The last few weeks (or is it months?) there’s been lots of references to ‘the base business.’ For some years in the early part of this decade, everyone – generics companies and their followers in the form of analysts and the media – was riveted by the western generics markets -the billions of dollars worth of opportunities, the ‘one-off’ windfalls from patent challenges – on the one hand, and R&Dlicensing deals – milestone cheques, and the potential royalty payments – on the other. The bedrock of every Indian company – the branded generics businesses in India, Russia and other similar markets was given short-shrift.
Big mistake. Turns out these could well be the saviours. R&D is now seeming like a really, long haul. It is also clear now that the US generics market is a race to the bottom as far as pricing is concerned and Europe is pretty-much headed the same way. On the other hand, markets like India and Russia seem to provide a great opportunity to ‘hold’ price once the brand is established. And this in spite of the US having no price controls and India having a National Pharmaceutical Pricing Authority. The Indian and the US generics markets represent two ends of the spectrum – one is fragmented with inadequate quality controls, the other is the opposite and highly-regulated. The former is perfect for brand-building – since brands are associated with quality – and therefore premium pricing for well-established brands. The latter, on the other hand, creates an environment where price is the only differentiator – the regulators take on the onus of ensuring that there are no quality differences once a product is approved – which is in fact the original purpose of having generics on the market.
Anyway, the result is that India ends up being a more stable, high-margin, steady-state sort of business in spite of pricing controls which are mostly limited to a small basket of products, than the US. No doubt this is the case with other branded generics markets like Russia or Brazil.
The ‘base business’ is now getting the place it is due in analyst projections, and media coverage. Everyone knows the emerging markets are where the growth is. But it is going to be challenging. Analysts will tell you it is a lot easier to track the US generics market than, say, an African market. Why analysts, the pharma industry admits as much. Chris Viehbacher, CEO, Sanofi-Aventis who is leading his company’s push into emerging markets, says that a majority of his investors know very little about these markets.
“I said to a number of them (investors), that I have a euro 750mn business in Africa growing at double digits. If I had a euro 750mn medicine growing at double digits in the US you would be all over that. You would be buying the weekly prescription (data), you would be forecasting that out, and you would happy as punch you know how to do that. You don’t know the first thing about what goes on in Africa – what are the competitive factors, what products are you selling, how long is that, what are the margins. So we are spending a lot more time actually educating our own investors..I mean they are getting there – you have to understand that it is a lot more simple – investors got a spread sheet at the end of the day and they’ve got to fill it and the US gives you absolute granularity of data. You can buy daily prescription data if you want.”
The fact that companies like Sanofi-Aventis are putting greater focus on these markets, brings me to the second point. Indian companies’ base business is under threat. And it is not just from local competitors but also from Big Pharma like Aventis looking to make up for their own past sins – the over-reliance on blockbuster sales in developed markets. In recent months, AstraZeneca, Pfizer, Sanofi-Aventis have all talked about the branded generics push. Hitherto, they were content marketing select brands to top-of-the-line doctors. No longer. As Anandh Balasundaram, MD of AstraZeneca says, “you can’t exploit the (India) opportunity by being only in niche segments.”
No doubt this is the case in other fast-growing markets. Not good for Indian generics companies and their investors alike.