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Pharmaceuticals: A season of weddings - Views on News from Equitymaster
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  • Dec 26, 2000

    Pharmaceuticals: A season of weddings

    It was the year of mergers and acquisitions for the pharmaceutical industry. The big one, of course came at the fag end of the year when the US Federal Trade Commission approved the Glaxo–SmithKline merger. Along the way, was the sale by BASF of its pharma interests (viz Knoll AG) to Abbott Inc. Meanwhile both Astra Zeneca and Novartis hived off their agrochemical interests and merged them to form Syngenta. Pfizer, emerged as the second biggest pharmaceutical company (after Glaxo Wellcome) when it took over Warner Lambert via a hostile bid.

    In India too, the after effects of this consolidation were palpable. While the Glaxo–SmithKline and Pfizer–Parke Davis (as Warner Lambert is known in India) integration is yet to get underway, Aventis consolidated its interest in India by selling off Rhone Poulenc to Nicholas Piramal.

    Indian companies too got into the act. Dr. Reddy’s announced the takeover of American Remedies and a merger with its sister concern Cheminor Laboratories. Kopran and Alembic also announced the integration of their group companies. Wockhardt’s demerger of its pharmaceutical and agrochemical operations also took effect in the current year. (Wockhardt Life Science was however, one of the worst performers of 2000 as its share price dropped almost 87% from its peak of Rs 263 to Rs 35 currently.)

    Coming to the operations, most of the MNC pharma companies rationalised their field forces, sold off their real estate and consolidated operations in India. Glaxo, for instance sold off its tail-end brands as did Hoechst. Indian pharma companies, on the contrary expanded their R & D set ups, filed abbreviated new drug applications (ANDA) to cater to the generic market overseas and bought brands from smaller companies in India.

    Brand Buyer Seller
    Epilex Knoll Pharma Reckitt & Colman
    Riflux, Clamp Dr. Reddy's Sol Pharma
    Becelac Dr. Reddy's Pfimex
    Mox Ranbaxy Gufic Labs
    Natamox, Coldact, Splanz, Zofer Sun Pharma Natco Pharma
    Omnatax, Haemaccel Nicholas Piramal Hoechst Marion
    Annovate, Derobin US Vitamins Glaxo
    Macraberin, Multivite FM Universal Medicare Glaxo
    Burnol Reckitt Knoll Pharma
    Dinoripe Gel, Deviprost, PG Tab Dr. Reddy's Dai Ichi Karkaria
    Alex Glenmark Pharma Lyka Labs

    The markets gave a thumbs up to these initiatives with the result that the valuations of the top Indian companies viz. Ranbaxy, Cipla and Dr. Reddy’s match their multinational peers. That however, puts added pressure on these companies to deliver topline growth via the overseas market. One of the fastest growing companies in the domestic market Sun Pharma, for instance, found the losses of its US affiliate Caraco affecting its domestic valuations. In this regard, Cipla’s strategy is worth mentioning. The company plans to effect the exports of its anti–ulcer bulk drug omeprazole to the US market via its partner Andryx Corporation without establishing an expensive distribution chain.

    The next year could be critical for Indian companies as they try to move up the pharmaceutical value chain. With a generic market worth over $ 7 bn emerging in the US, 2001 could prove whether Indian companies are able to use their reverse engineering skills and relative lower cost of production to compete in the international market. Domestic growth would however, be driven by introduction of new products in the faster growing therapeutic areas such as anti–diabetes, cardiovascular, cholesterol reducers rather than antibiotics, tonics and mineral supplements.

    The valuations of MNC pharma companies could be driven by the stand their international parent’s adopt on the introduction of new products in India. These companies already have products in the faster growing therapeutic areas but their parents have been loath to introducing them in India citing weak patent laws. An unwanted side effect of the global consolidation is that almost every MNC pharma company has ended up with a 100% subsidiary. There is an apprehension that new products would be introduced through these wholly owned subsidiaries rather than through the listed company. And since for a pharmaceutical company, anywhere between 25 % – 40 % of the turnover accrues from new products introduced over the last three years, it would imply a stagnating topline for the listed companies, a couple of years down the line. The relatively higher valuations that MNC pharma companies have enjoyed over the last 25 years could then be a thing of the past.



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