Mumbai: For Indian generic drugmakers struggling with cut-throat competition, regulatory hurdles and expensive legal battles, a tie-up with a global pharmaceutical giant may be just what the doctor ordered.
The world’s biggest drugmakers have been on an acquisition spree over the past year and are eyeing Indian firms to gain access to emerging markets and cheap production, as well as to retake some of the business they’ve lost to inexpensive copycat versions of their blockbuster drugs.
Global heavyweight Pfizer is seen as the most likely suitor of Indian rivals as it looks to replace revenue lost from the lapse of key patents, while Merck and Sanofi-Aventis may also seek to shake hands with Indian producers, analysts said.
Indian drug companies, for their part, are grappling with regulatory crackdowns that have made it harder to sell their products in the key US market, making a deal with a bigger and better-funded global rival look increasingly attractive. Indian generic drug makers including Ranbaxy, Dr Reddy’s and Matrix Laboratories have all linked up with global players over the past year. More deals are expected.
“The foreign companies can limit research expenses as the cost of developing a product in India is lower than probably anywhere else in the world,” said R K Gupta, managing director of Taurus Mutual Fund in New Delhi.
“While the Indian firm will get access to world-class facilities and need not handle legal issues once the drug is developed.”
Analysts say India’s Cipla, with its vast range of products, including anti-cancer and anti-diabetic drugs, and a market value of $4.5 billion, is attractive to foreign buyers.
They add that smaller firms Aurobindo Pharma, Orchid Chemicals and Pharmaceuticals and Dishman Pharmaceuticals could also be eyed by overseas firms.
“When foreign companies look at India, they consider two things: the low cost of development and the chance to expand in emerging markets,” said Sarabjit Kour Nangra, a healthcare analyst at Angel Broking in Mumbai.
“Cipla’s valuations are expensive, but the company has a strong asset base.”
The company’s shares trade at more than 20 times forward earnings, compared with a 17.5 multiple for India’s benchmark BSE index.
Rivals Sun Pharma, and Aurobindo Pharma trade at 17.9 times and 7.3 times expected earnings, respectively. Ranbaxy and Sun, the two biggest Indian drug makers by sales and market cap, respectively, are the two worst performers in India’s roaring main index this year, with gains of less than 10%.
India currently represents $6 billion of the $550 billion global pharmaceutical industry and its share is increasing at 10% a year, according to consultancy KPMG.
It is forecast that Indian companies will likely take around 30% of the global generics market from around 22% now, KPMG said.
Emerging Market Focus
Drug sales in emerging markets are expected to grow by mid-teens percentage rates through 2013, against low single-digits for mature markets, according to IMS Health, the leading tracker of prescription drug data.
Pfizer may pursue further links in India as it faces sales declines in coming years from patent expirations, including for blockbuster cholesterol treatment Lipitor.
The company wants to add $3 billion in annual sales from developing markets by 2012, and recently signed a deal with Aurobindo Pharma under which Pfizer will gain rights to about 60 products in more than 70 emerging markets.
Other global firms such as Merck and Sanofi-Aventis may also seek deals with Indian firms as efforts to control health care costs in countries including the United States push global drugmakers to find cheaper alternatives to branded drugs.
In June, Dr. Reddy’s signed a licensing deal with the UK’s GlaxoSmithKline, and No. 3 generics maker Mylan Inc announced a partnership with India’s Biocon.
Developing nations account for just 6% of worldwide trade in medicines, the World Health Organization estimates. By offering generic drugs that are a cheaper alternative to branded drugs from big global firms, Indian companies have an opportunity to increase their share of this trade, say analysts.
But the US Food and Drug Administration has recently been finding fault with Indian firms’ manufacturing procedures. A tie-up with one of the bigger players would help them acquire the know-how to better maintain quality standards.
“The FDA has been going no, no, no, no to so many drugs from Indian firms,” said Alex Mathew, head of research at Geojit BNP-Paribas Financial Services.
“A tie-up with foreign players will not only give financial stability, but access to technological upgradation that can prevent more disapproval.”
In late June, US authorities seized drugs made by the US unit of India’s Sun Pharma for manufacturing standards violations. Last year, the FDA found 15 deficiencies at Indian firm Lupin’s manufacturing plant in central India.
Japanese drugmaker Daiichi Sankyo’s $4.2 billion takeover in 2008 of Ranbaxy, India’s top drugmaker by sales, demonstrates the possibilities but also the potential pitfalls that global players face when linking-up with Indian rivals.
Ranbaxy shares plummeted late last year after a US ban on some of its products. The FDA in February said Ranbaxy had sold misbranded or adulterated drugs in the United States, its largest market, further hurting the company’s market value.
But analysts say Ranbaxy has been helped since being taken over by Daiichi, which replaced Ranbaxy head Malvinder Singh with its own executive in a bid to resolve problems.