Paresh Vaish – Director at The Boston Consulting Group.

Price Controls is the Key to Managing Healthcare Costs in India.

Governments around the world are increasingly concerned with managing the costs of delivering healthcare to their citizens. The Government of India’s focus on reducing healthcare costs is a welcome one as well.  However, price control of pharmaceuticals is unlikely to be the answer. 

First, more that 80% of the healthcare spending in India happens not on pharmaceutical products but downstream in the healthcare value chain.  As a result, forcing companies to control pharmaceutical prices will yield minimal impact – e.g. even a 10% reduction in pharmaceutical prices would only reduce overall healthcare bill by 1-2% or so.    

Second, there is little that price control can achieve that competition will not. Given that India is essentially a generics market, for each molecule sold in the market there are often 30-40 companies producing the same molecule and competing for market share. Any company which attempts to charge excessive prices for a molecule will rapidly find it is under priced by another player and losing market share. 

Third, India has great potential as a R & D base for MNC pharmacos.  Part of the reason foreign pharamacos do research in a market is the opportunity to sell their newly discovered molecules in that market.  Doing research in such markets makes sense because MNCs have opportunities during the clinical trials phase to build relationships with doctors who could later prescribe their newly launched products to their patients.  However, if there are excessive price controls, MNCs may feel they would not be able to market their products in India (not only due to unremunerative pricing in India but also re-export of lower priced products from India to their home markets) and prefer to shift research to other low cost countries like China.  This will have two negative effects: not only will investments in India be reduced as MNCs choose to do their R & D elsewhere, but also new medical breakthroughs might not be available to our people. 

The obvious question the above raises of course is how can overall healthcare costs be brought down substantially. One opportunity to tackle these costs is offered by the concept of disease management.  This concept is based on the fact that most healthcare costs (over 80%) are result from complications that arise from improper management of a disease.  For example, many see India as the diabetes capital of the world.  Diabetes is a disease whose effects on an individual’s quality of life can be controlled if the patient works closely with his/her doctor and takes medication to manage the same.  However, if the disease is not managed well, diabetes can lead to severe complications including blindness, heart disease etc. the managing of which contributes the lion’s share of the healthcare bill for our citizens.  The magnitude of this opportunity becomes clear when one realizes that of 34m people estimated to have diabetes in India today, for example, nearly 50% are undiagnosed.  Further, many of those who are diagnosed do not follow prescribed treatment.   It is not surprising; therefore, that many of these individuals develop complications related to untreated diabetes thereby incurring huge healthcare costs. 

The government could partner with players in the Indian healthcare system to develop disease management programmes.  Key initiatives here might be catalyzing diagnostic tests on patients with higher risk of incidence of diabetes, increased coverage of medical practitioners in rural markets to manage patients with diabetes, patient education programmes etc. In this way, costs related to complications will be controlled and patients will have a far superior quality of life.   Indeed, a state in the USA undertook exactly such an exercise and managed to reduce healthcare costs dramatically. 

In summary, catalyzing disease management programmes could not only substantially reduce healthcare costs but also yield a much higher quality of life for the Indian citizen – an achievement of which the government could be truly proud. 

Indian pharmaceutical sector

The pharmaceutical industry in India is going through heady days. With business volumes expected to rise, storage needs are poised to grow. Our survey indicated that storage, inter alia, received the top spending priority by the CIOs who participated in our survey.

About 57 percent of the CIOs we interviewed from the pharmaceutical sector rated storage as the priority spending area along with information security, customer-facing applications, network management and systems integration.

“We have a lot more business coming into India especially for technical trials and would need to ramp up our storage to accommodate the same,” says Radhakrishna Pil-lai, CIO, SRL Ranbaxy.

Companies are already witnessing a surge in stored data. According to a top Biocon official, the company had one terabyte of stored data on its systems this year. “As per our estimates, 2007 will see an increase in another terabyte,” says Radhakrishnan Menon, Group Head – IT, Biocon. The other factor that would boost the storage market is the exponential increase in drug discovery data.

Further, companies going for standards’ compliance have found their storage capacities being reinforced. For instance, Pillai notes, because SRL Ranbaxy is accredited by the College of American Pathology, the company’s storage system has to ensure that patient information can be retrieved within four hours time.

Industry scan

The Indian pharmaceutical sector has been registering decent growth figures owing to the global pharmaceutical brands coming off- patent. Major biopharmaceutical drugs have already come off- patent in 2004-06, and as per industry estimates, drugs worth $ 70 billion are expected to come off-patent over the next few years. “Indian bio-generic drug manufacturers are already gearing up to grab a significant share offered by these opportunities,” says Dr Jayashree Mapari, Industry Analyst, Healthcare Practice, Frost & Sullivan.

