News that GlaxoSmithKline Plc may buy a small stake in Dr Reddy’s Laboratories Ltd drove up the latter’s share price last week. Though unconfirmed, it is a reminder of the transformation under way in the local pharmaceutical industry.
Indian and multinational pharmaceutical companies, who once had mutually exclusive strategies, are finding it worthwhile to join hands. Indian companies began by selling generic drugs in India and other non-regulated markets. They also invested in the US branded generic drugs market, targeting drugs that went off patent and also challenging some patents. The final objective was to fund new drug research from these cash flows and jump into the big league with blockbuster patented drugs driving growth.
That dream has not succeeded. The initial generics success in the US has been clouded by some failures, with some key patent challenges getting defeated. Global pharma companies, too, have become aggressive in protecting their turf.
Indian companies have not made any key breakthroughs in the drug discovery space. That is nothing unusual, as pharmaceutical companies work on a number of molecules before they get a winner. But as their cash flows from generics have dwindled, funding new drug discovery has become difficult.
Meanwhile, multinational companies were facing a different predicament in India. With patent protection for post-1995 drugs, a key hurdle in launching new drugs was removed. Till then, they had a portfolio of aging drugs. Still, the process of launching new drugs has been slow, for various reasons, including regulatory processes.
Graphics: Sandeep Bhatnagar/Mint
But their parent companies are finding that emerging markets are growing much faster, while core markets are under pressure. Hence, an emerging market strategy is a must in every investor presentation. Consider this: IMS Global forecasts the global pharmaceutical market to grow at a compounded annual growth rate of 3-6% in 2008-13. But it expects emerging markets to grow by 11-14% in the same period.
The North American market, on the other hand, is forecast to decline by 1-2%. This has driven multinationals to explore new models to expand in the generic drug space in the fast growing emerging markets. The strategy itself is nothing new. Novartis AG had set up a separate division, Sandoz Inc., to sell generics in 2004.
Big pharma companies have been using India as a sourcing base for years. But they now see each other as partners in business, not merely as outsourcers. This has taken different forms. Daiichi Sankyo Co. Ltd liked Ranbaxy Laboratories Ltd’s generic portfolio and market presence enough to buy out the promoters. Similarly, Mylan Inc. acquired Matrix Laboratories Ltd.
These are a few major acquisitions but the preferred route is marketing-cum-manufacturing alliances, to sell generic drugs in emerging markets. Pfizer Inc. has an alliance with Aurobindo Pharma Ltd. GSK has a marketing alliance with Dr Reddy’s for emerging markets. These alliances are new and will start paying off only over a longer period of time.
There is no reason to get excited right away, but a stake sale brings up hopes of something bigger. Valuations are already high for companies on the healthcare index of the Bombay Stock Exchange quoting at a price to earnings multiple of 38 times. Investors seem to expect pharmaceutical companies to deliver in the current fiscal to March or expect more buyouts to happen.
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