Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Caught in a Catch - 22 Situation - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Apr 3, 2000

    Caught in a Catch - 22 Situation

    Globally among pharmaceutical companies new generation biotechnology and novel drug delivery systems seem to be the flavour of the season. The same seems to be happening in the Indian pharmaceutical sector too. This is due to slowdown in the domestic pharmaceutical market and higher emphasis being given to technology and research related companies. The pharmaceutical multinationals in India have strong backing from their parent companies who are very strong in their research and development efforts.

    Multi-National Companies (MNCs) operating in India received a nasty surprise in the 1970s, in the form of the Foreign Exchange Regulation Act (FERA). The Act forced them to dilute their holdings to 40%: many of them (e.g.; IBM, Coke) decided to leave the country rather than lose control. The pharmaceutical majors were particularly annoyed, as the lack of patent protection compounded their problems further. While they opted to remain in the country, many MNCs continued operating largely in segments like antibiotics, expectorants, nutrients and over the counter (OTC) products.

    Select segments drive growth...

    Source: Retail Sales Audit Data (1999)

    However they are now leveraging their strength in many ways. Liberalisation has resulted in an attitudinal change. Some large MNC's (e.g., Glaxo, Hoechst) are introducing more products and exploring possibilities of tie-ups and alliances to leverage their existing distribution strengths and franchises. A few other MNCs (e.g. Pfizer, Rhone-Poulenc, Smithkiine Beecham, Knoll) seem to have a different game plan for the period up to 2005. Their strategy seems to be of milking existing brands by transferring the manufacturing to low-cost third parties and reduce overheads through voluntary retirement schemes (VRS), closure of own plants, transfer of profits where feasible through royalties and technical know how fees and launching of drugs through fully-owned subsidiaries.

    The government (i.e. the Foreign Investment Promotion Board) has steadfastly refused permission to MNCs to set up fully-owned subsidiaries unless they include facilities for manufacturing or research. (Pfizer' application for a 100% subsidiary was rejected thrice before it was given permission for one.) The ostensible reason is that it wishes to prevent ventures that are pure trading operations. However it is ironical that they have not been able to prevent MNCs from converting their existing operations into near-trading companies.

    There are many other positives expected in the future for this section of the Indian pharmaceutical business. The review of the Drug Price Control Order (DPCO) which is expected to happen sometime in the future will benefit the multinationals to a larger extent than the domestic pharmaceutical companies mainly because they receive higher amount of revenues from products under DPCO vis--vis their Indian counterparts.

    In the past year MNCs have been undertaking restructuring with a view to reduce costs, improve marketing strategies and they have also been focussing on building their brands. These strategies will pay off in the future. Also international mergers in the pharmaceutical business have created stronger entities and this has had an impact on their Indian subsidiaries. Some of the big mergers that have taken place recently in the international pharmaceutical market are Glaxo-SK Beecham and Pfizer - Warner Lambert.

    A negative for the Indian pharmaceutical companies in the recent budget was that no incentives were given for their research and development efforts as was expected by them. However there were no such expectations by the MNC pharmaceutical companies whose research and development is not undertaken domestically in India but is being carried out by their parent companies.

    Hence inspite of the drawbacks faced by MNC pharmaceutical companies in India, they certainly seem to have found their place in the ground. The future looks bright... ...so watch our for these names in the Indian pharmaceutical markets: Glaxo, Hoechst Roussel, Knoll, Pfizer, Novartis, SmithKline Beecham and E Merck.



    Equitymaster requests your view! Post a comment on "Caught in a Catch - 22 Situation". Click here!


    More Views on News

    Sun Pharma: Bottomline Slips into the Red Amidst Challenging Environment (Quarterly Results Update - Detailed)

    Aug 14, 2017

    A challenging environment and one-time expense pushes Sun Pharma into a loss in the first quarter.

    Lupin: Bigger Challenges or Bigger Margin of Safety? (Quarterly Results Update - Detailed)

    Aug 14, 2017

    GST impact coupled with price erosion in US leads to lower profits for the quarter.

    Dr Reddy's: US Pressure Continues to Haunt (Quarterly Results Update - Detailed)

    Aug 8, 2017

    Profits plunge due to higher raw material costs.

    The Power of 5 Minutes (The 5 Minute Wrapup)

    Jun 16, 2017

    Here's what you can expect from The 5 Minute Wrapup in the coming months and years.

    Biocon: Lower Licensing Income Leads to Muted Growth for the Quarter (Quarterly Results Update - Detailed)

    Jun 23, 2017

    Net Profit lower due to exceptional items in the previous year.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 22, 2017 (Close)