Billions of dollars have been injected into the pharmaceutical industry over the past two years, as foreign firms have looked to gain from cheaper research and production costs and Indi- an drug makers' strength in manufacturing generic drugs.
However, saddled with un- profitable past investments, Indian companies have virtu- ally halted their acquisition of overseas pharmaceutical firms in the same period.
In June 2008, India wit- nessed its most expensive ac- quisition in this sector, when Japanese drug maker Daiichi Sankyo Co. Ltd acquired New Delhi-based Ranbaxy Labora- tories Ltd for nearly $5 billion (around Rs23,000 crore today).
Two years later, US-based Abbott Laboratories bought the healthcare solutions busi- ness of Mumbai's Piramal Healthcare Ltd for $3.72 bil- lion, becoming India's largest pharmaceutical company in the process. The overseas company made an upfront payment of $2.12 billion, and will pay $400 million annually for the next four years.
These were by no means the only big-ticket acquisitions in this period. In 2008, Singa- pore's Fresenius Kabi bought Dabur Pharma Ltd for Rs880 crore. The next year, French firm Sanofi-Aventis SA ac- quired Shantha Biotechnics Ltd for 550 million (around Rs3,340 crore today) and US- based Hospira Inc. bought the injectables business of Orchid Chemicals and Pharmaceuti- cals Ltd for $400 million.
“If you look at the Piramal- Abbott deal alone, it is a quar- ter of what India got from the sale of 3G (third-generation mobile telephony) spectrum,“ said Sujay Shetty, India phar- ma leader at the consultancy PricewaterhouseCoopers (PwC).
The government earned al- most Rs68,000 crore from the 3G auction this year, much more than it had expected. The money is expected to help sub- stantially reduce India's large fiscal deficit.
“These are mind-boggling values. It is our strength in ge- neric drug research and manu- facturing and knowledge of global regulatory compliance that gives us an edge over oth- ers,“ Shetty added.
Sanjiv Kaul, managing direc- tor of ChrysCapital, said In- dia's large domestic market was another attraction for for- eign direct investment (FDI) in drug manufacturing. “In the last two-three years, the importance of India as a domestic market as well as the leverage of the Indian pharma manufacturing platform for participation elsewhere in the branded market in India and outside has dawned on global pharmaceutical firms,“ he said.
Kaul added that nearly 2.6 percentage points of the annu- al 3% growth of the global pharmaceutical industry comes from the branded ge- neric segment, in which India was a leader. “So, the only country that can give you that leverage and allow you to par- ticipate competitively is India.
This FDI inflow is, thus, in ac- cordance with the capabilities of Indian pharma firms.“
But managing the growing pharma industry has also be- come a tough challenge over the years, demanding huge re- search expenditure and laws to protect intellectual property rights. With a number of major drug patents set to expire in the next two years, it is likely to get tougher.
“Hence, it is important for innovator firms to look at ge- neric opportunities,“ said Shetty of PwC.
Indian firms' acquisition of foreign assets has virtually dried up since Dr Reddy's Lab- oratories Ltd bought Ger- many's fourth largest drug company, Betapharm, for Rs2,250 crore three years ago, followed by Ranbaxy's acquisi- tion of Romanian pharmaceu- tical Terapia for Rs1,145 crore.
Analysts said the past deals have not been profitable for Indian companies, while the slowdown also brought in a fear factor.
“Indian pharma has learnt from the mistakes of the past.
Earlier, they would resort to M&A (mergers and acquisi- tions) as an entry model in dif- ferent markets. But now they have learnt that it is better to leverage the India platform globally,“ said Kaul.
Even Sun Pharmaceutical In- dustries Ltd, which is in a take- over battle with Israeli firm Taro Pharmaceutical Indus- tries Ltd, had signed a merger agreement way back in 2007.
“All the companies that had made acquisitions have FCCBs (foreign currency convertible bonds) on their books. In the last few years there were some great assets available for them to acquire, but they were al- ready stuck with assets,“ said Shetty. “Now there may be very small acquisitions but nothing eye-popping.“
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