frontiers offer scientists from Asia a niche other than going down well-trodden paths with the objective of creating research powerhouses of their own.
While innovation is essential for sustainable long-term success, the next generic frontier offers robust growth prospects. Asian firms can be expected to gain as strong a foothold in bio-similars or biogenerics, (which is a bit of a hybrid path between their current business model and that of biotechnology companies) as they have with the small molecule generics.
Next Generic Frontier
With over $10 billion worth of biological products likely to face patent expiration over the next five years, neither capacity nor capital has seemed to be a constraint for firms such as Sandoz and Teva. But a range of Asian companies not well known in this space are likely to play a significant role in the future, especially after the first round of regulatory approvals are put in place.
In fact, China is already the home of the worlds largest producers of EPO and insulin. Because biologic manufacturing is more capital and skill intensive than chemical synthesis, many potential entrants may be deterred, allowing bio-similar companies to escape the dramatic price erosions common in the small molecule generics segment. Thus, bio-similiars, like innovative drugs, can be an opportunity for Asian companies to transform themselves.
Let us remember that Amgen got to where it is today because of just two drugs (and a lot of lucky patent battles). Teva has accomplished the same feat thanks to a superbly executed comprehensive small molecule generics portfolio, most recently supported by its Copaxone NCE for multiple sclerosis. Both are truly global pharmaceutical companies.
Amgen sports market value ranking among the Top-10 in our industry, whereas Teva is among the Top-20. Many of the top-15 Indian pharma companies have been working toward such a valuation for at least a decade, with Ranbaxy knocking at the doors to enter the Top-50 globally. In our industry with long lead times, Asian biopharma companies deserve to be watched closely over the coming decade.