Friday, September 08, 2006


Indian generics companies


Gina S Krishnan

Some months ago it was rumoured that Ranbaxy Laboratories and Cipla were in talks about a merger. Both sides strenuously denied that discussions were on. But not before the virtues of such an alliance, if it ever happened, became evident.

The therapeutic strengths of Ranbaxy and Cipla (oncology, cardio-vascular diseases, vaccines, etc.) are similar. Both companies are present in the US generics market — Cipla as supplier of active pharmaceutical ingredients (API) and Ranbaxy in branded generics. In that sense, their business lines are complementary. A merger of the two would create a Rs 7510.59-crore player, which would be among the world’s top five generic players. There would be considerable efficiencies derived by streamlining a sales force that currently overlaps, pooling together of R&D resources and so on. That is not to be so.

However, the big question in the current global pharma environment is: how long can Indian companies turn their backs on consolidation?

With the Matrix-Mylan deal, the obvious answer is, not very long.
There are 3,000-odd pharma companies in India. Barely 50 of them are of a size that counts. All these companies were born in an era where process patents were recognised. Over the years, thanks to their mastery over biochemistry and reverse engineering, these companies have prospered. A few have also made a name for themselves globally. (see patents story)

Unfortunately, this ‘golden’ era is about to end. From 1 January, India has ushered in a product patent regime and, therefore, it is only a matter of time before multinational drug companies start targeting the country aggressively.

More significantly, the nature of the generics game and the API game is also changing rapidly. Innovator companies are fighting back by entering into sweetheart deals with challengers going for out of court settlements and launching authorised generics. Generic companies are seeing multiple day one launches leading to price erosion of up to 90 per cent in the first week of the launch, something unheard of even two years ago.

Meanwhile, hitherto unknown Chinese companies have entered the API space, considered to be the completely low-end, commodity aspect of the pharma industry. As a result, both margins and prices have crashed. Yet, Indian companies, with their small, fragmented capacities are continuing to compete against one another. “They are killing each other,” says an observer. Consider that India has one of the world’s largest capacities for cardio vascular diseases; but the capacity is fragmented across the top 50 companies.

The global generics industry has already seen a round of consolidation with the total number of significant players down to six from 14. Teva has bought Ivax, Watson Andrx, Sandoz Hexal, etc. As the previous article argues, the reason why Matrix’s N. Prasad decided to ally with Mylan was that he believed Matrix needed scale to survive, something that could come only through an alliance.

Pharma sector observers like Vijay P. Karwal, executive director (healthcare investment services), ABN AMRO, advisors to Matrix on this deal, say that so far Indian companies have shied away from buying each other out because they are almost always family-run. Emotional attachment to the family-run business is more significant than a dispassionate business decision,” he says.

Adds Puneet Bhatia, managing director, Newbridge India: “For many companies in India, the world is still the same. They have to look at the world and take cues from that market. That is the only way forward.”

While Karwal and Bhatia may not be overly optimistic about consolidation in the sector, there are a few pointers that indicate that that may not be the case.

The first reality for Indian pharma companies is that to survive, they can either add scale or move up the value chain (primarily, more R&D). Now, as the experience of big players like Sun Pharma, Ranbaxy and Dr. Reddy’s Laboratories has shown, the latter path is fraught with risks and uncertainties, which smaller players may not have the ability to stomach. That pretty much leaves them with option number one.

In this context, the Matrix-Mylan deal will act as a trigger for other deals. Usually, all it takes is one deal.

(Remember the telecom consolidation that followed Bharti Tele-Ventures acquiring the Karnataka and AP licences of JT Mobile in December 1999. The 42 telecom service providers were soon whittled down to six.)

While telecom and pharma may not strictly be comparable, many of the telecom companies that sold off were owned by entrepreneurs. And there is no reason to believe that India’s pharma entrepreneurs think any differently.

Especially when there are enough buyers hovering around. Most observers concur that Teva has been looking at an acquisition to enter India. It has recently also been rumoured that others like Pliva have begun scouting around for targets here.

Also, though corrections have taken place in valuation of generic companies, by historic levels, they are still high. So, this may just be a good time to sell.

Globally, pharma companies are either strong in research or if in the generics space, have scale. Indian companies, save a few, are a bit of an aberration, having neither R&D capabilities nor scale. And if the R&D route is most likely closed for most, then they are really left with no other choice — scale up through consolidation or perish.

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