New head. Newer thinking

IT ISN'T EVERY day that a CEO joins, is introduced to the team, and then, a few hours later, proceeds to overturn the company’s established business model. But on Feb. 1 this year, that’s what Subhanu Saxena did at Cipla, Mumbai-based pharma company. Saxena had joined as CEO that day, and was sitting with the top management team, which was discussing buying 51% of Cipla Medpro. Cipla had a long-standing agreement with South African Cipla Medpro under which the South African company distributed Cipla drugs. In November 2012, Cipla had made an offer to buy 51% of Medpro for roughly Rs 1,200 crore.

At that first meeting, which included the 76-year-old Cipla chairman Y.K. Hamied, Saxena suggested that Cipla take over the South African company. His reasons were convincing: The price would not be steep, since Medpro manufactured very little, and, more important, it would give Cipla an entry to Africa.

In many other companies, this would have been par for the course. In Cipla’s case, what Saxena was suggesting was almost revolutionary.

The company, started in 1935 by Hamied’s father, K.A. Hamied, had always taken the organic path to growth. In fact, Saxena’s predecessor, joint managing director Amar Lulla, had told analysts that Cipla would never do buyouts or have overseas subsidiaries. It took Saxena eight days to convince the board to jettison close to eight decades of conservatism. By the end of February, Cipla announced a revised offer to buy 100% of Cipla Medpro for Rs 2,700 crore (2.4 times FY12 net profit), a deal it completed two months later.

Saxena’s been at the helm for just about four months, so it’s far too soon to tell if his brand of growth will work. What is clear, however, is that Cipla needs some fresh ideas and action if it is to regain the sheen it had till even a couple of years ago.

Cipla still has a formidable reputation in the industry, thanks to Y.K. Hamied’s unflagging fight against what he calls a restrictive patents regime, where low-cost generics are not allowed to be sold even in developing countries as long as there’s a patented version of the drug available. In the early 2000s, Hamied made history by taking on big pharma companies that were selling anti-AIDS drugs or AIDS treatments at astronomical prices in African countries. Hamied worked with Cipla’s scientists to come up with a cocktail of drugs that cost $300 (Rs 17,856 at current rates) a year, compared with the then cheapest available drugs at $12,000 a year. He has never minced words when talking of how life-saving drugs must be made accessible to all.

With Hamied taking care of the drugs and regulatory end of things, Lulla managed the day-to-day operations. Between the two of them, they took Cipla to No. 2 spot in the domestic pharma market, and the company was on course to becoming the largest player. Their aim was to make Cipla a force to reckon with in India, as well as a significant exporter of bulk drugs globally. Then, in April 2010, Lulla died and Hamied was left in command. In a recent interview to a television channel, Hamied acknowledged that he was not responsible for day-to-day operations when he was managing director. A chemist by training, he said he was more involved in research and development. He wasn’t available for comment for this article.

Without an iron hand on daily operations, Cipla began to slide. In recent months, Cipla has lost its place to Sun Pharma. From a market capitalisation that was double Sun’s a decade ago, Cipla’s market cap is now a third of it. Younger companies, such as Dr Reddy’s and Lupin have also become more valuable than Cipla by market cap.

IT WAS NOT just Lulla’s death that caused Cipla’s slide. Competition was getting fierce and Cipla’s conservative model wasn’t what the times demanded. By 2011, Hamied was worried enough to seek help; he hired McKinsey, and asked the consultancy to point holes in Cipla’s strategy, as well as possible solutions. Among other things, McKinsey recommended a change in top management, making Cipla run entirely by professionals and not necessarily by family.

As part of a broad plan drafted after the McKinsey exercise, Hamied started building Cipla’s marketing arm in the U.S. and Europe. Also, for the first time, Cipla set up a human resources department; Lulla had created a flat organisation, where all decision-making was left to a few top managers. That worked under a long-time hands-on manager like Lulla, but Hamied knew he could not carry that on. Hence, a more conventional organisational structure was created. Hamied hired Pradeep Nair from Thomas Cook to set up the HR department, and is now setting up a legal team, essential in an industry as litigious as pharma.

