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Caught in a Catch - 22 Situation - Views on News from Equitymaster

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Caught in a Catch - 22 Situation

Apr 3, 2000

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.


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