Medium-sized pharma firms nibble at AOK

Recently, a number of Indian goliaths like Dr Reddy’s Laboratories (DRL), Ranbaxy Laboratories and foreign ones such as Israel’s Teva Pharmaceuticals, Germany’s Ratiopharm, STADA Arzneimittel AG, Iceland’s Actavis, etc locked horns for drug deals from Allgemeine Ortskrankenkassen (AOK), Germany’s largest health insurer that covers 25 million people.

The largest and more important in west Europe, Germany’s generics market is estimated at ?4.5 billion, or 50% of what the entire west European generics market is worth. New laws allow German health insurers to enter into discounted bulk purchase agreements with generics firms.

In August 2008, AOK announced a tender for 64 molecules worth $3.5 billion, or ?2.3 billion. Under the tender, which divided Germany into five regions, patients covered by AOK receive medications from the supplier picked by the insurer, and not the generics brand prescribed to them.

Even as the big daddies of pharma battled it out for the contracts, their smaller counterparts like Rs 2,773-crore Lupin Pharmaceuticals, Rs 400-crore Indoco Remedies, and the Rs 1,000-crore Biocon, quietly made their presence felt in the German market.

Pharma major DRL’s German subsidiary Betapharm AG bagged deals from AOK for eight products amid much fanfare. At the same time, Mumbai-based Lupin’s German subsidiary Hormosan and Bangalore-based Biocon’s German arm AxiCorp secured the supply contracts for one molecule each.

Analysts said that mid-sized Indian companies entering the AOK fray are looking more to get greater access to regulated markets such as Germany than to boost to their margins through deals with the insurer.

Tender processes are high-volume, low-margin games. “Big companies make money, but relatively small players may be entering such tender processes just to participate,” said a spokesperson of a mid-sized pharma company that didn’t participate in the AOK tender.

Sarabjit Kour Nangra, vice-president (research) at Mumbai-based broking firm Angel Broking, added, “The chances of winning are higher for bigger players. For mid-sized players, it is an entry point into lucrative markets.”

Bhavin Shah, a research analyst with Dolat Capital Market, didn’t see the AOK contracts adding much to the turnover of companies that won the bids. “But it provides good geographical expansion for companies,” he said.

For mid-sized players, any additional business coming from winning these supply contracts would be more or less in single digits, said industry watchers from an equity firm based in Mumbai.