Most telling, Hamied stepped down from his executive roles a week after Saxena took over, sending out a clear message that Cipla was going to be run by professional managers. Saxena had been hired from Novartis, where he was in charge of global product strategy and commercialisation. At Novartis, he was also part of the Global Pharma Executive Committee, responsible for marketing, sales, global medical affairs, and health economics. Before that, he worked with companies such as Citicorp, The Boston Consulting Group, and PepsiCo, in Europe, North America, Africa, and Asia. Apart from his global work experience, Saxena comes armed with a graduate degree in engineering from Oxford University, and an MBA from Insead, France. By bringing him on board, Hamied is sending out a clear message that Cipla will no longer be solely focussed on India; it will now be taking on the world.

Saxena, meanwhile, has given himself four key tasks (“I don’t like a long list of things to do; just four to focus on will bring better benefits,” he says) that he expects will yield results in the next 18 months or so. The first is to continue what Hamied began: creating a structured organisation and staffing it. Saxena has already hired an international head, and plans to do the same for domestic business. He is in the process of identifying 200 managers to groom the next level of talent in the company, so as to not create the same void that Lulla’s death created.

Apart from hiring a head of international operations, Cipla has hired two top executives from erstwhile partner, Israeli pharma giant Teva. This is part of Saxena’s agenda of growing Cipla’s international presence in the next one year or so—his second task. Over the next few years, Saxena expects Cipla’s export income to increase by 70%, most of it from developed markets. He is betting big on Cipla’s strength in the respiratory and nasal spray business, an $8 billion to $10 billion opportunity in the U.S. alone. “Saxena’s knowledge of the European market could come in handy to get approvals, and Cipla has a good pipeline of products to reap rewards from,” says Tarun Shah of Vadodara-based pharma research firm MP Advisors.

Saxena has already set up a quality-control team, whose head reports directly to him. This is another of his four tasks, and an important one in the backdrop of quality issues faced by companies such as Ranbaxy and Sun Pharma. And finally, he is taking a hard look at Cipla’s portfolio and plans to plug what pharma analysts say are huge gaps. For example, in therapeutic areas such as CNS-(central nervous system) related illnesses, Cipla hardly has any presence whereas Sun is a clear leader.

Most of Cipla’s portfolio is for acute care (antibiotics) and it has fewer drugs for chronic ailments such as diabetes, cardiovascular diseases, and cancer.

Besides, Saxena is focussing on some of the basics necessary to run a large corporation. Cipla will shortly implement SAP to bring its information systems up to speed. It’s later than most to this party, but Saxena hopes that the increased efficiency will make up for the late implementation. Most large Indian companies implemented SAP, an organisation-wide software program which gave real time operational and transactional information to managers to improve efficiency, in the 1990s.

WHAT CIPLA IS doing is by no means new—Dr. Reddy’s Laboratories (DRL) and Ranbaxy (in the ’80s and early ’90s under Parvinder Singh) had envisioned similar structures and grew their businesses in the U.S. a decade or more ago. According to Sanjiv Kaul, managing director with investment advisory firm ChrysCapital, the three original stalwarts of Indian pharma were Hamied, Anji Reddy of DRL, and Singh of Ranbaxy. Kaul, who worked with Singh in Ranbaxy before heading the pharma practice at ChrysCapital, says the three took distinctly different routes to grow their companies. For all three, the U.S. was the largest market, and the ticket to quick growth.

