On Feb. 11, the pharmaceutical world in India was shaken up by Novartis India Ltd.’s decision to fire 400 employees following a ‘strategic arrangement’ to hand over some of their matured brands to Dr. Reddy's Laboratories Ltd. While this is being called a deal where Novartis will continue to manufacture those medicines, they handed over sales and distribution rights to Dr. Reddy’s which will book product sales.
Novartis was hardly the first to make such a move. Last October, Eli Lilly sold off its best-selling brands to Cipla Ltd. and retrenched 120 employees. Lundbeck A/S shuttered operations in India and let go of employees. Pfizer Inc. ‘transferred’ its established portfolio to Mylan NV to establish a new company, Viatris. GSK plc sold many of its old brands over the last few years, mostly piecemeal to multiple companies as they ‘optimized the portfolio’. Sanofi SA’s legacy consumer brands were sold to private equity-backed Universal Medicare recently. Now it seems like Novartis’ turn.
This isn’t India-specific. Overseas, Sanofi sold its consumer brands to german firm Stada. AstraZeneca plc sold a strong legacy brand to Germany’s Cheplapharm. Novartis AG sold its legacy branded business to Sun Pharma in Japan. Meanwhile, MSD (Merck in the United States and Canada) spun off its old portfolio under Organon.
With so many pharmaceutical multinational corporations selling off or discontinuing the promotion of their established brands while unable to build new ones without patent protection, is this an opportunity for Indian pharma? Or will technology evolve faster than new players being able to take control? Will such 'Digital Darwinism’ eventually force the pharma industry, as a whole, to only manufacture and supply drugs to non-traditional players such as the Tata Group who now increasingly own customer relationships with doctors (TataHealth), patients, and their families (Cure.fit and 1mg).
Why Are MNCs Letting Go Of Marketing Mature Brands?
The reason offered by company executives in all these cases is almost the same – the decision is driven either by a ‘strategic’ shift into more lucrative therapy areas, ‘future businesses’ or by the need to reduce a ‘drag on growth’. So, what makes companies do this? One strong reason could be to downsize. Although Novartis claims downsizing is not the reason for its decision, it could well be the consequence of the decision to divest the Sandoz business globally. While the brands involved in the arrangement with Dr. Reddy’s were not strictly generics under the Sandoz arm, Novartis’ review could have well extended to all the mature or ‘established’ brands in its portfolio, including these.
When these decisions are made, operational efficiency then demands a ‘reassessment’ of business. Such reviews often result in either a selective or a full sale of their established portfolios.
Are Pharma MNCs Giving Up On India?
With India steadily migrating from a growth market to one that needs deft management of operations, companies will opt for a lean structure. If shedding flab is what the doctor prescribes, the easiest way to do so is to outsource business operations. If Dr. Reddy’s takes care of sales and distribution, Novartis can easily lay off 400 employees, as this significantly reduces their selling expenses which are sometimes around 35% of the brand P&L, thus improving margins.
However, some Novartis India shareholders may not have seen it as an exercise to make the company leaner, but one which may have potentially weakened the Indian-listed vis a vis the unlisted entity in India called Novartis Health Private Ltd. or NHPL. The move was perhaps construed as a precursor to a delisting effort by Novartis India considering that a majority of their employees are now in the unlisted entity which will also be the way through which the company will launch all its future businesses thus depriving minority shareholders of dividends.
While such decisions are perfectly justifiable from a business sense, they send mixed soft signals to other stakeholders in a $44 billion pharmaceutical market.
A series of such deals may send a message that MNCs are not truly interested in India. For decades, they used their massive market size to sell products but did precious little to develop the market for the potential it has. Unfortunately, neither have the domestic pharma players. It just happens that MNCs have a choice of other markets open to them and so can reduce their interest in this geography temporarily.
From CRAMS To CDMO
At the moment, the policy framework in India does little to keep MNCs interested. With continued ambiguity around compulsory licensing, the government not formalising the Uniform Code of Pharmaceutical Marketing Practices, leaning towards import substitution, and expanding price control, it is unlikely that we will see MNCs think really hard about growing their Indian businesses. With India expected to grow its pharmaceutical market by around 3x to $130 billion by 2030, as per an IPA-McKinsey report, this is not a small market to ignore, and therefore, commercial interest in the geography ought to remain strong.
Over the last decade, the Indian industry rose to popularity as the world’s destination for contract research and manufacturing services or CRAMS. While that acronym cramped up quickly, a new one is replacing it – CDMO, which stands for contract drug manufacturing organisations. Private equity players such as KKR & Co, Carlyle, Advent, and ChrysCapital are showing interest to invest in Indian API, bulk, and contract manufacturing companies and have acquired Indian generic players with strong manufacturing and intermediate research capabilities, such as JB Chemicals, Piramal Pharma, and Integrace.
‘Innovative’ MNCs appear to be all but giving up on India, and the domestic industry is looking at strong non-traditional competition from digital health platforms such as Tata Digital, JioMart, Amazon, and Apollo 24X7, which provide not just medicines but everything from diagnostic apps, doctor consultation, counselling, diet and exercise options as well as medicines. All of these services are delivered to people as a ‘healthcare at home’ model. Is the Indian pharma industry now slowly moving towards becoming a hub of outsourcing? As ‘Digital Darwinism’ catches up, and the industry unwilling to adopt new ways of marketing to a fast-evolving customer, will legacy pharma be relegated only to manufacturing and supplying medicines?
Salil Kallianpur is Founder & MD of ARKS Knowledge Consulting, and a former pharmaceutical industry executive.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.
RECOMMENDED FOR YOU
POPULAR