This has to be the ultimate irony: MNC pharmaceuticals firms that left India in the 1970’s and 1980’s when the Drug Price Control Order (DPCO) began to squeeze margins, are now coming back even as a host of Indian firms are exiting, to a great extent, because they find the price controls onerous. The latest to join this group — Mylan bought Matrix Laboratories in 2006, Daiichi Sankyo bought Ranbaxy in 2008, Frensenius Kabi bought Dabur Pharma in 2008, Sanofi Aventis bought Shantha Biotech in 2009 and Hospira bought Orchid Chemicals’ injectables business in 2009 — is Piramal Healthcare which has sold off 350 branded drugs along with one manufacturing unit to Abbott Laboratories for $3.72 billion (Rs 17,000 crore).
To be sure, Piramal Healthcare CMD Ajay Piramal was at pains to tell the press on Friday, there is enough left in the Indian market. After all, compared to low or negative growth in OECD markets, India’s industry is growing by 15-20 per cent each year — that’s why MNCs continue to want to buy Indian pharma firms and why, for instance, Abbott paid Piramal around nine times it annual sales value compared to Daiichi which paid Ranbaxy 4.5 times its sales. That said, there is little doubt Indian firms were finding the going tough. Price controls have become very restrictive (prices of important drugs are 10-20 times lower than those in even Pakistan), and firms have little left to invest in serious R&D, as a result of which there are virtually no new medicines; the competition is so intense, the top 10 companies command just around 40 per cent of the total market — there are 101 brands in drugs like ciprofloxacin, 67 for gatifloxacin, 83 for cetrizine, and so on; low-cost manufacturers like Mankind have come up from nowhere and are already in the top 10 firms in India; spurious drugs are 25-30 per cent of the market. To the extent firms like Piramal made good profits, it was through milking of decades-old products — bestsellers like Pfizer’s Corex and Piramal’s Phensedyl are both 40-50 years old.
It is important, in this context, to look at India’s health-care pyramid. Medicines, the stuff Ranbaxy and Piramal make, constitute just 15 per cent of the total spend on health care, hospitalisation is another 20 per cent or so, diagnostics is around a fourth. Which explains why, for instance, after selling off Ranbaxy, the Singh brothers are investing their money in hospitals. A large part of Piramal’s future thrust, the company refuses to say how much, is going to come from similar areas. The company is among the top four-five in the world in anaesthetic products (both gas as well as injectables) and has a turnover of around Rs 450 crore from this business already (while the turnover of the business it sold to Abbott is around Rs 2,000 crore, the part left with it does around Rs 1,700 crore); it does around Rs 200 crore from diagnostics. Both areas offer good growth potential, neither is included in the traditional definition of medicine and there are no price controls in these areas.
The Piramals’ big gamble (neither Ajay nor Swati think it is a gamble, of course!) is the focus on drug discovery, the belief that any drug that can be discovered abroad can be discovered in India at a tenth of the cost. The company has 14 molecules in various stages of clinical trials — it claims it has India’s best library of microbes, acquired through the purchase of Hoechst Marion Roussel’s India R&D business — and is confident a drug for cancer should be ready to market in 2012. How much this will change the company’s fortune if it does work is difficult to say, but keep in mind that a single drug has changed the fortunes of several companies — Zantac for Glaxo and Valium for Roche are two examples that come readily to mind. Indeed, a part of the reason given by the Piramals for selling to Abbott was that the company will now have enough money to directly fund the research. Whether the strategy will work, of course, is difficult to say, more so when you look at the tens of billions top global pharma firms have spent on R&D with not too much to show, as well as the failures of several Indian firms in this area. That’s also why the canny Piramal refuses to say just how much of the Rs 17,000 crore he plans to invest in which part of the group’s future plans — all that’s certain is that around Rs 4,000 crore will be paid to Pranab Mukherjee since, unlike several others who have exited their businesses, Piramal made an asset sale, not a sale of stock that would benefit only the Piramals and the handful of shareholders who would be entitled to the mandatory open offer from Abbott.
The Piramals do around Rs 150 crore of business from the over-the-counter (OTC) market — Aspro, Saridon, iPill, LactoCalamine, and so on — and this will grow if the government changes the rules, at some point, to allow more drugs to go OTC instead of requiring doctors’ prescriptions. But the meat of what’s left with the Piramals is the Rs 1,000-crore contract manufacturing (Crams) business, basically making drugs for global pharma firms— though global markets have hugely sluggish growth, the requirement for lower-cost medicines will make this rise, just as India’s ITeS market is growing.
The bottom line, for those who care to read it, is that India’s top pharmaceuticals firms are exiting the business for reasons of unhelpful government policy, preferring instead to move to unregulated areas (hospitals, diagnostics) or increase their focus on exports. That can’t be very good news for those looking for a vibrant home-grown industry.
