The original poster boys of the Indian pharmaceutical industry all seem to be in a spot of bother. Habil Khorakiwala of Wockhardt has sold his animal health, nutrition and hospital businesses to repay the debt on his books. Dilip Shanhgvi of Sun Pharma faces regulatory problems in the US. Caraco Pharmaceuticals, a company he owns in that country, faces a manufacturing ban imposed by the Food & Drug Administration. Dr Reddy’s Laboratories has had to recall products in the US. And the Singh family, of course, has exited from Ranbaxy. One of the company’s facilities in India has been blacklisted by the Food & Drug Administration.
All of them, not so long ago, shared a common dream — quickly capture the market for drugs that have gone off-patent in the west. They were good at reverse engineering pharmaceutical products and their production costs were low. With help from some smart patent attorneys, they could bring Big Pharma down on its knees. So they believed.
Malvinder Mohan Singh, one half of the Singh brothers, says the reason why he exited from the business was that the fight with Big Pharma was getting tougher by the day. Here’s why: To begin with, the worldwide market, which was growing at 7 to 8 per cent ten years ago, has slowed down to 2 to 3 per cent now. The pipeline for new products has begun to run dry. Ten years ago, the global market used to see up to 30 new products every year. The number is now down to not more than 15. And these are very small products — there has been no blockbuster in the last several years. As a result, the generic segment has grown from 7 per cent of the overall market ten years ago to almost 20 per cent now.
This has changed the paradigm for Big Pharma as well as Indian generic companies. Big Pharma cannot afford to ignore the generic market any longer. But that is not its core strength — that space is dominated by generic companies, most of them from the emerging economies. So, Big Pharma needs to guard its turf against generic companies. This it has done in two ways: One, it has acquired or forged alliances with generic companies the world over; and two, it has turned the heat on those generic companies which still want to slug it out in the courts.
Actually, two set of lobbies are at work against Indian generic companies in the US — the world’s largest market for pharmaceuticals. Apart from Big Pharma, there is also the group of generic producers of the US. Indians have a huge cost advantage over them. Industry estimates suggest that once patents on a product expire and prices fall below 90 per cent, US generic producers become non-competitive. Indian companies, in contrast, can stay put in the market place even if prices erode by as much as 98 per cent. Ten years ago, prices would fall up to 75 per cent on patent expiry. Now, the fall can be as much as 95 per cent — governments in the west want lower healthcare costs, more bang for the buck. This gives Indian generic companies a distinct edge over their rivals in the US. To block Indian rivals, US generic companies have often complained that their production facilities are sub-standard. So much so, the Food & Drug Administration has now opened an office in India.
To be fair, the Food & Drug Administration has initiated action against a whole host of generic producers, not just those from India. And Indian pharmaceutical exports to the US have grown at 24 per cent, better than 20 per cent overall export growth. But Indian pharmaceutical companies suspect there’s more to it. There was a buzz when action was initiated against Ranbaxy’s facility at Ponta Sahib in Himachal Pradesh that it was a result of the Singh family not selling their stake to a US company.
For Indian generic companies, the writing on the wall is clear: Collaborate or blow up huge sums of money on legal fees. Some of them have settled patent litigations out of court. Unpredictable windfalls have got converted into predictable revenue flows. Some Big Pharma companies want to vacate the emerging markets space, so that they can focus on large markets. They may like to tie up with growth-hungry Indian companies for such markets.
In the past, Indian pharmaceutical companies did some spectacular acquisitions in the West. First, it was in the US. Once the going got tough there, they trained their guns on Europe. In the last two years, that activity has come to a total standstill. The import is clear: The priorities are being reconfigured.
What is certain is that there will be more takeovers and alliances in the pharmaceutical space. A clear indication of this is that private equity wants to invest in Indian pharmaceutical startups. Dabur India Chairman Anand Burman is in the process of setting up such a fund. With Big Pharma on the prowl for Indian companies that can produce generics at low cost, there is a good opportunity to make some money.
The new trend of alliances has also put a question mark on the whole business of contract research and manufacturing services (CRAMS). A whole host of Indian businessmen thought they could offer their skills to do things at a fraction of the cost to pharmaceutical companies overseas. The pressure on the bottom-line, they thought, would drive Big Pharma straight to their arms. This business proposition has lost much of its sheen in the world of alliances. In the new world order, Indian pharmaceutical industry could look very different from now.
