A hidden “diamond in the rough”

There are companies in the specialty chemical world that have good technologies and product applications. Their unique niche and technologies enhance the performance of their customer’s products. I call them the “real specialty chemical” company. Such uniqueness should have value. However, the “Wall Street mind-readers or investing aficionados” have not had much penchant for them. One can only conclude such an oversight is due to lack of the investors understanding of the technologies of such companies. One such company is International Specialty Products, Inc.

In 2002 ISP went back to being a publicly held company to being a privately held company. Their sales from 1999 to 2001 were around $787 million for each year with profits going through its cycles. In 2007 ISP revenue was about $1.6 billion about 10% revenue growth per year. Samuel Heyman being an astute investor has had margins to his liking in the last nine years with his management. If the margins were not there, he would have unloaded the business.

Since ISP is privately held company and away from the daily Wall Street scrutiny, they have also managed to stay under the acquisition radar. I believe that 2009 or 2010 may be the year when someone will realize their full potential and buy them out. It would have to be a company, which values technologies and would want to cross-fertilize ISP technologies to other applications and realize their full potential.

“Bail out or Hand out” is not the answer but Innovation and Conservation is.

Recent turmoil in the financial markets is taking its global toll. However, this event, once in lifetime event, is also giving us a message and presenting us with an opportunity. The message is “It is time to have innovative technologies that also conserve our resources”.

US Automobile industry lost its focus when it quit innovation in sixties and were not farsighted to raise the fuel efficiency. They fought tooth and nail against raising gas mileage standards. Japanese came with better quality, pizzazz and hybrids. But Detroit thought it was not a good idea to have a “better idea”.
Lately we have read about plants of many chemical companies being shuttered for lack of demand. We will probably hear more such closures before things come back. Bankruptcies would be there also.

I wonder if the closures are a reflection of not having the best technologies to manufacture the products. Had the technologies been such that the feed rates could be lowered or increased to meet the prevailing demand, plant shutdowns could have been avoided. Lack of the best methods suggest that there is an opportunity to have better manufacturing technologies. Better equals high conservation i.e. produce more from less.

Pharmaceuticals, which are disease-curing chemicals, cannot think conservation when they are able to make their profit margins on “human desire” to extend their life. Poor yields, high in-process inventory and producing quality only by checking every milligram are acceptable suggest significant opportunities. Consumer pays for every in-efficiency e.g. inventories, poor quality and costs related with inefficient use of their raw materials. In 2007-2008 we saw loss of employment and knowledge base accelerate. When a pharmaceutical company can close more than 50 plants, it suggests that companies have technologies that need total overhaul. They need to develop and implement technologies for their survival.

Their blockbuster model is dying on the vine and their new product pipeline is heading from gusher to a trickle in the next few years. Pharma needs to create a new business model. Due to toxicity of their chemicals Pharma needs to improve their manufacturing technologies to levels better than “non-disease-curing” chemicals. Higher yields mean higher profitability and less effluent or/and emissions in our eco system.

In my recent trip to China, I saw electrically charged bikes to move around town. Similarly in Europe and China they have low cost and simple solar water heaters on their rooftops to provide them with the hot water for their daily use. Roof top heaters do not look esthetically bad but tell us the inherent character of inhabitant’s and their nature to conserve and use nature’s gift of sun’s heat. A missing rooftop heater suggests a “missing link”. Communities in US have prevented such installations with the thinking that they look ugly and will lower real estate value. Esthetics is more important than conservation.

Chinese company BYD is introducing an electrical car and an Indian company TATA is introducing about $2500.00 car. This suggests innovation is possible if we step up to the challenge.

We need to move from a “consumption zealots” to “conservation zealots”. Conservation and preservation will not result in any hardship but will lead to innovation that will improve profitability. Present slow down is the best time to innovate and we need to spend effort so that we can reap benefits in future.

Is "Creative Destruction" the way to go for the Pharmaceuticals?

Roche Chief Warns of a Likely Shakeout makes an interesting admittance of the need for the change in the pharmaceutical industry.

World is seeing the automobile (premier) industry requesting salvation from the government as they drove themselves in a ditch. Are the Pharmaceuticals heading in the same direction?

Recent Wall Street article "How Detroit Drove Into a Ditch" is an excellent review of the auto industry. It clearly suggests that they lagged innovation and are suffering. Recent admissions by management of General Motors also stated that. Only way out is to innovate and do it in a hurry if they want to survive. Only time will tell but based on their past record, future looks bleak.

Pharmaceuticals have lived on the "blockbuster model" and have won. One player of the team has led them to victory for many years. Now it is time for the whole team to play together.

