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T H E M c K I N S E Y Q U A R T E R LY 2 0 0 1 N U M B E R 1

Indias pharma challenge

Ashwin Adarkar, Sankar Krishnan, and Sanoke Viswanathan
Indias drug companies will soon have to compete against global ones by global rules.

he problems and opportunities facing midsize pharmaceutical companies in the developed world are similar to those that will soon face Indias leading drug makers. Historically, these Indian companies have concentrated on reverse engineering patented drugs and selling them locally for 8 to 15 percent of what they cost elsewhere. This strategy is unsustainable, for impending regulatory and demographic changes are making the Indian market more similar to global markets, thus forcing Indian companies to compete against global ones according to global rules. Indian companies must either identify arenas in which they can compete successfully with the large multinationals or develop new models of collaboration.

Signicant changes are expected in the Indian market over the next ve years. First, in signing the General Agreement on Tariffs and Trade (GATT), the Indian government agreed to adopt worldwide patent standards by 2005. Despite industry expectations, the impact on prices is likely to be limited, since only drugs patented in the West after January 1995 will receive protection, and they are likely to constitute less than 10 percent of the Indian pharmaceutical market by 2010. The real impact of Indias decision to sign the GATT will be the stagnant sales facing Indian drug makers, which cannot reverse engineer and launch molecules patented by multinationals. Second, rising incomes and a growing number of elderly peoplesustained by advances in hygiene and medicineare driving a shift in the market away from sales of vitamins and anti-infective and gastrointestinal treatments and toward sales of treatments for cardiovascular problems, central-nervoussystem disorders, and other complex ailments. By 2010, cardiovascular and central-nervous-system treatments, which accounted for only 15 percent of the market in May 1999, are expected to account for 33 percent (exhibit).
Ashwin Adarkar is a principal in McKinseys Los Angeles office, and Sankar Krishnan is a principal and Sanoke Viswanathan is a consultant in the Mumbai office. Copyright 2001 McKinsey & Company. All rights reserved.

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This increased convergence of multinational product pipelines and the Indian market will inspire multinational pharmaceutical majors, most of which have sat on the sidelines, to renew their interest in India. These market shifts will require Indian players to develop new skills and to form new kinds of partnerships. Since reverse engineering promises little or no growth, Indian drug makers need their own source of patentable products. Although taking on the majors may be difficult, Indian companies could develop their own drugs by focusing on products that would be uneconomical for the multinationals to develop and commercialize: any drug with a sales potential of less than $300 million a year. Examples include treatments for diseases (such as tuberculosis) prevalent in low-price markets. In developing these treatments, local companies have the advantages of lower costs and easier access to patients. Moreover, a savvy Indian company that lacked the resources to conduct basic research could buy such compounds languishing in Western pipelines. Capturing the full value of these products, however, will pose a challenge, for Indian pharmaceutical companies typically lack a signicant global sales force; alliances may be required.
EXHIBIT Developing drugs independently Whats ailing India? isnt the only option. Indian companies, with their world-class skills in Composition of therapeutic treatments, percent chemical synthesis and process engiIncrease in sales neering, could be valuable partners $6.5 $3.7 for multinationals. Indian companies 100% = billion billion Central nervous system 6 could, for example, help reduce the 9 Cardiovascular 9 time it takes Western pharma com15 Vitamins 10 7 panies to produce commercial lot 11 Gastrointestinal 11 sizes. With todays time-to-market Anti-infective 32 pressures, six months saved in scal29 ing up production could be the Antirheumatic 6 6 Respiratory 8 8 difference between a blockbuster Other 18 15 and a me-too drug. At one end of the scale, an Indian company could 20051 May 1999 1 in effect become part of the R&D Forecast. Source: ORG-MARG; interviews; McKinsey analysis organization of a large multinational by specializing in a step in the development process or in a set of molecules. At the other end, world-class, world-scale Indian processing hubs could serve global players in areas (such as clinical trials) that leverage Indias cost position.

Decrease in sales

$10.5 billion 10 23 6 10 23 9 8 11 20101

Finally, Indian companies could position themselves as marketing partners of choice for multinationals trying to enter the Indian market. A local company with a dominant franchise and access to Indias 400,000 doctors would be indispensable for multinationals that lack minimum local scale.