Pharma sector rides consolidation wave
As the impact of WTO regulations kick in, Indian pharma players are learning to collaborate and consolidate to grow
If the industry is to be believed, the Matrix-Strides merger is only the beginning of the shakeout that the pharma sector is set to witness over the next few years. Though this is the first big merger in the post-patent era, over the last one year, mid-cap pharma companies have been particularly aggressive in forging global alliances, buying brands and investing in international companies and joint ventures.
Sun Pharma’s acquisition of MJ Pharma, Ipca’s joint venture (JV) with a Chinese company for a malaria drug, Iceland based Actavis’ acquisition of CRO Lotus Labs, Jubilant Organosys’ 75 per cent equity buy out in a US generics company, Glenmark’s JV with Shasun, Glenmark’s merger of Tasc Pharma’s operations into its own - all point to one thing - consolidation. Not only that global companies are taking a relook at their India plans and evaluating scalable models.
For instance, Sandoz, now the world’s largest generic player, is planning a new multipurpose plant at its recently acquired site at Mahad in Maharashtra. And Teva, which had acquired JK Drugs & Pharmaceutical not long ago, is reportedly in talks with Aurobindo Pharma, Cipla and Dr Reddy’s, according to industry sources.
The pharma sector accounted for the highest foreign direct investment in the financial year 2004, amounting to Rs 1,571 crore. “M&A activity is likely to be high in the generics manufacturing & early drug development space. Domestic generics companies are selling off non-core businesses and have been on a fund raising spree to mobilise large amounts of investible cash for inorganic growth,” says Utkarsh Palnitkar, industry leader, healthscience practice, Ernst & Young India.
Agrees Sanjiv Kaul, partner at ChrysCapital and former vice-president at Ranbaxy, “A shakeout is inevitable in the sector. Alliances are likely to happen in primarily two areas - among Indian companies in the generics space and among MNCs and Indian companies in R&D (contract research).”
Therefore the main drivers behind the spate of alliances are: Supply chain integration Domestic companies are looking to consolidate their position across the value chain by coalescing their strengths with partners having complementary skillsets. This was precisely the logic behind the Matrix-Strides merger. While Matrix is strong in the API (active pharmaceutical ingredient) area, Strides has capabilities in the finished dosages and formulations space. This is also why Jubilant Organosys is acquiring a US generic company.
“Not only would we be able to integrate our operations forward, it is also a means of addressing growth markets abroad,” said Shyam S Bhartia, chairman and managing director.
Risk mitigation
One of the key drivers behind alliances is risk mitigation. Over the last couple of years, several global generics majors have been ramping up their India presence. Players like Ivax and Watson are forging partnerships with Indian manufacturers. Teva has integrated JK Pharma (now called Reagents & drugs Ltd) into its global supply chain.
“These players have quite literally brought the battle for the international generics pie to the doorstep of their Indian competitors. This could in turn be a strong trigger for domestic majors to consolidate and coalesce their strengths to meet this threat,” says Palnitkar.
Scale economies
The large number of alliances pharma companies have forged across the value chain could very well be a precursor to mergers. The merger of two entities has the potential to increase the competitive force of the combined entity exponentially as it is a coming together of a coalition of companies allowing the merged entity to tap into a vast network of partnerships.
A very clear example is that of Matrix and Strides - now the combined entity is worth Rs 1,000 crore and the 7th largest player in India. “The merged entity offers much more potential in terms of enhanced footprint and will find it easier too to attract investment,” says Sandeep Dhupia, Partner, Transactions Services at KPMG. Drug discovery costlier Drug discovery is becoming expensive and lengthier as administrative and regulatory costs are on the rise. Moreover, given India’s strengths in chemical synthesis and process engineering, Indian companies have cost advantages over other destinations like Hungary and Israel.
“Many MNC companies are scouting for Indian partners especially in the area of contract research. There is a growing trend of early stage discovery being outsourced to India,” says Dhupia. Even among Indian organisations, Ranbaxy has recently tied-up with the Department of Science & Technology and National Chemical Laboratories to source leads for new chemical entities. Generic market opportunity In the next two years, drugs worth $80 billion are going off-patent.
Though there is a huge opportunity in this space, often Indian companies lack marketing muscle to go it alone in the global markets, especially. Thus we find players like Lupin entering a pact with Cornerstone to market Suprax, Wockhardt entering into joint ventures in Mexico and South Africa; and Glenmark tying up with Shasun. “It is virtually impossible to do all things on your own. Then it becomes imperative to draw on someone else’s competence. In our case, we do not have a global reach.
Therefore, we have entered into a number of co-marketing pacts,” says Glen Saldanha, CMD of Glenmark Pharma. Investment & fund raising M&As are also looked at as a fund-raising activity for R&D and expansion, especially in the biotech area. “There has been discussions with many companies in this sunrise industry. We are open to M&As so long as our partner is open to our philosophy of developing low cost vaccines,” says Varaprasad Reddy, chairman of Shantha Biotechnics.
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