Mumbai: Global drug makers may have turned risk-averse towards buying or forming partnerships with Indian makers of generic medicines after being hit by revenue losses stemming from quality and compliance issues over previous acquisitions and tie-ups, deal makers say.
Daiichi Sankyo Co. Ltd, Japan’s third-biggest drug maker by market value, has had to cut its annual forecast twice after it purchased a controlling stake in India’s largest drug maker Ranbaxy Laboratories Ltd in 2008. On Wednesday, Daiichi Sankyo slashed its profit forecast for the year to 31 March because of a $500 million provision to settle a Ranbaxy dispute with US authorities.
Pfizer Inc., the world’s largest drug maker by sales, lost precious time in accessing key revenue opportunities in emerging markets after two of its Indian partnership deals got stuck because of manufacturing compliance issues. France’s biggest drug maker, Sanofi-Aventis, lost a mutli-million-dollar contract after the World Health Organization (WHO) found fault with vaccines produced by its newly acquired Indian unit, Shantha Biotechnics Ltd.
For years now, India’s Rs 90,000 crore generic drug industry has been one of the most reputed suppliers of cheap and quality drugs to several countries, WHO and many global healthcare groups. The Indian pharmaceutical market’s rapid growth also made it an attractive destination for multinational drug makers.
The last five-six years have seen a number of acquisition deals and manufacturing and research partnerships by multinational drug makers in India. That trend seems to have been set back by the issues that earlier tie-ups are confronting.
“...one of the key impediments to that (trend) will be the dwindling credibility that the Indian (pharma) industry has in the global arena now,” says Murali Nair, partner, business advisory services, at consultant Ernst and Young.
Against the backdrop of drug-sourcing deals failing and the question mark that has arisen around Indian quality, it’s unlikely that global pharma companies would be enthusiastic about acquisitions and tie-ups with drug makers in the country, at least until the existing issues are settled, analysts say.
The most serious of the quality compliance issues that cropped up in the recent past involved Ranbaxy Laboratories, which had a ban imposed on imports from two key Indian plants by the US Food and Drug Administration (FDA) for manufacturing defects. That was soon after Daiichi Sankyo acquired a controlling stake in the company from its founders for $4.6 billion. Daiichi Sankyo shares have lost half their value since the purchase.
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WHO declined to certify a vaccine made by Shantha Biotechnics to protect babies against whooping cough, tetanus, diphtheria, hepatitis-B and a bacterium linked to ailments such as pneumonia and meningitis, soon after Sanofi-Aventis paid $602 million to buy the Hyderabad company.
Pfizer faced a similar debacle after Hyderabad-based Aurobindo Pharma Ltd and Ahmedabad-headquartered Claris Lifesciences Ltd—with which it had manufacturing and supply partnerships— failed FDA audits.
To be sure, Indian firms have their defenders, including Sanofi’s local management.
“These apprehensions (about quality compliance) are not specific to India as quality and drug safety are concerns in every country,” says Shailesh Ayyangar, managing director for India and vice-president for South Asia at Sanofi. “We don’t believe that the issues we are seeing in India are any different to what we encounter elsewhere.”
Strict due diligence, including site visits, correspondence with FDA and third-party audits, is essential prior to acquisitions, and contractual guarantees can also be sought at the time of negotiations, Ayyangar added.
Ranbaxy declined to comment for this story.
For the companies involved, the compliance issues have led to significant revenue losses.
“These are mainly due to grossly overlooked due diligence processes and are to be equally blamed upon the oversight of the buyer as well as the deal maker,” said an investment banker, who has been involved in a few pharma deals, and who spoke on condition of anonymity.
The issues that have surfaced from these transactions have made deal making in the pharma space all the more difficult because potential buyers have become risk-averse, said the banker.
“Pharma deals are very complicated given regulatory oversight. Companies, therefore, are more exposed to market and regulatory risk than they were five-seven years back,” says Probir Rao, managing director and head of investment banking and capital markets at Jefferies India Pvt. Ltd, a leading deal maker in the pharma industry.
Experts say that in some instances, foreign companies made the wrong choices in selecting their local partners.
“It’s a fact that some of the foreign buyers are now regretting their deals in India, though a larger part of such instances were due to their own decision to select wrong partners,” says Dilip G. Shah, secretary general of the Indian Pharmaceutical Alliance, a lobby group representing top Indian drug makers.
The whole Indian pharma industry can’t be blamed because it’s still known for the quality of its generic medicines, says Shah.
“As far as the compliance issues are concerned, the fact remains that even units in the US or even the top drug multinationals were served warning notices by drug regulators,” he adds.
Sanofi’s Ayyangar agrees.
“Many Indian companies continue to benefit from an excellent manufacturing reputation and India continues to be an attractive market given the estimated market growth of around 15% over the next five years,” Ayyangar says.
Sanofi will continue to invest in India in line with its strategic plans, he says.
A couple of recent policy measures—a restriction on foreign direct investments in existing pharma units and a potential expansion of price control on drugs—have made deal-making tougher, say analysts.
The government last month announced changes in rules for foreign investments in existing units in the pharma sector. Such investments have to get approval from the foreign direct investment board now instead of the earlier automatic route. The government has also recommended widening the scope of price control to cover at least 430 top-selling drugs, from 74 drugs now.
“These two policy measures will now cause further anxiety among foreign investors while making decisions both for acquisitions as well as partnerships in the Indian drug industry,” said an industry analyst with a foreign brokerage.
Harini Subramani contributed to this story.