For Big Pharma, the playfield’s here

The west wind, rising, made him veer. “Eastward,” said he, “I now shall steer.” The east wind rose with greater force, said he: “‘Twere wise to change my course.”
— John Masefield

Multinational drugmakers are taking Masefield a little too seriously. They are fast moving eastward, with India in the periscope.

What started with the acquisition of Hyderabad-based Matrix Laboratories by US generic drug maker Mylan Laboratories in 2006 for $736 million, and gained momentum with the acquisition of a majority stake in the country’s largest drug maker, Ranbaxy Laboratories by Japanese major Daiichi Sankyo for $4 billion in June 2008, is laying the foundation for the establishment of a domestic pharmaceutical industry spearheaded by multinational drugmakers.

Pharma industry watchers say the influence and penetration of multinational drugmakers in India’s approximately Rs 34,000 crore per year domestic market would strengthen with each passing day.

The latest example being the licensing deal that the world’s largest drugmaker Pfizer Inc struck with Aurobindo Pharma to sell over 70 generics manufactured by the Hyderabad-based player in the US and Europe.

The domestic pharma landscape will rapidly change after the next two to three years, with multinationals gaining significant clout, says Sujay Shetty, associate director of professional services firm PricewaterhouseCoopers (PwC).

“In the immediate next three years, Indian drugmakers will continue playing a dominant role, but it will change after that,” says Shetty.

Sourcing strategies, mergers & acquisitions, collaborations, etc. between Indian companies and multinationals will happen more, and benefit both parties, says Sanjay Singh, associate director, (corporate finance), of professional services firm KPMG.

“Over the last five years we have seen a host of small outbound M&As by Indian companies. But Ranbaxy-Daichi was the turning point and over the next few years I expect increased inbound activity,” says Frost & Sullivan’s healthcare industry analyst Supratim Majumdar.

The huge capacities, the vast knowledge base, the large number of US Food and Drug Administration-approved facilities and the 30-40% lower production costs in Indian pharma are the attraction for multinationals.

DG Shah, secretary general of Indian Pharmaceutical Alliance, said there is realisation among foreign pharma firms that future growth will come from emerging markets.

“As they don’t have the basket of products for emerging markets (generics), they are desperately looking for opportunities to acquire or form strategic alliances with Indian companies to source generic products,” Shah said.

Foreign firms get ready access to distribution and marketing channels by joining hands with local players, and they, in turn, can get access to innovator drugs and vast geographies of the multinationals, says KPMG’s Singh.

Currently, Indian companies hold a 75% share in the domestic market, while the rest is held by multinationals, says Singh.
“In the next five years this equation will change, and the share of both foreign and Indian companies in the domestic market will be more or les equal.”

“With a per capita spending of just $44 on healthcare India still lags behind many other countries, while the Tier-II and Tier-III centres still remain untapped. That is the attraction for multinationals, which will also lead to a change in the complexion of the Indian pharma industry,” adds Frost & Sullivan’s Majumdar.

At present, as per estimates by ORG IMS Research, the Indian arms of GlaxoSmithKline (GSK) and Abbott are the only two foreign firms among the top-ten drugmakers in the domestic market (see table). But this scenario would soon change with more multinationals being in the top ten in India.

The reasons for them gaining in clout in India are too many to ignore. First, India has a huge market with a diverse disease population - comprising over 41 million diabetics, 25 lakh cancer patients, 2.4 million HIV afflicted people, and 60% of the world’s heart patients, amongst others.

Secondly, the drug pipelines of MNCs are fast drying up. According to estimates by PwC, in 2007, only eight of the 27 new therapies that were launched globally were the first of their kind, the rest being “me-too” treatments, with at least three predecessors.

Moreover, industry estimates say that there are just 18-20 new chemical entities (NCEs) existing worldwide, with an exorbitant $80-90 billion being spent on their development.

NCEs are innovator molecules discovered by companies, which after successfully undergoing clinical trials become new medicines.

Further, multiple patent expiries are staring big pharma in the eye.
According to data from securities house First Global, in 2008-09, around 11 leading drugs worth $29 billion will go off patent in the US.

It is projected that another $44 billion worth of drugs will go off patent in 2010, including leading ones like Lipitor (for cholesterol), Cozaar (blood pressure), and Protonix (for lessening stomach acid) in the US; and Keppra (epilepsy) in Europe.

Figures by Pfizer say the current generic drugs market is worth $270 billion globally and will shoot to $500 billion in the next five years.

Thus several innovator companies are getting big time into the generics, which cost anywhere from 30-80% less than innovator drugs, through acquisitions (like Daiichi Sankyo buying Ranbaxy), and licensing deals (like Pfizer-Aurobindo).

French drug maker Sanofi Aventis acquired Czech generics player Zentiva NV recently, and unconfirmed reports say that both Sanofi and British major GSK are in the race for Indian generic maker Piramal Healthcare.

Also, valuations are really cheap now for mergers and acquisitions, says research analyst Bhavin Shah from financial services firm Dolat Capital Market.

“By acquiring Indian companies, MNCs would get ready access to cheap raw material and labour and this is the key in times like these when MNCs are initiating various cost cutting measures,” says Bhavin Shah.

More importantly, the high FCCB exposure of Indian companies opens up the gate for their acquisition in the not too distant future, says Frost & Sullivan’s Majumdar.

While Indian pharma majors have a high debt-equity ratio the liquidity crunch in the current economic conditions will add to this, he adds.