The other factor that’s driving growth is the widening scope of offshore Research & Development (R&D) opportunities in India. Paresh Vaish, Director of the Boston Consulting Group in India says that Indian pharma companies are well positioned to generate fast value for global pharma players by taking on contract research and clinical trial work.

India’s outlay on pharmaceuticals to reach $ 16 billion by 2015

India’s outlay on pharmaceuticals to reach $ 16 billion by 2015 says The Boston Consulting Group

The Boston Consulting Group today launched Looking Eastward- a report which explores the opportunities offered by China and India to reinvigorate the global biopharmaceutical industry. As threats to their profitability loom, multinational pharmaceutical companies (MPCs) are increasingly looking at offshoring R&D to China and India to help them increase productivity and reduce costs. While historically the biopharma industry has lagged in hopping on the offshoring bandwagon, it is catching up as the regulatory and competitive environments in both countries improve.

Speaking on the launch, Mr. Paresh Vaish, Vice President  & Director said,” The India pharmaceutical is posed for growth and the report highlights the benefits offered by both India and China for multi national pharmaceutical companies. The wise path is one of planned engagement, defining a medium- to long-term R&D offshoring vision that harmonizes with the company’s global R&D strategy.”

To help guide companies in developing a strategy, the report provides an in-depth review of the current state of play in biopharma in China and India, as well as the primary benefits and risks associated with offshoring R&D in both countries. In addition, it shares a wealth of data, case experience, and analysis on the specific opportunities afforded by both China and India and across the R&D value chain.

Both countries hold great opportunity to meet the R&D productivity challenge. But to most effectively create value through offshoring in both the short and the long term, companies must see the big picture and build an integrated strategy that balances the advantages and the risks. Whereas many R&D activities currently offshored to China and India have been launched and managed in an ad hoc fashion, those companies that carefully implement a more integrated and deliberate strategy will have the greatest advantage in the future, The Boston Consulting Group (BCG) concludes in its recent report, Looking Eastward: Tapping China and India to Reinvigorate the Global Biopharmaceutical Industry.

An effective off shoring strategy will have to be flexible to accommodate constant shifts in both countries’ R&D landscape—including shifts in capabilities, availability, and risk factors. At the same time, MPCs will need to accommodate changes in their own internal environment, including budgetary constraints and the corporate appetite for risk. This applies whether an organization is just starting to explore the opportunities in China and India or has already been down the off shoring road a number of times.

Basis research and experience the report has developed a three-part framework to help MPCs build their strategy and execute it. The key elements of this framework include developing a range of scenarios to help define the vision, choosing the optimal business model and migration path for the company, and ensuring rigorous implementation with appropriate precautions to manage the risk. Besides this, the report includes a number of case examples and best practices to highlight what drives success.

MPCs’ offshoring strategies should involve both countries in both the near and the longer term, but China and India require differing business models. For example, outsourcing some of a company’s ‘excess’ leads to India is a great way to quickly ease bottlenecks and access a broad and reliable vendor base. In contrast, the optimal business model in China is generally the captive R&D center, which helps ensure a stake in that country’s huge potential market in the longer term. These and other potential business models must be evaluated against the specific company’s needs.
Looking Eastward: Tapping China and India to Reinvigorate the Global Biopharmaceutical Industry is the latest in a series of BCG reports examining R&D productivity in the pharmaceutical industry. Together with this in-depth analysis, four previously released companion reports help companies tackle the underlying issues of R&D productivity and the path to increased value. Two recent publications in the series separately cover the opportunities in China and India, while the others examine the broader framework and additional approaches to enhancing productivity in biopharma R&D.

Boosting profitability in your Pharmaceuticals business

No regrets, only results: Boosting profitability in your Pharmaceuticals business

As the Indian Pharmaceutical market becomes increasingly competitive, Indian Pharmaceutical companies and MNCs operating in India alike will need to consider every source of potential profitability that they could tap. A key driver of this will of course be dependent on which of several alternate strategic paths they adopt which was referred to in an earlier article.  However, these firms would also do well to consider a number of what we would call ‘No-Regret Moves’.   These are steps that companies could take independent of whatever long term strategy they choose to pursue. There are at least three categories of no-regret moves pharma companies could pursue: 

Reducing sourcing costs:

