For Cadila Healthcare's Pankaj Patel, Patents Are Key to Growth

Pankaj Patel
Chairman and MD, Cadila Healthcare
Age: 61
Rank in the Rich List: 26
Net Worth: $3.2 billion
The Big Challenge Faced in the Last Year: Revamping Zydus Wellness and its distribution system
The Way Forward: Focus on building R&D capabilities to enhance drug discovery programmes; steering the company on the path to zero debt and crossing Rs 10,000 crore in revenues by 2015


Pankaj Patel won’t watch movies on a long flight. He would rather scribble on a piece of paper—number-crunch costs and timelines of his new projects.

Nor will he pause to soak in the views of a beautiful Ahmedabad skyline from his top-floor office. The chairman and managing director of Cadila Healthcare doesn’t have a moment to squander. Not since he took over the family business from his father in 1995.

Over the last two decades, Patel has built pharma brands and expanded either through joint ventures or strategic acquisitions of niche pharmaceutical companies across the globe. Today, with about 15 acquisitions, four joint ventures and 11 manufacturing plants, Patel’s Cadila Healthcare, which was a Rs 200-crore company in 1995, has revenues of Rs 7,224 crore (as of FY14) with net profits of Rs 820 crore. 2011 was a particularly defining year for the company as it crossed the billion-dollar mark in revenues.

With a market share of 4.25 percent, Cadila Healthcare has become the fourth-largest pharmaceutical company in India (after Abbott Labs, Sun Pharma and Cipla). But Pankajbhai, as his employees know him, wants more. He has set a revenue target of Rs 10,000 crore by 2015 for his son Sharvil, now the deputy managing director of the company, and for his chief executives. More significantly, he wants Cadila to become a research-driven and original drugs company by 2020. And this is the difficult task.

The pharmaceutical business model in India is largely a generics play—that is, producing cost-effective and quality drugs that go off-patent. This approach has created billion-dollar companies. But there’s a flipside: A pure generics business invariably leads to a price-point tussle, what Patel describes as a “value destroyer”. He believes having its own patented drugs accords the company a considerable pricing power and higher profit margins. It also helps it fund the next drug discovery programme and move out of the price battle, which has lately become a race to the bottom. (Consider how, unable to move to the next stage of original drug discovery, companies such as Ranbaxy Laboratories, Piramal Healthcare and Paras Pharmaceuticals have dropped out of the race and been bought out by multinational companies.)

For Cadila to survive the next decade of pharma wars, Patel says his company needs to discover and patent its own drugs. In pharma parlance, this is called discovering an NCE (new chemical entity). Cadila’s first—and so far only NCE—was launched in India in September 2013. Lipaglyn, which treats diabetic dyslipidemia (by controlling blood sugar and cholesterol levels), did well in India, and Patel now wants to take it to the American and European markets; he has already filed applications with the US Food and Drug Administration seeking approvals to conduct trials.

Lipaglyn was developed at a cost of about $250 million for over 12 years. But its success has given Cadila and its R&D team the confidence to attempt more such initiatives, and has convinced the management to allocate necessary funds for further drug discoveries. According to Patel, Lipaglyn would fetch the company Rs 100 crore in revenues over the next five years from India alone. The drug could rake in $500 million in global revenues once it receives the approval to sell abroad.
 
“I strongly believe we can discover drugs. Being a scientist [he holds a master’s degree in pharmaceutical sciences], I believe we can create a breakthrough,” says Patel. “People will come to recognise India as a drug discovery destination. It just has to happen once. Just one drug can change your fortune. But in drug discovery, you also have to be lucky. And I believe I am lucky, otherwise I wouldn’t be here talking to you.”

Luck has had a role to play in Patel’s journey: He has taken risks few companies are willing to. Remember, developing new drugs is not only cost-intensive, but the investment in time and money can often come to naught.

Risk-taking, however, is not new to the man.

In 1995, Cadila Laboratories (set up by his father Ramanbhai Patel in 1952 along with Indravadan Modi) had split. Both firms agreed to share the Cadila name in their respective flagships, Cadila Healthcare (for the Patels) and Cadila Pharmaceuticals (for the Modis). (Pankaj Patel later decided to call his group Zydus Cadila, where ‘Zydus’ was derived from the Greek god Zeus.)

At that point, Patel had to start rebuilding Cadila Healthcare. For that, he sold all his assets and land (except his family home) to build a plant where he could produce quality drugs and exercise complete control over the manufacturing process. “I was advised by everyone to drop the idea of my own plant, and outsource manufacturing. It would have saved me money and also quickly rebuilt the business, but I was very clear that, to become a global company, I would need my own plant,” he says. “I was not gathering assets, I was building the business. Asset is a consequence of a successful business and not vice versa.” In 1997, he put in Rs 50 crore to set up the plant.

 Thereafter, Patel adopted a combination of organic and inorganic strategies to grow his business; he acquired a few companies over the years, some to get a foothold in new global territories, while others to acquire talent and knowhow. Acquisitions have taken place both domestically and internationally. But Patel’s mantra has been the same. “I never sack people,” he says, “especially if it is an international acquisition.”  

He has walked the talk. In 2003, Patel acquired Alpharma France, the French subsidiary of American company Alpharma Inc, to venture into the European generics market, the second largest after the US. The transition could have been painful but Patel ensured that all employee voices were heard; he held multiple meetings to address the French team’s concerns and did not replace the French employees with Indians.

