“Why join the Navy if you can be a pirate?”

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This week, the pharmaceutical industry around the world and in India bore witness to how prices of medicines were decided more as a matter of executive grit and determination than any other factor that affects market dynamics. When the chief of India’s top pharmaceutical company, Cipla Ltd., announced an up to 75% cut in prices of some important cancer drugs in its portfolio, it expectedly evoked a general response of relief from all quarters. The one announcement that especially kicked observers, was the huge price reduction in the generic copy of Bayer’s kidney cancer drug, Nexavar. This was the same drug that the Indian Patent Office (IPO) had, in March, allowed another Indian company, Natco, to make and sell in India despite its original research company Bayer, holding a valid patent.

The decision was then hailed as one that would benefit Indian patients at large – both because Nexavar became relatively more affordable at Natco’s price of Rs 8,800 per month against Bayer’s price of Rs. 2.8 lakhs a month and also because this decision of the IPO had set a precedence for pulling up other profiteering companies. Yet, the man who walked away with the “Humanitarian of the Year” title was not Natco’s chief, but Dr. Yusuf Hamied, Chairman and MD of Cipla.

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What most people seemed to have missed was that Cipla didn’t introduce its generic product at this price point. It simply reduced the price from Rs. 28,000 to Rs. 6840 per month for a generic version that was already on the market. And, this happened only because Natco had pegged the price of its product at Rs. 8800 per month. Before that, when Nexavar was the only option available to patients, Cipla sold the same product at Rs. 28,000 per month!

So what seems to be the case here was that with a reference price of Rs. 2.8 lakhs, Cipla priced its product at Rs. 28,000 per month (a tenth of market price), and when Natco brought the price to Rs. 8,800 per month, Cipla simply cut its price to Rs. 6840 per month (approx 25% of its original price to still stay the cheapest). Dr. Hamied clarified today that while he was being humanitarian, he certainly wasn’t doing charity. There was a business angle to it and he didn’t deny it. That the price of the product, even at Rs. 6840 per month, is out of bounds to over 90% of Indians is probably what he meant when he said he wasn’t doing charity. Therefore the question, why not make it really affordable while you’re at it? The reason is explicitly offered by Dr. Hamied himself. Its not because Cipla would lose money in the bargain, but because physicians in India associate the quality of the product with its price. So, if Cipla priced its products very low, the doctors who prescribed them would worry about the quality. Seems it’s more about doctors than patients, doesn’t it? Did you hear concerns for the suffering humanity in that argument? I didn’t!

Interestingly, the same yardsticks do not seem to apply when these companies view opportunities overseas. While bidding for tenders in developed markets, most generic companies price their products at a significant premium over the price of the same products in India. Even though these range in the bottom quartile of the category, they are still quite high. And by quoting the least price in large value tenders, generic players are able to bag these orders – despite the high prices – simply because they are lower than the even higher prices of the innovator brands.

So, as Cipla did before Natco triggered the price spiral in the Nexavar category, generic drugs can price themselves just a little lower than the innovators and make significant profits. The question therefore is, do generic manufacturers sacrifice profits a little bit in India and appear “humanitarian”, while making a lot more money in the developed world?

Steve Jobs had once asked of his competitors in utter dismay, “Why join the Navy when you can be a pirate?” suggesting that they took the easy way out by copying Apple’s products and not sweating it out by creating better products (or services) of their own. It is more harmful to customers in the long run when innovation dries up and newer products that can create better value don’t emerge.

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This does not behoove of an industry that holds within it sparkling talent, enviable human capital and an inextinguishable competitive spirit. India must create game-changing moves, not those that can raise unflattering remarks, but those that customers will see most value in and place a premium on. The best successor for Apple is not some cheap Chinese imitator but Samsung, preferred by customers the world over for its innovative and appealing products. That is a worthy way to be remembered. Not as a pirate, but as one who sailed with the navy, proudly.

10 thoughts on ““Why join the Navy if you can be a pirate?”

  1. Nice article sir..When the entire media is celebrating the price cuts and cheaper drugs no one is caring about the adverse impact it’s going to have on disease management in the long term..Indian regulators are stifling innovation with a short term view by reducing the rewards to the innovators…Indianized prices like in the case of Januvia will be the best strategy to change this scenario..

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    1. Ramesh, thank you for reading my blog and for your comment. I have always maintained that pharma marketers must not focus simply on price but on creating sustainable value. The price game (in my opinion) is relative and creates limited value for patients. Therefore, simply focusing on it is not desirable. Your example of Januvia best illustrates this point. If all that Januvia did was to bring the product in at a India-friendly price, we would, in a few months be debating about how MSD is also profiteering. The combination of a good price and sustainable VAS for patients is what made it the blockbuster that it is today!

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  2. Thanks Salil for bringing up the issue on price reduction and camouflaging as humanitarian stand. I was thinking is it possible for even the Navy to do justice to their job if the threat of Pirates are not there. I strongly feel if the only when pirates pose a threat the actual colour of Navy comes out.

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  3. Nice post!

    I understand Cipla’s generic Nexavar was an “at-risk” launch. What exactly does that mean? And what stopped the other players from launching their own “at-rist” Nexavars?

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    1. Rangan, I am not sure so the explanation that I offer is merely a hypothesis. Cipla’s generic was launched in direct violation of the Patent Act and Bayer rightly sued it. The fact that the bet now paid off (although Bayer is challenging the ruling at the Intellectual Property Appellate Board) shows the genius of Cipla’s management and its ability to manage risk. Few companies were willing to take that risk and probably thats why we didnt see other copies on the market. This judgement by the Patent Controller of India is likely to reduce risk on such moves albeit for life saving drugs now. But it all depends on the way the Nexavar case progresses which is why its a “landmark case”.

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  4. The ‘humanitarian’ ammunition was provided by Bayer’s ‘pirate’ pricing! Could Bayer have done it better with humanitarian pricing and taken the market, media and society at large into confidence? Now no matter what the court outcomes are; Bayer will be looked at as a company that considers profits more important than patients. And that’s just not Healthcare Business.

    Lessons for other ‘Navy’ companies – factor in the Pirate factor when launching IP products, especially in countries like India.

    I still believe that most MNCs don’t read the Indian market rightly – they need an India specific strategy and that includes pricing that bonds with the community and does not alienate the interest groups.

    Excerpts from McKinsey Quarterly – “For multinationals, the key to reaching the next level will be learning to do business the Indian way, rather than simply imposing global business models and practices on the local market. It’s a lesson many companies have already learned in China, which more multinationals are treating as a second home market. In India, this trend has been slower to pick up steam, although best-practice examples are emerging.”

    Full Report link – https://www.box.net/s/cf73e350cb9e410b0d6e

    Bottom-line – To win a market filled with pirates – think like a pirate but use the firepower of the Navy!

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    1. I have my views on Bayer’s pricing, but I totally agree with your observation that companies do not have an India-specific strategy. I have written about this in earlier posts as well.

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