Unless R&D and Manufacturing become strong, Ethical Pharmaceuticals cannot compete in the global market. Marginally better drugs and personal medicines will not generate the revenue stream once the patents have expired. It is time to compete on the global scale i.e. serve the needs of 6.2 billion by serving across the globe rather than a small percentage of the population. Manufacturing and R&D need to innovate.

Dr. Severin Schwan, chief executive Roche Holdings AG is correct. It is time to change the business model. Are Pharmaceuticals Antithesis of Creative Destruction?
I do not think so. We need to innovate for the long term survival.

Is Auto Bailout a prelude for others to ask for help and an admission of “lack of vision”?

Head Line:

"An Auto Bailout Would Be Terrible for Free Trade"
Does anyone really expect other countries to ignore our subsidies?"

American automobile industry gave the world automobiles and held everyone in awe. However, the dire straights of automobile industry suggest that it never thought much of the future. German cars were always considered a luxury and quality product and never considered a threat for the mass producers. It was the Japanese followed by the Korean cars who really changed the playing field by bringing quality from the get go. Their quality, styling and innovation were the first threat to the survival of the US automobile industry. However, the US automobile industry has been slow to catch up. A recent article in Wall Street Journal How Detroit Drove Into a Ditch gave an excellent overview of how the industry has arrived at its current state.

Japanese brought quality to the masses of the world and the world jumped on quality without paying luxury prices. World was hungry for quality and fuel efficiency and did not get it from American carmakers.

Now the American carmakers are in trouble asking for the government help. If they are given a straw would they ask for more? Would other industries that are not able to compete with quality and cost would ask for government help and protection. It is very possible.

Why are we there? Blame would lie squarely on the management of the companies for the lack of their foresight in innovation and delivering to the customer anticipated fuel efficiency. Whatever happens in the auto world, it will work out for the good of the country. Better management is the answer. Asking for a government handout is taking advantage of the current economic woes rather than being responsible for their own inability.

If we step back and see any similarity with any other industry that has served the human kind but is experiencing some turbulent waters. It is the Ethical Pharmaceuticals.

Since 2005 the Ethical pharmaceuticals have been facing head winds with their age-old “blockbuster” model. They will loose about $60 billion dollars in revenue in the next three to four years. They have very little in their pipeline. They are scrambling to determine how they can sustain their revenue growth. The Generic pharmaceutical companies are also challenging them on their turf.

Would pharmaceuticals be the next in the handout line if they cannot solve their challenges i.e. start growing their revenue with new drugs? History is repeating for the pharmaceuticals as it did for the chemicals, textiles and steel industry. Chemical and textile industries have mostly moved overseas. Steel industry innovated its technologies to survive. May be the time has come for the pharmaceuticals to innovate their R&D and manufacturing technologies which they have acknowledged needs attention.

Is Pharmaceutical Consolidation on Horizon?

Recently I had opined the following. Since then I keep reading views at other websites. [http://www.pharmatimes.com/WorldNews/article.aspx?id=14672]. I still believe that a consolidation is needed to quickly fill the pipeline. Industry is venerable and the only reason Venture Capitalists have not moved in due to the current credit crunch. Once the monetary crunch eases, we should see the beginning of consolidation. Increasing layoffs are suggesting that financial preservation is a must but it is coming at the expense of the basic knowledge base which is going to be difficult to replace. R&D and Manufacturing technologies need to be brought to 21st Century. Even with that, the basic business model will have to be revised. With increasing global effluence, market size will increase. In the increased market size the need for generics will be higher than the ethical drugs.

"If one sifts through and compiles the news about the pharmaceutical companies, a clear trend with respect to their shifting business model starts to emerge. Slowly but surely, major pharmaceutical companies are behind the scene inching toward being a combination of "Block Buster, Bio-tech and Generic" model. This is their last and the only hope. Merck is experimenting a new business model of selling patented drug (Januvia) at one-fifth the US price level in India. Glaxo is venturing in South Africa and Egypt. These are undeclared secrets. Daiichi Sanyo has bought Ranbaxy. I am sure others are in the works.

I believe Ethical pharmaceuticals are not very clear about what they want to be. As a result, they are dabbling with every opportunity they see i.e. riding many boats with the hope that one will take them to the promise land. If they clearly define their mission, they might just need one big and strong boat (it could be a combination of blockbuster, bio-tech and generic) to take them to the goal. This will allow them to properly focus their attention.

Competing with the Generic producers is going to be a challenge for the Ethical producers. Their knowledge base is shrinking through lay-offs. Their manufacturing technology is not current. If the Ethical companies do want to go in serve ethical and generic markets, they will have to have very efficient manufacturing technologies that can offset generic producers cost advantages. They can achieve this by collaborating and/or acquiring Indian or Chinese companies. With the globe shrinking, second option is more likely. If this happens, it will lead to an eventual global consolidation in the pharmaceuticals."

