Title: Innovation strategies in the bulk drug industry Case Study: Unilab Chemicals Pvt. Ltd. and M/s Blue Circle BY Mrs Pooja Gupta Assistant Professor; Bharti Vidyapeeth Institute of Management Studies & Research, Belapur Email: [email protected] M: 9960727539 Dr. Pradeep Manjrekar Head; Research and Extension centre; Dr. D Y Patil Institute of Management Studies, CBD Belapur Email: [email protected] M: 9870348898

Abstract: Innovation is the fundamental basis for creating firm specific asset that enable a firm to achieve sustainable advantage and improve its corporate performance (Howard, 1993). Indian bulk drug industry is expanding at a very fast rate and is an important part of the Indian economy. Many entrepreneurs have ventured in this industry and are now facing competition & price wars. This research paper reviews innovation strategies adopted by the bulk drug manufacturers in India vis a vis their effect on the bottom lines and sustainable competitive advantage. The directors and other members of the management of Unilab Chemicals Pvt. Ltd. and M/s Blue Circle were contacted and interviewed personally by way of semi structured informal interviews. Responses were measured on a ten point scale. The responses have been qualitatively analysed. Innovation (Product & Process) are directly proportional to the growth in turnover & profits. Besides, innovations prove to be the key for continued sustainable advantage and improvement of the bottom lines. The study makes theoretical & methodological contribution to the literature for innovation strategies in the bulk drug industry which would be useful for the manufacturers. Introduction: A literature survey shows that very less study has been conducted in establishing a relationship in between the innovations and the impact on the bottom lines in the bulk drug industry. Like any other industry, Innovation strategies in the bulk drug industry can be implemented at various levels 1. Company Level/Owner

2. Functional Level – Finance , marketing, R&D, manufacturing, information systems and human resource managers 3. Operational Level- plant managers, sales managers, production and department managers Growth is the long run intention of any organisation and is sine qua non for its survival. Growth cycle of a business has mainly five stages, viz, planning, initiation, penetration, accelerated growth and transition.

Approaches

Elements

Scope

Chief Means

INTENSIVE EXPANSION

Product, Product lines & Within Industry Market

Market Penetration, Market Development, Product development

INTEGRATION

Product, Business Area

Vertical Integration Backward Integration, Forward Integration; Horizontal combination

DIVERSIFICATION

Business Area

INTERNATIONAL BUSINESS

Product, Business area

Market, All-inclusive

Within and industry

outside Concentric, Horizontal, Conglomerate

Market, Across country lines

Exporting, Foreign licensing, direct investment, etc

Innovation strategies can be aimed at growth which can be by means of any of the basic growth approaches. The growth can be sustained when a company has a sustainable competitive advantage

especially in the bulk drug industry where the technology gets copied relatively in advance as compared to other industries. This competitive advantage can be derived from two basic themes viz (i) Competitor Centered & (ii) Customer Centered. Competitor Centered implies deriving strategies by comparing your performance with respect to your competitors and for which the BCG, SWOT and finally the financial performance of the competitor is considered. Customer Centered involves studying issues like the type of benefits preferred by the customer, innovations, customer complaints, comparing the potential vs. the extraction rate of the customer, process analyses, etc (R. Gopal 2007). As per Porter’s five generic descriptions of industries, the bulk drug industry is a mature industry. It is the onus of the various companies in this industry to tap the markets by formulating a competitive growth strategy which is its sustainable competitive advantage to reflect on the return on investments Research Objectives The research seeks answers to questions like 1. Which of the innovation strategies at various levels would prove effective for an Indian company in the bulk drug industry to grow 2. How to formulate a competitive growth strategy? Does innovation help in developing competitiveness; competitiveness being measured in terms of turnover, profits & market share? 3. The study evaluates the effect of innovations on the bottom lines. Research Methodology: 1. The study employs the popular case study method for assimilation of facts. Study of Innovation Strategies has been conducted in two companies namely Unilab Chemicals Pvt. Ltd. and M/s Blue Circle; manufacturers and exporters of bulk drugs. 2. Data was collected from the respective industries with regards to the impact of innovations on the revenues & profit margins by way of personally by way of continuous interaction & semi structured informal interviews with the management of these companies and also interaction with the personnel in their research and development departments. Details were collected with regards to two bulk drugs viz chlorohexidine gluconate & cetrimide. 3. Responses were measured on a ten point scale. The responses have been qualitatively analysed. 4. Periodicals and magazines on the Indian chemical industry like the Chemical Weekly Annual and books on strategic management have been referred for theoretical inputs Limitations of the study: 1. Since the study employs the case study method, it suffers from the problem of a small sample size. 2. A lot of the data is confidential in nature and has not been revealed by the company officials 3. In absence of data some assumptions and projections have been made which may have a significant effect on the accuracy of the results 4. The study is based on the bulk drug industry only. Many findings are specific to this industry and hence it is not possible to generalise the findings of the study The Indian Bulk Drug Industry:

