Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the August 21, 2007 issue of the Bangkok Post.
By Zoya Vassilieva
This is the second article in a two-part series on the global pharmaceutical industry. On Aug 7, we looked at how the industry is shifting its centre to Asia, and examined the markets in China, India and Thailand. This week we will look at the key issues pharmaceutical producers should consider before determining which country to set up in.
This article is based on a recent PricewaterhouseCoopers' survey featuring in-depth interviews with 185 senior pharmaceutical executives across nine countries: China, India, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.
Are pharmaceutical companies that are currently established in the region planning to expand?
Competition and the need to harness expertise and reduce costs are leading big pharmaceutical companies to explore partnerships and merger and acquisition (M&A) opportunities in the region. A third of multinational companies (MNCs) already in the region have plans to expand within the next year, either through their own ''greenfield'' sites or acquisitions.
Not surprisingly, China and India head the list of target countries and represent the most active M&A markets in the region, with Singapore and South Korea next. Half of those considering joint ventures are prepared to accept minority stakes in cases where local regulations limit the presence of foreign companies.
How are domestic pharmaceutical companies faring in this competitive environment?
Over a third (34%) of domestic companies are looking to acquire pharmaceutical companies. Two-thirds of these are on the acquisition trail in order to expand their domestic presence, but more than half (52%) are seeking to acquire international market share. Indeed, when asked about the objectives underpinning their business growth, 74% of all the domestic companies said that exporting outside their local market was a key goal; with 65% identifying increased global market share as ''important'' or ''very important''. A similar percentage stated that co-operation with foreign companies is a key objective.
Several regionally based companies are seeking to expand their geographical footprint and become pan-regional and, in some cases, global players. A string of recent acquisitions around the globe by Indian companies such as Ranbaxy Pharmaceuticals Inc and Doctor Reddy's Laboratories Ltd are the result of their ambition to become global industry players. In 2006 Doctor Reddy's acquired Germany's Betapharm for $570 million. Ranbaxy led the way with eight acquisitions and is aspiring to be a $2-billion company by 2007.
Is anything impeding the growth of domestic pharmaceutical companies in Asia?
Capital constraints can be a significant brake on growth for domestic pharmaceutical companies. While some are not seeking acquisitions because such a strategy does not fit with their current priorities, 27% of the domestic companies not seeking acquisitions say money is holding them back.
There are a few specialised venture-capital funds to support biopharmaceutical startups in Asia. However, most of these don't have access to a supportive stock market environment, such as a junior market such as London's Alternative Investment Market (AIM).
The implication is that, if funding obstacles could be overcome, around half of all the domestic companies surveyed might be looking for deals.
How are domestic companies contemplating to overcome this obstacle?
While domestic pharmaceutical companies are hungry for investment, and particularly for (R&D), just over a third (36%) would consider selling all or part of their company to foreign investors to raise funds. Not surprisingly, the majority of these companies cite the need to raise cash for investment, although a significant 30% say such a move would also help them gain experience in a foreign market.
Many domestic companies are also looking toward initial public offerings (IPOs) to raise funds. Thirty-eight percent of those surveyed are already listed but, among those that are not, a further 36% have plans to raise capital from foreign capital markets by way of either a public or private share issue.
Where are domestic companies focusing their investment interest?
Fifty-five percent of companies seeking to attract investment from selling stakes in their companies are looking to strengthen their R&D activities compared to 45% looking to invest in sales and marketing and 24% in manufacturing. This reflects the overall strength of the domestic pharmaceutical companies in manufacturing and their relative weakness, compared to MNCs, in R&D.
What are the key considerations for MNCs planning to acquire a domestic company, enter into a new joint venture, or set up a new greenfield operation?
First, one should consider conducting a market study, which involves assessing the size, both now and in the future, in terms of volume, value, key product characteristics, growth rates, share of major players, and product evolution.
Second, one should understand the regulatory framework. Companies need to understand key points of influence as well as the operational impact of regulation.
A competitor and target assessment involves mapping the performance of current players, profiling them, understanding their competitive strengths and weaknesses, assessing them as potential acquisition targets, and analysing their ownership and financial performance.
A thorough examination of the competition structure, including capacity and cost-structure issues, and key success factors for market entry, is vital. As is a supply assessment, which involves identifying the availability of material needs, assessing import alternatives, evaluating suppliers to understand the robustness of the future supply chain, and understanding the consequences of associations entered into.
Finally MNCs should perform a location study which essentially means gathering and analysing data to select the optimal location, including analysis of the supplier base, and any tax and incentive packages offered by development zones.
The above is based on
Gearing up for a Global Gravity Shift: Growth, Risk and Learning in the Asia Pharmaceutical Market