US FDA citations to Ranbaxy are an excellent opportunity

I am sure the deficiencies of the Ranbaxy plants will be remedied. However, the US FDA citations should be considered a positive wake up call and an opportunity for Ranbaxy and rest of the Indian pharmaceutical companies. Only way they should rest easy is exceed any and every global standard. They have to take that extra step, walk the extra mile to establish and exceed the toughest standards. In fact, they could use the opportunity to establish a higher standard that could become a showpiece of the industry.

It is not going to be costly and/or a monumental effort to get to a higher plateau. It just takes resolve to get their. Economically it is not expensive and the return on investment will be significantly better at the higher standard. Customer will be pleased when their quality demand is exceeded. They will always come back even at a higher price.

While Ranbaxy is setting up to meet and/or exceed FDA standards, they and the other Indian pharmaceutical companies should consider producing single specification active pharmaceutical ingredient (API) and formulated product for every market rather than multiple specification API and products for different markets. It will simplify their manufacturing, reduce costs and would take away every bit of laxity, as they will have only one standard to follow.

Ranbaxy and other Indian pharmaceutical companies have to keep in mind that since 2005 they are catering to a much larger customer base. Their job would be simplified and will be cost effective if they catered every market with one formulated product rather than multiple formulated products using multiple specifications API.

If the formulation processes were converted from a batch process to a continuous process, which would be definitely feasible when using single spec API and excipients, many of the problems could be self corrected, as product uniformity would be there. Costs would be lower than a corresponding batch process.

These steps will simplify their total business process, inventory management, manufacturing methods and processes giving them higher profitability. Savings due to these steps would give the Indian companies an unprecedented competitive advantage.

Reshuffling of the global pharmaceutical drug deck

In the last five weeks, we have seen the global generic pharmaceutical playing field change with the acquisition of Ranbaxy and Barr.

Until recently, the blockbuster model has worked for the ethical pharmaceutical companies, but with about $80 billion of ethical drug patents expiring in the next four years and with not much in the pipeline of major pharmaceuticals their business model needs a re-look.

Major pharmaceuticals need to consider a strategy that would allow them to develop new drugs and also serve a large market that needs low cost drugs whether they are patented or otherwise. It could be the last opportunity for the majors to get in the generic business (similar to Novartis).

Recently Merck US took a bold step in this direction without declaring a shift in its blockbuster model (Merck’s low-priced diabetes drug might change a few rules). If they are successful, it would have other majors consider similar options. Acquisition and assimilation of the generics could be an option also.

In order for Merck to have success in selling their patented drugs at a lower price and maintain their profit margins, they will need to lower their API manufacturing and formulation costs. This will require a complete overhaul of their manufacturing technologies i.e. moving from “quality by analysis” to “quality by design.” Depending on Merck’s success, other companies could follow the lead. This would be a giant leap for the pharmaceutical companies from their current manufacturing practices.

Opportunities for Private Equity companies in India

Ranbaxy-Daiichi deal has opened many doors and possibilities especially for the private equity (PE) companies in India (PE firms review plans after Ranbaxy deal). Some PE companies are participating in the pharmaceutical ventures. However, there are large number of Indian companies that could be ripe for PE participation.

The opportunity:

Many of the Active Pharmaceutical Ingredient (API) and Pharmaceutical companies have been producing API and generic drugs before India joined WTO. These companies have flourished as they were supplying to major pharmaceuticals, competing against them, and satisfying the need of low cost generics and ethical drugs. Entrepreneurs who are now approaching their golden age started these companies.

With WTO participation, new set of entrepreneurs have joined in to capitalize on the growing opportunities. These new companies are based on narrow niches.

Entrepreneurs who started many of the companies have majority holdings in these companies. As the time has progressed, succession has been an issue and will continue to be an issue. This is especially true in India. Recent examples are Singh’s at Reliance, Birla’s, Singhania’s, Bajaj, Piramal and the list goes on. Lupin Pharmaceuticals, Sun Pharmaceuticals, Wockhardt, Neuland Labs, Shasun Chemicals, Dr. Reddy’s, Biocon, Hetero Group, Cipla, Cadila Pharmaceuticals, Aurobindo Pharma Ltd. etc. for that matter any of the Indian companies with a majority single family holding can be in play.

With India’s pharmaceutical companies participating in the competitive global world, it is necessary for them to operate at their peak levels even if there are succession issues. Sometimes it might become necessary for the promoters to dilute their holdings or bring in an outsider (e.g. Mittal Steel diluted their holding as part of the Arcelor acquisition, Ranbaxy brought in a GSK veteran, Dr. Brian Tempest), to placate the markets or the corporate governance needs.