Indian bulk drugs market in 2006 was about US$3.29 billion, witnessing a growth of 19% over 2005 at CAGR of 18.81% in the last six years. India ranks 4th in terms of volume, among the top 15 drug manufacturing countries worldwide. Indian companies have the distinction of developing cost-effective technologies for manufacturing bulk drugs and intermediates, conforming to global standards. India has over 80 US FDA approved plants, the second highest in the world. Indian bulk drug market is fragmented with top 10 companies contributing 44% of the market and about 1,323 companies accounting for the balance 56%. Nearly 70% of the bulk drugs, manufactured are exported to more than 50 countries. Contract manufacturing in India in 2006 was USD658.6 million, registering a growth of 48% over previous year. Indian companies have filed 408 DMF's during 2006 out of a total 704. By 2010, Indian bulk drugs market is projected to grow to about US$6.54 billion and contract manufacturing to USD1.5billion. The Pharmaceutical Industry in India is increasingly being recognised as a reliable source of quality medicines at affordable prices and is emerging as a global powerhouse. As we enter the Knowledge Economy, speedy and efficient exchange of reliable information will be a prime requirement for the efficient management of our intellectual capital. The Indian manufacturers of bulk drugs have taken the advantage of the prevalent economic conditions and have accordingly carved their markets. During the times when the import duty was as high as 115%, the Indian bulk drugs were positioned as import substitutes and when the duty fell they have become exporters. The growth which the Indian Pharmaceutical Industry has achieved is mainly due to the Indian Patents Act, 1970 which was one of the achievements of IDMA in strengthening the national sector. The main Industry Associations in India are: 1. Bulk Drug Manufacturers Association (India),

A-24, 2nd floor, View Towers, Lakadi Ka Pul,

Hyderabad-500004, Tel : 3322142 /3316328 2. Indian Drug Manufacturers Association (IDMA), 102-B, Poonam Chambers, Dr.A.B.Road, Worli, Mumbai - 400 018, Tel: 2494 4624 / 2497 4308, Fax: 91-22-24950723, Email: [email protected]

/

[email protected] 3 Organization Of Pharmaceutical Producers In India (OPPI): (established in 1965), Peninsula Chambers, Ground Floor, Ganpatrao Kadam Marg, Lower Parel, Mumbai 400 013., Tel: +91 22 24918123, 24912486, 66627007, Fax: +91 22 24915168, E-Mail : [email protected]

Unilab Chemical & Pharmaceuticals Pvt Ltd: Unilab Chemicals & Pharmaceuticals Pvt. Ltd. is a manufacturing company established in 1978. It is a quality manufacturer of bulk drugs & formulations, APIs (active pharmaceutical ingredients), API intermediates, quaternary compounds and fine chemicals . The Company specializes in the manufacture of antiseptics and disinfectants. Unilab holds all necessary licences and a Good Manufacturing Practices (GMP) certificate granted by the Food and Drug Administration, Maharashtra State.

Head Office Address : 107/108 Anjani Complex, Plot No. 316, Parera Hill Road, Off Andheri-Kurla Road,,

Andheri-E,

Mumbai

-

400

099.

India

Plant Address: W - 32, M.I.D.C., Phase II, Dombivli (East) 421 204, India. Bankers: Industrial Development Bank of India Ltd., Damle Building, Phadke Road, Bajiprabhu Chowk, Dombivli (East), Mumbai 421 201, India. Satisfied customers include: Glaxo, Cadila, Cipla, Johnson & Johnson, Ranbaxy Laboratories, Emeralds Pharma, E-Merck, Rhone Poulenc, Bengal Chemicals, Astra IDL, Vam Organic, Manisha Pharma, Hipoten Biochem, FDC, Super Fine Labs, Government Hospitals Major competitors: Dishman Pharmaceuticals and Chemicals Limited. Bhadr-Raj Chambers, C.G. Road, Navrangpura, Ahmedabad - 380 009, Gujarat, INDIA M/s Blue Circle Ltd.: Blue Circle has three strong manufacturing sites located in the industrial belt of Thane, having close proximity to Mumbai. Jet Chemicals Pvt. Ltd. (JCPL) incorporated in 1969 is the oldest unit built over an area of 12000 Sq. Mtrs. Blue Circle Speciality Chemicals Pvt. Ltd. (BCSCPL) incorporated in 1989, occupies an area of 3000 Sq. Mtrs. Blue Circle Organics Pvt. Ltd. Came into being in July 2004. They have a strong presence in the global market with their expertise being

1. 2. 3. 4.

