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Pharma pulse - getting the right combination

Mahesh Singhi
Wednesday, December 6, 2017, 08:00 Hrs  [IST]

For more than past ten years, domestic drug making firms are gliding towards a new formulation for making the right combinations through in-organic route to survive in an ever increasing competitive ambience. The prescription that tipped the balance of the drug makers in favour of merger and acquisitions (M&As) include the shift towards the Trips plus product patent law followed by tight fisted regulatory eco-system starting from periodic US FDA quality check-ups and warning letters that are flying thick and fast through domestic price controls to search for lower cost locations for research and development (R&D) activities by MNCs as well as rock-bottom valuations.

In 2005, when the Government of India pushed through the legislation amending the patent law to comply with the Trade Related Intellectual Property Rights (Trips), everyone knew that it was going to be a game changer for the domestic pharmaceutical industry.  The Trips plus regime, as the new patent law is commonly referred to among the industry circles removed the life support enjoyed by the domestic drug industry which were thriving on reverse engineering.

However, Trips plus patent law became the beginning of a change covering the entire pharmaceutical spectrum.  It spurred a wave of merger and acquisitions as companies vie each other to get a footprint in the global pharmaceutical map. The latest acquisition of the Bangalore-based Strides Shasun Ltd’s branded generics business - Strides’ India branded generic drug business comprise of a portfolio of over 130 brands in the domains of neurology, psychiatry, nutraceuticals, gastro. etc. by Eris Life Sciences for a consideration of Rs 500 crore is the last among the deals that were made public so far.

Though the deal may not be significant going by the ticket size, it brings forth the unique position the Indian drug companies enjoy. First, the domestic drug industry has been crowded by generic drug manufacturers who fill up for approximately 75 per cent to 80 per cent of the market. Second, the domestic drug firms play a dominating role in the formulation space boosted by early investments. Third, the ruling prices for making drugs in India are relatively cheaper.

This is why though India ranks 10th in terms of value, the country ranks 3rd in terms of volume. These key facets of the Indian pharmaceutical market throw up their own opportunities and challenges making the country a hot spot for deal making.

According to industry estimates, last year the pharmaceutical sector witnessed 51 deals valued at $4.6 billion. Outbound merger and acquisitions and domestic transactions drove most of the deal activity. In terms of disclosed deal value, merger and acquisitions were pegged at $ 2.1 billion each, a rare coincidence indeed. Domestic deal making was concentrated in smaller value bands with approximate consideration pegged at $ 342 million, of which four deals valued at $ 272 million were restructuring.

On industry sub-segments, sterile injectables led the deal pack with nearly $ 2 billion in value, followed by other generic formulations with aggregate consideration pegged at $1.6 billion. There were two deals in the Contract Development and Manufacturing Organization (CDMO) and Contract Research Organization (CRO) sub-sets worth $ 258 million, and seven relatively smaller deals worth $ 42 million in the biotechnology vertical.

Going by the past trends, the combination formula is expected to dominate the pharmaceutical space with merger and acquisition momentum picking up steam. This is due to the large number of US FDA approved manufacturing sites and low capital expenditure. The recent changes in foreign direct investment (FDI) regulations also augurs well for drug makers, given that, brownfield investments of up to 74 per cent - as against the earlier 49 per cent - are now allowed under the automatic route. Finally, frontline domestic pharmaceutical companies’ ever increasing ambition to penetrate and consolidate their presence in regulated markets through market diversification and product expansion fill the prescription to full.

Further, the recent policy announcements made in the US on drug price controls, bidding processes for generic drugs and degrees of outsourcing and offshoring, all come as multiple booster doses for domestic pharmaceutical companies. While it is true that India continues to offer competitive advantages to the US pharmaceutical companies as research and development base for generic drugs, it remains to be seen how the merger and acquisition story is going to pan out.

Another shot in the arm is the lower valuation of the drug firms which went through a correction making overseas shopping for Indian pharmaceutical majors lucrative. They could easily cash-in on opportunities to close portfolio gaps at lower valuations.

Back home, consolidation in the industry will be dominated by value unlocking and wealth diversification related considerations, even though business fundamentals such as price controls and the lack of product pipelines weigh and remain as major drags.

The story will remain incomplete if a mention is not made about the robust growth in the domestic pharma market. Rising income, patient awareness, expanding medical insurance coverage etc have helped the domestic market to clock a double digit growth during the past few years. This growth has been broad-based and across therapy and location agnostic. With frontline companies started to firm up new formulations for growth by tapping emerging opportunities, the pace of innovation in business models is promised to be unprecedented.

So the general refrain in the industry has now been shifted from: `Is it worth our while to make a serious India play?’ to `How we can make it to the top of this promising market?’  Therefore, Indian pharmaceutical firms have more opportunities than challenges both in internal and external geographies and with the right dose and fixed formulations, they could make winning combinations going forward at much lower levels of valuations.

(Author is founder & MD of Singhi Advisors)


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