PE firms have invested in Indian companies as long as they have confidence in original entrepreneurs/promoters (Emcure Pharmaceuticals-Pune: Blackstone Gr.; Granules India- Hyderabad: ISP Investco, Ridgeback Capital Investments).

PE firms are well versed with Specialty Chemicals. Thus, their foray in API (specialty chemicals with a disease curing value) companies in India is the easiest entry and presents them with a huge opportunity. In India, PE companies could hold a majority position but the operations might have to be operated by the local management as they know the political and social climate and can maneuver in it. Individual options will have to be reviewed.

Ranbaxy and Daiichi Sankyo relationship

Ranbaxy and Daiichi Sankyo relationship is going to change the pharmaceutical landscape. Not only these are two different companies originating from two different (Japanese and Indian) cultures but also two different work methodologies with one common element i.e. to make money for the stakeholders.

Ranbaxy has had confrontational (challenged patents) and friendly relationships with challenged companies. This has worked for them but the question would be how the two cultures marry to make the relationship successful. Takashi Shoda, President & CEO of Daiichi Sankyo Company, Limited has said “While both companies will closely cooperate to explore how to fully optimize our growth opportunities, we will respect Ranbaxy’s autonomy as a standalone company as well.”

My conjecture is that the two strong cultures would have differences and assimilation will take time and would be interesting for all of us to watch. Another question is “Is the Singh family bailing out”?

Would Ranbaxy Daiichi Sankyo marriage open door for other relationships? If they are to happen, they would be between Indian companies and non-American and non-EU companies. Time will tell us.

Ranbaxy, AstraZeneca, Nexium and NEW opportunities

We may not know who is the winner and looser today or in the near future in this settlement of the Nexium deal between Ranbaxy and AstraZeneca. The deal allows AstraZeneca (AZN) to keep its sales of $30 billion for the next five years. However, I believe Ranbaxy had a big win.

In addition, a new way to settle a drug dispute was established.

1. A generic producer sued and eventually settled with the ethical drug manufacturer of API to produce the API and formulate. They also received benefits of distribution of other drugs. Ranbaxy win.
   
   
2. If AZN did make any payments or concessions to Ranbaxy as part of this settlement, we would eventually come to know. It would be another win for the Ranbaxy.

Would similar settlements happen in the future? The answer would be “why not?”

Ranbaxy is a big winner, as they would have the API and formulation know-how and capabilities. They can optimize their manufacturing processes before the patents expire and keep others a bay.

Teva and Dr. Reddy’s may have been stopped for Nexium but they and other generic companies can use the current resolution model to scout for other opportunities.

How many “genies” have been uncorked by the Nexium deal?

New Management style: New experiment in Management?

Merger, Indian Style Buy a Brand and Leave It Alone. Is this story a preamble of new way to manage as the world economy globalizes?

Mr. Mohandas Karamchand Gandhi aka Mahatma Gandhi.” He took on Henry David Thoreau’s non-violence and civil disobedience philosophies, modified them to shake the British Empire, and delivered the “unthinkable” independence to India. He had stepped out of the sand box.

Are Tata, Essar Global, Bharat Forge, Infosys, Wipro are also stepping out of the traditional management box and creating a new management style, which combines the proven management philosophies with the wisdom of empowerment and trust giving people the power to shape their own destiny?

Acquisitions following the proven management styles result in layoffs, as cost cutting accelerates the realization of their desired return on investment. This has worked for many companies but the social and intellectual downside is enormous. It is a major disruption to the company personnel, associated communities, and its knowledge base. It is not easy to monetarize the financial value of these occurrences. Communities readjust and recover. However, the knowledge base is lost forever. Companies in the developed countries are grappling with these especially with the intellectual losses.

If the Indian companies mentioned in the article and other companies are successful with their experiment and succeed in achieving their goals, they will strengthen the social structure and win many friends. It would be a new management style for the twenty first century. It will be an amalgamation of different cultures and philosophies, a real globalization.

Heparin Contamination: effort to maximize profits?

FDA Identifies Contaminant Found in Baxter's Heparin makes an interesting story.

Let us assume that the identified contaminant, oversulfated chondroitin sulfate, appears at the same point as Heparin on chromatographic analysis. If the cost of this chemical is significantly lower than the cost of Heparin API, it presents an argument that how much of this contaminant was added to lower the total cost of the Active being shipped. This was all in an effort to increase profits. If people lost their lives, it did not matter to the API producers.

There has to be a minimum threshold below which side effects of the contaminant were not noticeable. Could it be that the API producers did not know the highest safe threshold? Since they did not know the safe threshold, stepwise increasing amounts of the contaminant were added by overzealous entrepreneurs to lower the cost and maximize their profits. Unfortunately, the recent lots the additive reached the threshold where the side effects were pronounced, some people lost their lives, and others became sick.