“Meet, communicate, listen to them and keep the conversation going. That’s the only way to convince them that you mean well for them,” he says about his employees. “Today, that company of $5 million is [worth] $50 million with just one Indian employee [in the finance division]. And, although the French work only 36 hours a week, my employees work more than that without any compulsion. They want to grow the company like I do. I always trust people and, by and large, every organisation has good people. They just need motivation,” he adds. Patel has adopted this philosophy across a series of acquisitions in the US, Spain, Africa and Brazil.

It helps that people have always been a priority for him. At Cadila Healthcare, too, there are many senior employees who have been around for over a decade or two. For instance, Ganesh Nayak has worked in the company since 1977. He started as a field officer and after 36 years, is the executive director and chief operating officer, and the only professional employee on the three-member Zydus Executive Board. (The other two board members are Patel and his son Sharvil.) The board devises long-term strategy for the two group companies, Cadila Healthcare and Zydus Wellness—both of which are listed entities.

Beyond acquisitions, Patel has also forged successful joint ventures with Abbott, Hospira, Takeda and Bayer. In some cases, this was to convert a contract manufacturing relationship into a partnership: Patel was aware that a contract manufacturing relationship hinges merely on the price factor; the cheaper option typically wins. To circumvent this uncertainty, Patel would offer to split profits from the manufacturing contract and invest that money into a joint venture with the partner. Result: Instead of just making drugs on contract, Cadila Healthcare has formed JVs where new drugs are produced jointly or marketed in newer territories, capitalising on the strengths of both partners. For instance, the 50:50 JV with Bayer—apart from the manufacturing relationship—is for marketing products in India focusing on women’s health care, diagnostic imaging, cardiovascular diseases, anti-diabetic treatments, and oncology.

As a rule, Patel allows the partner company to appoint a finance head, such that there is trust and transparency in the relationship. “Although we would run the company [the JV], we always ensured that our partners had complete knowledge and access to our financial records so as to eliminate any doubts that can affect our relationship,” he says.

Patel’s ambitions have taken him beyond pharma. He has established another set of businesses housed under Zydus Wellness. Consider brands like Sugar Free (a sweetener for diabetic patients), EverYuth (a skincare brand) and Nutralite (a healthy substitute for butter). The company, with revenues of Rs 403.64 crore in 2013-14, claimed 93 percent of the market in the category of sweeteners.  

However, the Zydus Wellness business is where Patel’s son Sharvil has his task cut out. The company’s financial performance has taken a hit in the last two years. “We ran it [Zydus] like a pharma company, with its sales and distribution strategy akin to that of a pharma player. That won’t work as this is pure FMCG play,” says Sharvil.

Zydus has since hired a professional CEO, altered its distribution model, and is improving its marketing strength to ward off competition from FMCG giants including Hindustan Unilever and Procter & Gamble.

Stock market analysts are also concerned about the increasing debt in Cadila Healthcare, which has a 75 percent stake in Zydus Wellness. Other top pharma players in the country have zero or very little debt on their balance sheets. (Most of Cadila’s debt was incurred during acquisitions and expansion of business.)

But, Patel remains unfazed by the rising debt. And his confidence is reminiscent of the times (1995) when he had approached then ICICI Bank chief KV Kamath for funds to set up his business after the split with the Modis. After assessing select Cadila brands, the bank agreed to take them as collateral—a first-of-its-kind decision by any bank.

Says Kamath, now the bank’s non-executive chairman, “Ultimately for someone starting on a new journey, an independent journey, all you have is your reputation—either what you have acquired or the one you hope to build. In Pankaj Patel’s case, he had these brands and had to leverage them. To me, the brand became an extremely critical collateral, which he was willing to put on the table to make his aspirations come true.”    

Patel, who now owns 75 percent of Cadila, is ready to part with his stake to fund further acquisitions, and rank among the top 10 pharma companies in the world by 2020. But wealth, he says, should also be shared. “Dad is at a stage where he feels he needs to give back to society,” says son Sharvil. Pankajbhai has been instrumental in building two schools in Ahmedabad; he heads the Gujarat Cancer Research Institute, and has also helped build a hospital and medical school for the underprivileged in the state.

A technocrat like his father, Sharvil did his PhD from the John Hopkins Bayview Medical Center in the US, and believes that a knack for business can be acquired over time by working with people and learning from mentors. And that is why he took up PhD over an MBA. It was critical for him to have a science and pharma education; it has earned him the respect of his team because they know that he is qualified to hold important discussions with scientists and doctors alike.

As Sharvil assumes a greater role in Cadila over the next few years, there will also be a generational shift in the company’s management cadre. Many of the core team members, who have built the company alongside his father, are about to retire. And Sharvil is building a new team to take over their responsibilities.

The senior Patel, meanwhile, has given up his duties at the manufacturing plants, at Zydus Wellness (he recently resigned from its board), and in a few departments at Cadila. “Dad knows exactly what machine can give what output at our manufacturing plant. He knows precisely how long it will take to finish a project and at what cost. But he has just given it all up for me to figure it out and learn in the process,” says Sharvil.  

And, Pankajbhai is investing his energies in scaling up the Zydus Research Centre. He wants the focus of his scientists to be on discovering the next billion-dollar drug, and he is confident that it will happen in his lifetime. Like he says, “I believe I am lucky.”