A worrying trend in pharma industry
by Virendra Parekh on 03 Sep 2010 2 Comments

Pharmaceutical multinationals are gobbling up Indian drug makers and may soon be dominating the Indian market. This could mean a steep hike in prices of medicines and the extinction or marginalization of SMEs in the sector, unless Indian authorities wake up in time.


For decades, Indians have enjoyed easy access to cheaper drugs, priced at a fraction of what multinational pharma majors charge in their own countries, thanks to the presence of a number of generic pharmaceutical companies in India.


All that could change soon. In the last two years, as many as seven Indian companies have sold off either their controlling stake or their key business to foreign MNCs. In June 2008, India’s largest drug maker Ranbaxy Laboratories was taken over by Japan’s Daiichi-Sankyo. Since then, Delhi-based Dabur Pharma and Shantha Biotech have been bought by German’s Fresenius Kabi and France’s Sanofi Aventis, respectively. Two subsidiaries of Wockhardt have seen sold and in May Abbott Laboratories bought Piramal Healthcare’s domestic business.


Among those seen as potential targets for global drug companies are Dr. Reddy’s Laboratories, Ahmedabad-based Torrent Pharma, Cadila Healthcare, Mankind Pharma and Elder Pharma. There are reports of the global pharma major Pfizer buying stake or striking a marketing deal with the company. However, these have been strongly denied by Biocon.


From a purely business point of view, the move makes perfect sense for both sides. Most of the stake sales have been driven either by a shortage of funds to run the business or a realisation that the next leap in business will only be possible with heavy capital infusion and substantial strength in marketing and distribution. This is true of branded generics. Also, some Indian pharma companies with R&D strengths recognise that only those who can pump in substantial risk capital can be credible participants in the race to develop drugs for new diseases.


“The model of the generic business has changed. You have to move up the value chain to develop new drugs or have the size, which I don’t see in the Indian industry today,” says Mr. Malvinder Singh, whose family sold its stake in Ranbaxy Laboratories to Japan’s Daiichi-Sankyo.


Pharma multinationals, on their part, are facing a triple problem: their most important drugs are losing patent protection, growth in developed markets is slowing to a crawl, and much of their cash is trapped overseas.


Six of the world’s 10 biggest drugs are likely to lose US patent protection by the end of 2012. Other major markets in Europe and Asia are on similar timetables. The loss of revenues due to the expiry of patents is estimated at $70 billion by 2013. The value of many big franchises will be gutted as cheaper versions of these compounds are introduced. The R&D pipeline for drug innovators is drying up and new launches cannot compensate for the revenue losses from patent expiry. At the same time, costs of research are going up, putting a squeeze on margins.


Annual growth of drug sales in developed countries is likely to be between 3 and 6 per cent over the next several years, while Emerging markets are estimated to grow at more than 15 per cent a year. While MNCs’ businesses still generate substantial profits and cash flow, the trouble is that much of this comes from foreign subsidiaries, where it remains stashed away. Repatriating the cash to pay investors dividends or buy back stock would generate a large tax bill.


One way to deal with this triple problem is to move into generics, another is to expand in emerging markets and a third is to utilise the cash stashed overseas for buying foreign companies. This is why Indian generics companies are an attractive target for overseas multinationals. Taking over an Indian generic drug-maker like Ranbaxy or Piramal encapsulates all the three responses in a single action. India, for example, is growing about three times as fast as developed markets and given the state of its medical care, it is unlikely to slow down any time soon.


That explains the huge valuations being offered to Indian companies. If Mr. Malvainder Singh got a whopping Rs. 10,000 crore for his family’s stake in Ranbaxy, Mr. Ajay Piramal got Rs. 17,000 crore for his company’s domestic business.


If such acquisitions continue, multinationals will gain market supremacy and people may have to pay through their nose for essential medicine. For there are only two options for MNC pharma companies if they want to recover the billions of dollars they have invested in these acquisitions: make products more expensive, and bring more products to the market. Since patients will not take in more drugs than required, the only option for them would be to increase prices.


This has huge ramifications. Purchase of drugs constitutes 70 per cent of the total OOP (out of pocket) expenditure in urban areas. The percentage is higher in rural areas. Therefore, any increase in the price of medicine will have a major ripple effect on a billion people.


Another likely consequence of the mergers and acquisitions in the pharma sector is elimination or total marginalization of small and medium enterprises in the industry. With big Indian companies being bought out by MNCs, the market share of just six MNCs has risen to a whopping 25 per cent.


It is often argued that since there are a large number of players in the market, competition will keep the prices in check just like in the telecom sector where the tariffs are unregulated. However, market dynamics in the pharma sector is different. One key difference is that while a subscriber is free to choose his mobile operator, a patient has no option but to buy the medicine prescribed by the doctor.


The Government has taken note of these developments and is examining the regulatory action and financial incentives required to be taken in the interest of this “vulnerable” sector. Right now, there are no effective legal or policy tools to address threats emerging from the acquisition of Indian pharmaceutical companies by multinationals. The government needs to take a close look at the present system of allowing 100 per cent automatic approval for foreign investment in the sector, and see if a more guarded investment policy is required. It should amend the Companies Act to subject mergers and acquisitions of Indian drug companies by multinationals to a scrutiny by the Competition Commission of India.


However, it should not lose any time in imposing strict price controls on essential drugs by making changes in the Drug (Price Control) Order which was last revised 15 years ago in 1995. There are only 74 out of 500 commonly-used bulk drugs that are kept under statutory price control. Dr. Pronab Sen, who headed the Prime Minister’s special Task Force to explore options to keep drugs affordable, had recommended earlier that all the 354 drugs in the National List of Essential Medicines (NLEM) should be price-controlled.


The pharma companies are bound to threaten that they will be compelled to discontinue production of those medicines whose prices are not realistic and raise fears of growth of grey market in drugs. The government should not succumb to these pressure tactics. What the companies lose on prices, they could make up on volumes in markets like India.


At the same time, drugs developed and patented by Indian companies should be kept out of price control to encourage them to move up the value chain rather than being content with job work of MNCs. The fiscal incentives for expenditure on R&D may be refined further.


At a deeper level, the government should more actively promote alternative systems of medicine. Indian society should make a conscious effort to move away from a healthcare system dominated by drug makers, hospitals, and insurance companies, and towards an alternative lifestyle.  


The author is Executive Editor, Corporate India, and lives in Mumbai

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