We can blame FDA for non-inspection, ill inspection, and Baxter for not having the necessary protocol in place. They are not to be blamed 100%.

Finding the sulfate contaminant is a case of pure adulteration. It is very similar to the pet feed contamination, where melamine was added to increase the nitrogen content of the pet food.

Low or no value additives can be added to bulk up the product hoping that no one will notice. Some very smart people are involved in these issues. They know how to use the knowledge base for profit. Greed comes into play. Unfortunately, people lost their life.

Pharma companies and regulatory agencies have to increase their due diligence and understand mindset of the people who are willing to “make a buck” at any cost.

“Quality by Analysis” cannot compete against “Quality by Design”

FDA Orders Heparin Shipments to be tested at the U. S. Border is the only choice but it is a manifestation of material failure of “quality by analysis” methods.

The explanation of “contaminant being a heparin-like molecule” begs me to ask questions. This is not a comforting explanation but seems like an attempt to placate the audience. Complete details showing the scientific details need to be in print.

Pharmaceutical industry has to implement “Quality by Design” NOW. Had the production of Heparin been done using “QBD” methods, we would not have seen the current global dilemma.

I have said repeatedly that “QBD” is based on “complete understanding” of the manufacturing process, which is the “P” of the PAT. Unless we understand the “process,” we cannot produce quality.

Based on my experiences, complete understanding the processing steps allows one to repeat the mistakes and that is where we need to be rather than playing “Monday morning quarterback.”

Drug safety, side effects, FDA, and its challenges

Recently USFDA announced "Safety First" program for the drugs that are in the market. WSJ reports, “Top Food and Drug Administration officials said this week consumers should expect to see more advisories and warnings from the agency about drug-side effects.”

It is an interesting and an intriguing program. I am not sure of its efficacy and how it will help the consumers. The side effects of drugs that are commercial are public information and available. If one is expecting that the database is going to list every and all side effects, it is not going to do it and is going to come short of what everyone will expect.

We need to revisit and understand what the drugs are. Drugs are toxic specialty/fine chemicals. Fine/specialty chemicals, to a chemist are organic molecules that are mostly heterocyclic ring/s with nitrogen, sulfur, halogen, phosphorous and/or oxygen incorporated in the ring/s and/or in their side chains. It is very likely that they have unsaturated bonds.

Drug evolution, development, and regulatory review process leads to the introduction of many drugs. I am sure during the development process close attention is paid to how the drug will interact with human body. There are checks and balances in place and only the drugs that have no or minimum ill effects enter the approval progression process. I do not believe that the interaction with every possible drug on humans take can be identified and quantified.

Developers and/or the regulators do not know or have where-with-alls of how an unsaturated complex organic molecule is going to interact with another unsaturated complex molecule/s and acid/alkali of the human body. I do not know if anyone speculate and/or can conjecture how the molecules will breakdown and possibly recombine to create a new complex molecule in the human body. Only way to make a scientific conclusion is to actually study the effect of combination of drugs.

Since the interaction of the drugs is happening in the human body, the resulting chemicals cannot be sampled and studied for their good and/or bad effects. We all know that the human body is a well-controlled reaction system. Every bad effect on human body is manifested by an illness, which is called side effect.

Why did USFDA take on this task? They are the “FOOD AND DRUG SAFETY PATROL” and this additional task is being taken on to placate its critics. Everyone eventually is going to treat FDA database as gospel and indicator of all ill effects. It is going to come short on expectations and FDA again is going to be blamed.

In addition, I do not know how they will carry out this enormous task when it does not have sufficient money and/or the manpower to higher priority tasks. This task is impossible at best. It is a loose-loose situation at best.

Heparin and Quality by Design

The Wall Street Journal February 19, 2008 published an article on Heparin.

Following are some excerpts.

“Baxter, which supplies about half the U.S. heparin market, said last week it had temporarily stopped production because of about 350 bad reactions, including four fatalities, potentially tied to the drug. About 40% of the reactions were classified as serious, ranging from stomach pain to vomiting and diarrhea, low blood pressure, speeding heartbeats and fainting.”

In pharmaceutical business, the current methodology to produce consistent performance quality drug is to follow “quality by analysis,” which is analyze everything. In the case of Baxter International, casualties and bad reactions are a clear failure of the prevailing “quality by analysis” culture.

Legislators and consumers are demanding increased inspections. The FDA does not have enough staff to inspect every drug that is imported in US. FDA inspects only 7% of the incoming drugs (FDA inspections). It will not only take increased funding but also time to train inspectors to achieve 100% inspection. We have neither luxury.