Globally, raw material costs comprise a relatively small proportion of revenues and hence are not a focus area.   On the other hand, in India due to the lower prices prevailing in the market, material costs can often account for 30-40% as a percentage of sales for a pharmaco operating in India – and this figure does not even include the ‘indirect spend’ which we discuss later in this section.  As a result, companies can benefit substantially from an effort to reduce costs of outsourced materials.   In our experience, cost reduction comes from multiple sources – companies that focus purely on pushing vendors to reduce price rarely capture even 25% of the opportunity to reduce sourcing costs.   For instance, certain raw materials which used to have to be imported by many pharmaceutical companies have recently become available in the local market. By identifying these and sourcing them locally, Indian companies can reduce costs substantially.   Other savings come from working with suppliers and R & D to assess whether the specifications of the items they are buying e.g. packaging materials can be modified given what competitors are doing, newly available technologies and package design to reduce costs. One pharmaceutical company which conducted a systematic analysis of its sourcing costs found that it could save costs by introducing a creative change in packaging: A leaflet with indications for a medicine which used to be inserted with a bottle  containing the formulation was eliminated completely and the same indications were simply printed on the packaging. The resulting saving was almost 20% of the total cost of the product.  Similarly, the same company was able to achieve more than 10% savings in packaging costs by rationalizing the number of different types of cartons used to ship formulations to its distributors.    A third idea involved dropping a measuring cup shipped with certain liquid formulations when marketing indicated that customers rarely used this item, preferring instead to use a teaspoon to measure the syrup. Indirect spending such as travel, insurance, bank charges, telephone bills are often not reviewed by sourcing cost reduction efforts.  These can and should also be studied as they usually yield double digit savings opportunities as well.  

Ramping Up Sales Force Productivity:   

A second source of value creation is in boosting the productivity of the sales force of a Pharmaco as measured by the sales or profit generated per sales rep.  Companies frequently find that benchmarking with their competitors they are well behind on these measures.  Further, even within their own company there are often large variations in sales/rep across individuals.  Our analysis indicates that Indian pharmaceutical company sales force productivity varies by up to 100% between the best performing company and the weakest company on this dimension not unlike the US market where sales/sales rep vary by more than 100% depending on the company.  While sales force productivity comparisons are affected by product mix, they are nevertheless indicative measures companies would do well to review.Addressing this issue involves focussing on two dimensions – the efficiency of the sales force i.e. how well does the sales force cover the market and the effectiveness of the force i.e. how well do individual reps perform once they are with the prescriber.One Indian Pharma major which undertook such an effort found that a large part of the market of high potential, large prescribers was not well covered by its sales force which was focussed mostly on smaller doctors who were easier to access and meet.   Addressing this issue alone yielded a more than 50% increase in the market the firm had access to.   A Japanese pharmaco found that while it was covering all the key doctors, its sales reps were very poor at closing sales with doctors and that its sales reps spent a lot of time in administrative tasks away from doctors.  A major sales force training and redeployment exercise went a long way to boost profits.  In both these cases, the companies found that by a focussed effort in this area, they could secure in excess of a 30% increase in revenues.  In a relatively flat market, the Japanese company was actually able to realize a 30% growth in revenues for 3 years in a row(leading to a doubling of sales after 3 years) by pursuing a systematic sales force productivity programme. Boosting sales force effectiveness also creates two other sources of value:  First, companies which have higher sales force productivity are likely to be more attractive partners of choice for foreign companies looking for marketing partnerships in
India.  Secondly, as the mix of drugs sold in the Indian market evolves in a post patent era, there would be an increased need to have a more sophisticated sales force which adopts the latest techniques adopted by world leaders. 

Pricing:  

Pricing is the most powerful operational lever a pharmaceutical company can deploy.  This is a valuable lever inspite of the price controls currently in force for some molecules.  A 1% increase in price overall typically translates to a 3-5% increase in profits. Our work in this area suggests that a systematic focus on pricing can typically increase profit by between 3 and 5 percentage point of sales.  In the Indian context where a number of products similar to each other are sold, Indian pharma companies would do well to benchmark their prices, margins and product volumes to the pricing that competitors are showing in the market.  One Indian Pharmaceutical major which had the lion’s share of a molecule class observed that its price was also much lower than that of its immediate competitor and that its margins on this product were minimal. By increasing its price substantially but still keeping it well below competition, it found that it could maintain its market share, still sell at a lower price than this competitor but make a substantially greater profit through the increased margins.   As many of the above examples indicate, it clearly pays to ‘look inward.’ As pharma companies operating in
India begin their strategy deliberations about whether to tap unregulated markets overseas, or pitch to be manufacturing or marketing partners to global giants, etc. they should simultaneously work to ensure that they are operating at maximum profitability given the current business they have. With this approach there can be no regrets, only results. 

Paresh Vaish is a Director and Abhinav Sinha is a Principal at The Boston Consulting Group, Mumbai, India 

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