Gomberg and related reactions and formations of biaryl compounds Sandmeyer reaction Grignard reaction Hydrogenation with nobel metal catalyst

The company is recognised in four major areas: 1. 2. 3. 4.

Pharmaceutical intermediaries/ Fine chemicals X Ray Contrast Media Intermediaries Polymer Modifiers Custom Synthesis and Toll manufacturing

Their production facilities can take up multi-step synthesis. Their facilities are equipped with glass-lined and stainless steel multi-purpose reactor, safety and control system installation. All manufacturing operations are carried out as per ICH Q-7A guideline. Blue Circle also aims at manufacture of products with flexibility and with the regulations in force concerning the environment, safety & health. Innovation strategies employed: Unilab Chemicals & Pharmaceuticals Pvt. Ltd. (UCPL) started with the production of Cetrimide and Chlorhexidine Gluconate. It is in the transition from the third stage (market penetration) to the fourth stage (accelerated growth) of the business growth cycle. UCPL & Blue circle have gone for combination growth strategies. Both the companies are engaged in international business at the very first rung of direct exports. They went for intensive expansion at varying levels. Markets were carefully carved in the developing countries like Africa, Latin America rather than developed countries from Europe & USA. Advantage was that these countries were initially importing from Europe at a much higher price and are behind India in terms of technology by approximately 10 years. Also, this is an industry where profits lie in volumes and these countries will not have market large enough to even achieve break even if they start manufacturing themselves. UCPL & Blue circle have resorted to forward integration by also producing the intermediaries and for some chemicals the packaged product for the end user eg phenolic cleaners. They are also helping their existing customers to set up manufacturing units while ensuring life time partial dependence for the generation of continuous income. Sustainable competitive advantage in the bulk drug industry where the technology gets copied relatively in advance as compared to other industries; comes in the form of continuous innovations. This competitive advantage is derived from the combination of two basic themes viz (i) Competitor Centered & (ii) Customer Centered

Competitor Centered

•

• •

Comparison of various factors w.r.t. the immediate competitors in the market Configuration Costs

• •

Customer Choices Segments

• • •

•

Customer Centered

SWOT Analysis BCG Matrix The analysis of the profit

Comparison of various attributes w.r.t. competitors & its

Fig 3: Successful Bulk Drug companies in India are following a combination approach Product related innovations are in general customer centered and process related innovations are generally competitor centered. As a result of these innovations it is observed that there is either an increase in the price or decrease in the price along with increase in the volume. In any of the cases, the result has been an increase in the return on investment. The process innovations help reduce the cost and hence increase the margins. One of the processes to obtain 98% purity of a molecule, it had to undergo reflux reaction in which Naphtha was used as a solvent, took 125 hours for a batch of 500 cc. They introduced a new wax process by which though the purity was reduced by three percent to 95%, the reflux would be completed in 8 hours. As a result of this twelve batches could be produced instead of just one batch in the same period of time. This amounted to 30% utility cost reduction

Fig 4: Product & Process Innovations result in increase in margin or an increase in volume Innovation Process Innovation Factory Processes

Product Innovation

Factory Forward Processes

Cost Reduction

Cost Reduction Increase in margins

New Product Increase in price

Product Extensions Decrease in price

Increase in volumes

Increase in Return on Investments The factory forward process involves Business Competency Process, Channel Management, Customer Account and Order Execution. It is the most complicated & difficult process. As the Indian Bulk Drug