Even if FDA could do 100% inspection, they would be following “quality by analysis” methods, which FDA wants the pharmaceutical companies to abandon. It is well known that “quality by analysis” is an inefficient and expensive method of producing drugs. Consumer pays for every mistake, rework, and disposal, if the drugs do not meet their respective specifications.

It has been mentioned that USFDA or EU regulatory agencies should be stationed in China, India and/or other countries exporting drugs. This can only happen if there are agreements in place between various governments. We are nowhere close to such agreements.

If a supplier/manufacturer is behind schedule, there is pressure to release the drug to the market as soon as it is produced. In such circumstances, mistakes like Heparin are going to happen. As more drugs are imported in the future, we are going to hear more about the mistakes. Heparin mistake also suggests that there is a failure on part of the pharmaceutical importer to set up strict standards and stringent protocols. Laxity has to be completely eliminated.

Pharmaceutical industry has to move from “quality by analysis” culture to “quality by design (QBD)” methods. Until this happens, increasing FDA inspectorate and passing new legislation is not going to solve situations similar to the current situation. QBD builds quality in the product from onset. It will change the culture, improve quality and will significantly reduce pressure on FDA and/or any regulatory bodies. Someone has to make a move.

Is close good enough? Heparin fiasco.

The recent fiasco of Heparin being sold by Baxter International is going to lay the blame of FDA (lack of inspection) and companies from China and India for making poor quality product and shipping it to US sellers. This is very myopic thinking.

Companies in EU or US who are importing active pharmaceutical ingredients (API) from China and India very well know which manufacturing facilities in these two countries have been inspected by USFDA and EU regulators. If they are importing API and formulated drugs from un-inspected facilities, then the blame of non-compliance has to be squarely put on the companies selling these products in EU and US.

It is well known that the regulatory agencies do not have sufficient staff to be inspecting every facility. With that being the case, the companies that are selling the pharmaceuticals have shrugged their “corporate responsibility” of selling products that have to meet regulatory standards.

We saw the case of melamine being incorporated in the dog food to enhance the superficial nitrogen content to give the analytical people the “good feeling” of meeting the necessary standards. No one has studied the toxicity of a substituted non-food product on human and animal health. Same thing happened with toothpaste.

Baxter International did not set up the proper protocol with their Chinese suppliers. I am sure they had set up the standards that have to be strictly met. However, there were sufficient laxities in the spec and/or the protocol for slightly off-spec API to pass through. I would not be surprised that the API met every spec but was slightly off spec that if not carefully reviewed would meet the set specifications.

Having manufactured products that have dual use i.e. food grade and non-food grade, I can speculate and speak from experience. In the case of Heparin, the API could not be reworked to meet the specs. Since it was marginally off specification and might meet the spec if overlooked must have been the case for the lots imported by Baxter International.

Press, legislators, and consumers have to look at the facts before they jump to conclusion that FDA is not doing its job and companies in China and India are bad. Any company anywhere if gets a similar opportunity will try to use a short cut and reduce rework, which cuts into profits.

Let us think rationally and understand the facts. Right or wrong, the seller has to be blamed no matter what the facts are. They did not live to their responsibility.

Girish Malhotra

Challenges to Ethical and Generic Drug producers

If the current scenario of “drying of the blockbuster pipeline” and Generics increasing their market share holds, we could see most of the API manufacture, formulation and clinical testing moving to low cost countries. Since “Laws of Economics” prevail, this could be considered inevitable. Ethical and Generic companies have to develop and implement strategies that could give them competitive edge and allow them to move forward on their chosen path. Since Ethical and Generic producers are adversaries, it would be interesting to see the playing out of respective strategies. It is a real Chess game.

Ethical Pharmaceuticals:

Major pharmaceuticals have developed and commercialized blockbuster drugs. However, they have not retained these drugs in their portfolio after the patents expire, as they have been busy developing new drugs. Producing “patent expired” drugs has not been part of their strategy.

Due to high profit margins, Generics have taken over the patent expired drugs and have lately made every effort to take over the patented drugs through litigation. With aggressive entry of Generic producers from Israel, Iceland, and India, the turbulence in the pharma field has dramatically increased.

With the drying of blockbuster pipeline, escalating clinical trial costs, and relentless pressure of Generics to capture the market, Ethical drugs producers are trying to implement strategies to reduce their costs and retain their stronghold on the drug development chain. Some of the strategies being implemented are as follows:

• Outsource drug development·
  
• Outsource active pharma ingredients (API) manufacture and formulations
• Synergize small molecules and/or biotech combinations
• Acquire small biotech developers
• Whatever else works i.e. collaborations

Some of these strategies might work as a short term fix to retain profits. However, the long-term impact of these strategies is going to be significant. The biggest consequence is going to be the shift, disappearance, and/or reduction of knowledge base from “Major Pharma” companies to the outsourced companies. Since the “outsourced companies” are in low cost countries, they have dual benefit of the above relationships. It makes them intellectually and financially stronger to become formidable generic competitors. We are beginning to see the happenings of this.