Singh invested heavily in setting up a marketing network mainly in the U.S., believing that distribution was the key to size. Reddy, meanwhile, invested 10% of sales in launching products in the U.S., and spent huge sums on litigation. (Other companies invested only around 5% of sales in launches in new markets.) Hamied, however, was far more conservative. He had once said that spending aggressively on marketing was equivalent to burning cash. His chosen way to grow was to create manufacturing skills and be the preferred export partner for overseas firms such as Teva, IVAX, and Watson. Lulla also stayed focussed on being the domestic market leader, which was growing at an average 13%.

To understand how all this matters to Cipla, it’s important to understand the way the U.S. pharma market functions. To get the USFDA to approve a drug for sale in that country, an Indian pharma company has to file a DMF (drug master file) or an ANDA (abbreviated new drug application). The DMF is to get approval to sell bulk drugs to companies in the U.S., which would then formulate them into tablets and other dosage forms.

The ANDA process is far more complicated and risky, but when the approval comes through, a company stands to make windfall gains. These applications are filed for drugs on which the patent is likely to expire soon. A generics company can file an ANDA for this drug, and if granted, will be the sole manufacturer of that drug for six months, after which other generics makers will be allowed in. In the case of vital drugs, the generics company can make huge profits in those six months. However, companies that hold patents for such drugs can file for an extension if they can prove that the drug has been altered in some way. Often, the patent holders challenge the generics companies in court for filing an ANDA on a drug for which an extension has been sought. This leads to long and expensive litigation. Sun Pharma has to pay $550 million, or a year’s profit, for infringing on Pfizer’s patent. This is the kind of loss that Hamied did not want to face, and so he preferred to file DMFs and sell bulk drugs; Cipla has filed very few ANDAs.

The focus on lower value bulk drugs instead of dosage forms meant that Cipla’s growth path, especially abroad, was very different from the competition. In FY13, Sun Pharma’s U.S. sales stood at $1.1 billion compared with less than $300 million for Cipla. Cipla today manufactures in 34 locations in India and is building several more units in a special economic zone in Indore primarily to focus on export markets. This also means that Cipla has more employees than competitors—it has 20,000 employees on its rolls compared to about 15,000 each for Dr. Reddy’s and Sun Pharma. This despite sales being 30% less than the other two. Saxena says this is because Cipla is a predominantly Indian operation, “unlike other companies that have a much larger proportion of revenues from overseas markets”.

His international focus, starting with the Medpro acquisition, should help even things out. Saxena’s focus is on increasing Cipla’s direct presence in overseas markets, rather than selling to bulk customers. He has already brought down the number of these buyers from 1,000 to 800, and wants to reduce this drastically, saying Cipla can serve some 50 to 60 such customers. “The focus will continue to be efficient, technology-led manufacturing, but we will increasingly sell directly to customers rather than through agents,” he says.

Saxena says respiratory products will be a top priority for the next few years, and Cipla will stay away from expensive acquisitions and launching generics that can lead to expensive litigation with patent owners. At the same time, he does not want to diminish Cipla’s contribution in the global fight against AIDS; the company is the global leader in HIV medicines (by volume), thanks to Hamied’s efforts a decade or so ago. Anti-AIDS drugs contribute to almost 15% of Cipla’s sales though competition of other Indian firms is making the business difficult.

Saxena’s focus areas are clear: Increase direct presence in overseas markets to move up the value chain, and rejig the India strategy to re-establish leadership. “I’m extremely competitive and there is no way I am going to give up the lead I have,” he says, when asked about his India strategy. Cipla’s big advantage in India is that it uses the bulk formulations that it sells abroad to make dosage forms for the Indian market. This allows it to maintain a cost advantage.

Kaul says that Cipla is moving in the right direction. He feels that at $30 billion, the Indian pharma industry is just 3% of the global $900 billion market. As drug companies find it difficult to discover newer therapies and drugs, the opportunities for generics are only increasing even in markets like the U.S., partly fuelled by President Barack Obama’s thrust on cheaper medicines. “India is in a sweet spot with a strong local market and great manufacturing skills,” says Saxena. And that’s just what the doctor seems to have ordered for Cipla.