industry relies a lot on direct exports, the complications get compounded. Effective debtor management becomes vital. The financial analyses give a clear picture of the problem areas of the firm. Eg a high level of debtors indicates that the 4Ps need to be relooked, a high level of raw material inventory may imply that the supply chain needs to be modified. Initially, the import duties were 115% of FOB value and the landed price of the raw material worked out to be almost 2.5 times of the actual price. Market for the bulk drugs was growing in India and witnessed an increase in the number of manufacturers and hence the competition. Unilab Chemicals & Pharmaceuticals Pvt. Ltd. And M/s Blue Circle employed continuous innovations in order to maintain the price level and remain in the market. 1. Company Level/Owner: Unilab Chemicals & Pharmaceuticals Pvt. Ltd. changed its structure from a partnership firm to private limited company 2. Functional Level & Operational level: a. Acquisition of more land for increasing production capacity meant for exports b. Marketing i. In 1970s the only marketing channel that was available in India was groups of traders, brokers and Purchase executives of MNCs who where looking for indigenous products and person to person contact with these people was the only way to promote the product. Slowly there were innovations in communication technology. Later participation in International trade fares (e.g. CPhI Worldwide Pharmaceutical Ingredients in Frankfurt a three day event which attracts everyone from manufacturers to consumers). Being Internet savvy has helped them break many barriers and attract international markets ii. Markets were carved in the developing countries like Africa, Latin America rather than developed countries from Europe & USA. Advantage was that these countries were initially importing from Europe at a much higher price and are behind India in terms of technology by approximately 10 years. Also, this is an industry where profits lie in volumes and these countries will not have market large enough to even achieve break even c. Advantage of all export incentives offered by the government such as import of duty free raw material as well as duty draw back, was taken d. Substantial emphasis on R&D and process innovations was laid. Work was carried out on various kinds of solvents. Major process changes were done in 1995 to improve the yield per unit of raw material consumed e. In case of Chlorhexidine Gluconate, prior to 1990 only ICI was the only major manufacturer in India and the price of this product was Rs.600 per Kg. Along with Unilab Chemical & Pharmaceuticals Pvt Ltd, two other manufacturers entered into this product in

1992-93 and within 1 year the price of this product went down to Rs.350/- per Kg. which was also due to the saving on import of raw material by making this product with indigenous raw material. Size of the market was very small. Subsequently few more companies entered into the market and the price war started. This reduced the product cost and after this most of the companies started exporting. As a result, the price of the products chlorohexidine gluconate & cetrimide were drastically brought down f. The dip in the prices helped increasing volumes and hence the profit margins g. This resulted into a need for further process innovation. h. They purchased latest automated machines. Substantial expenditure on information systems Financial performance of Unilab Chemicals & Pharmaceuticals Pvt. Ltd. Accounting Year

Turnover in Crores

2000-01

5.1

2001-02

7.24

2002-03

9.23

2003-04

11.48

2004-05

12.70

2005-06

12.62

2006-07

14.50

Accounting Year Figure 1

Conclusions: 1. Bulk drug industry is a growing industry. The growth and achievement of the Indian bulk drug industry has been highest among the developing countries. It was established by the study that innovations have a positive impact on not just the bottom lines but also is vital for survival in this industry where the entry of the competitors is marked quite early due to the copying mechanism. 2. Customised strategies are means rather than ends of the growth for the enterprises in the bulk drug industry 3. There is no general formula for formulation of innovation strategies targeted at growth at various levels which would prove effective for an Indian company in the bulk drug industry 4. The combination of the basic growth strategies would depend on the business environment. Though the customer centered as well as competitor centered companies have performed better in the Indian bulk drug industry 5. Sustainable Competitive Advantage in the bulk Drug industry can be attained mainly by way continuous product & process innovations 6. The strategies adopted by Unilab Chemical & Pharmaceuticals Pvt. Ltd and M/s Blue Circle have been found effective in terms of growth, business expansion and competitiveness (competitiveness assessed in terms of turnover, profits & market share). Acknowledgements: 1. Mr. Deepak Vora: Director, Unilab Chemical & Pharmaceuticals Pvt Ltd 2. Naresh Shah: Director, M/s Blue Circle Ltd. 3. Dr. Ramesh Natekar, Head; Research & Development, M/s Blue Circle Ltd. References: 1. Eric Wiklund, International Marketing, Marketing Exports Pay off, McGraw Hill, New York, 1986 2. Francis Cherumilam, Global Economy & Business Environment, Himalaya Publishing House, Mumbai, 2001 3. Francis Cherumilam, International Business, Wheeler Publishing, New Delhi, 1998 4. Francis Cherunilam, Strategic Management, 2nd edition, Himalaya Publishing House, 2005 5. Fred R David, Strategic Management, Concepts & Cases, 10th Edition, Prentice Hall India, New Delhi, 2005 6. Kenioni Ohmae, The mind of the strategist, New York, Penguin Books Ltd., 1982 7. Michael Porter, Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, New York, 1985

8. Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, New York, 1980 9. R. M. Srivastava, Management Policy & Strategic Management – Concepts, Skills & Practices, Himalaya Publishing House, 1999 10. Sak Onkvisit and John J Shaw, International Marketing, Prentice Hall of India (p) Ltd., New Delhi, 1999 11. William F Glueck, Business Policy & Strategic Management, McGraw Hill, 1980 12. Chemical Weekly Annual, Sewak Publicatioons, Mumbai, 2005 13. Indian Bulk Drug Industry Insight 2007, Cygnus 14. Chemical Business Annual, Color Publications, Mumbai, 2005