Generic Pharmaceuticals:

Generic pharmaceuticals are enjoying what I will call best of all worlds. They are basking in an unprecedented growth. I do not believe any of the financial analysts and pundits would have predicted this in the beginning of 2005.

Customers would like to have drugs at lower prices. Generics are able to fulfill this need in every market as a result the demand for generic drugs has increased. This surge has increased generic business dramatically in the recent years.

They have used these profits to grow organically and acquire sites that are being shed by API producers and formulators at significantly low costs. They have also been beneficiary of technology and intellectual property that comes with these acquisitions.

Strategies ⁽¹⁾ being implemented by the Generic companies are unconventional and this is causing additional turmoil in the Pharma field.

Future and strategies:

Pharmaceutical companies have achieved handsome profit margins by inventing new drugs and by producing generics. Customers have paid for every inefficiency in the development, clinical testing, manufacturing, and supply chain. Since the pharma companies have been able to make respectable profits, they never saw a burning need to minimize costs of each step. Everyone has been comfortable in their respective arenas. However, the drying of the blockbuster pipeline and Generics trying to encroach on the playing field of Ethical companies is changing the market dynamics.

The price we pay for the drugs in US and some other countries are not market driven but driven by what the market can bear. Many consider these prices high and are getting low cost drugs every way they can e.g. Canada, Mexico, imports, and/or Internet. This has led to considerable debate and discussions as healthcare costs increase. Wal-Mart and few other companies are offering drugs at low price. This puts pressure on the companies in the supply chain to make an effort to continuously lower their costs. Companies will have to consider and implement new strategies.

If the major pharma companies are not able to develop new blockbuster or biotech drugs, they could start making generic drugs. This could lead to consolidation and formation of “Mega” companies. My definition of “mega” merger is combination of an Ethical and Generic company to be players in both markets. These mega companies not only will develop new drugs but they also will have to make every effort to retain the patent expired drugs as part of their portfolio. If this happens, every step of the supply chain (especially manufacturing technologies) would be critically evaluated and methods implemented to reduce costs. The business model of mega companies could be a combination of market and consumer driven companies trying to maximize their market share. This should reduce global healthcare costs.

Government of India ⁽²⁾ has announced an innovative drug discovery program combining global IT firms (Sun Microsystems), researchers (Royal Society of UK, Imperial College of London, Medicine Sans Frontiers etc.), companies, and young minds at India’s scientific laboratories to invent drugs at a fraction of the cost of a multi national company (MNC) developed drug. An open platform of drug research like Linux development is an interesting and innovative concept and path. Success here would genericize and commoditize pharmaceuticals and add additional pressures on pharma companies to implement technology improvements to reduce costs. Other business models will emerge and it would be interesting. I expect that better than 50% of the pharmaceutical market would be a commodity market in the next five years and we will see prices drop.

⁽¹⁾ Generic Antidepressant May Affect Wyeth http://www.forbes.com/feeds/ap/2007/12/20/ap4461011.html?partner=alerts accessed Dec 20, 2007

⁽²⁾ Govt to rope in young minds to invent cheaper drugs http://economictimes.indiatimes.com/News/News_By_Industry/Healthcare__Biotech/Govt_to_rope_in_young_minds_to_invent_cheaper_drugs/articleshow/2635842.cms accessed Dec 20, 2007

Girish Malhotra

Year 2007 in Pharmaceuticals

Year 2007 might be remembered as an eventful year for the Pharmaceutical industry. I have not kept a tally but the number of layoffs and plant closures are significant. I do not believe anyone would have thought about this five years ago.

Pharma industry has had a myopic vision. They have believed in that the pipeline will always be full and the “generics” will live on crumbs. It never invested in upgrading manufacturing technologies. Simpler technologies could have prevented generics from taking over the crumbs. Crumbs are now becoming stronger, boulder and they will haunt the majors.

Unfortunately, the pipeline is sputtering and has leaks. Now the majors do not know what to do. The world needs cheaper medicines to live and generics can fill the need.

Jacob Schumpeter of Harvard said that industries go through “creative destruction” and it is a necessary part of the progress. Is the Pharma heading that way?

Girish Malhotra

Environmentalism, Technology and Human Life

Environmental conservation became a way of life in early seventies. Every manufacturing industry had to comply with appropriate effluent standards. Conservation technologies were developed and implemented to meet necessary regulations. Chemical industry used either of the following options to comply with the regulations.

• Improve processes to maximize conversion of the raw materials to finished goods so that the waste treatment load is minimized.
  
• Develop and use technologies to treat and dispose the unconverted raw materials and intermediates.
  

Commodity, specialty, and fine chemicals, due to their competitive pressures maximized their efforts to improve the raw material conversion and relied on option #1. However, the Brahmin cousins of chemicals “pharmaceuticals,” who have a disease curing and life extension value due to their toxicity to bacteria have mostly relied on the second option. This has been possible as pharmaceuticals have been able to achieve their profit margins due to relatively low competitive pressures and their ability to charge their demanded price. Customers have paid for the low conversion of raw materials in useful products as well as disposal of the undesirable reaction byproducts.

Since 2005, the global pharmaceutical playing field has suddenly seen many players challenging their big brothers. With about $100 billion dollars of ethical drugs coming off-patents and pressure from their generic brethren, major players are under considerable pressure to meet stock market and shareholder expectations. Lack of blockbuster drugs in the pipeline is also adding to their woes.

Brahmins who until recently were “untouchables” have become vulnerable and are scrambling to retain their profit margins. It is surprising that they are following the same road that has been unsuccessfully travelled by many in the chemical and other industries. Recently we have seen layoffs, plant closures and they are accelerating. Research is moving offshore. I guess the Brahmins are no longer the “untouchables.”

Short term with the current strategy the Pharmaceuticals might be able to retain their profits. However, there is a downside and it is disappearance of the knowledge base while the generics becoming stronger competitors. Generics are taking advantage of this situation and expanding as they have a growing customer base, (almost everyone in the world wants lower cost drugs).

Is there a way out of this dilemma? There is and it is through manufacturing technology improvements. Companies need to develop processes where they do not have a double jeopardy, which they currently have. Double jeopardy is low raw material conversion to finished goods and then spending monies to convert the toxic materials to products, which can be properly and safely disposed to meet the necessary environmental regulations.

Pharmaceutical manufacturing plants may meet the established environmental standards but the small percentage of chemicals in the effluent could still be toxic to the plant and aquatic life. Thus to prevent damage to the life, pharmaceutical companies might have to meet an “ecotoxic” standard.

Ecotoxic definitions and control limits would have to be developed for most of the pharma raw materials, their intermediates, and actives. This can be a prolonged and expensive process. This will be resisted by the industry. It is difficult to conjecture the implementation costs but would be high. All this could raise costs and potentially make drugs more expensive.

Is there a choice and can we reduce the cost of drugs rather than raising them to achieve a certain eco-balance? Life extension also becomes a part of the economic equation. These issues can be discussed and I am not sure of the “correct” answer. However, while all this is debated, the pharmaceuticals will still be needed. Is there an economic interim solution? There is, and it is “need to improve the active pharmaceutical manufacturing and formulation processes.” Some could say that in the overall scheme of things, such an exercise is not worth the effort. Such efforts will not only reduce pharma costs but will also reduce the toxic load on the effluent wastewater treatment and soil. And finally, if some one says or believes that in total scheme of things technology improvement and cost reductions are not important and they have “NO” impact on our planet’s environment, then we need to think about the legacy we will leave behind for the next generation and the generations to come.

Girish Malhotra

What is India?

I just returned from India and the changes I see in the last 18 months are enormous. It begs a question "What is India?"

India is a complex mix of every imaginable culture, color, creed, religion, caste, and social structure. In 2007, India celebrated its 60^th Independence anniversary. This is a milestone but I do not look at India as a 60 year old but a 16-year-old youngster who has a “can-do” attitude. Why the 16 year old?

Even though India became independent in 1947, it was shackled by its stringent policies, which suppressed economic growth and bread every ailment that goes with it. In 1991, by stroke of crisis, luck, quirk, and/or their combination, then Prime Minister Mr. P. V. Narasimha Rao changed the course of India on advice of the current Prime Minister, Dr. Manmohan Singh, Finance Minister P. Chidambaram and others. Thus, a sixteen year.

Any visitor can be awed by India when they land at any of its gateway airports. Traffic, people, vehicles, and chaos at any road intersection overwhelm many visitors from “the developed countries.” For some strange reason this chaos teaches India tolerance and desire to get ahead. This chaos also lets an Indian look at multiple scenarios simultaneously and come up with a solution.

I look at India as a runaway train with its 20-40 year old having a time of their life. This is evident by their totally blue-sky goals and objectives. Can they make it?

My answer is yes. Majority of the 16 year old grow up to be a fine young person. They do stumble but with societal support, they quickly recover, grow stronger, and move forward. This is how I see India.

Star date 2025 will give us an interesting picture. Signs are there.

India's stock exchange index has gone from 10, 000 to 20,000 in twenty months. Bill Gates used to be the richest person on the planet. Last week Mr. Mukesh Ambani became Numero Uno.

Girish Malhotra