NO one in India Inc understands globalisation and its implications better than domestic pharma companies, which are trying to transform themselves into global enterprises for nearly a decade now. The past few years have seen a flurry of global mergers and acquisitions (M&As) by Indian pharma companies, including Ranbaxy Laboratories, Dr Reddy’s Laboratories, Sun Pharmaceutical and Lupin, among others.

A May 2007 report of the Federation of Indian Chambers of Commerce and Industry (Ficci) says that the Indian pharma sector had 62 global acquisitions to its credit, accounting for 20% of the M&As undertaken by Indian Inc in the past eight years. The industry ranks next only to the IT/BPO sector in terms of the number of M&As.

However, when it comes to global M&As, there is a vital difference between the Indian pharma industry and other sectors. While in sectors like metals, cement and auto, it’s the bigger and established players which go for cross-border acquisitions, size has not been a deterrent for pharma players, as most mid- and large-sized companies have several acquisitions to their credit.

But what is driving the sector to look beyond domestic frontiers, when the domestic market is growing at a healthy clip of 12-14% per annum and the Indian generic drug market is one of most profitable markets globally?

Well, there are several compulsions. The product patent era that kicked off in 2005 has changed the playing field for pharma companies. Pure generics play alone can no longer help Indian companies, as they cannot launch ‘First in India’ products of innovator companies. The increased clamp-down on combination drugs is also expected to hurt their sales within the country. India is also being tapped by big pharma MNCs, which are facing poor product pipelines and increased generic threats in their home markets.

All this makes it difficult for Indian firms to grow beyond a particular level in the domestic market. Thus, consolidation within the industry is a strong possibility. Also, M&As among large Indian companies are difficult as there are too many overlapping businesses with little value creation. This leaves domestic pharma companies with the inorganic route as the only viable option for growing in foreign markets.

Access to larger markets in North America, Europe and CIS attracts most Indian companies. Domestic generic companies have been particularly active in acquiring smaller foreign generic players, especially in Europe and the US.

“Most often, cross-border acquisitions have been made to set up marketing front-ends abroad, while the manufacturing is done in India,” says DB Gupta, Chairman, Lupin. In some cases, foreign acquisitions have enabled Sun Pharma and Aurobindo to gain a local manufacturing facility catering to specific regulatory requirements like controlled substances and government tenders. Conversely, for a 100-year old company like Alembic, it is one of the fastest routes to catch up with the current industry leaders.

The momentum has picked up to such an extent that the current global economic slowdown has not affected the expansion plans of ambitious Indian pharma barons. In the past six months, Jubilant Organosys, Lupin and Cadila Healthcare have acquired companies abroad. However, acquisition is not the only route for pharma companies to globalise. Cipla has adopted the strategy of alliances to tap the global opportunity. The company, in its history of over 70 years, has not made a single acquisition. In foreign markets, it functions via marketing partnerships and alliances with local firms. While this model caps profits — as Cipla has to share profits with its overseas partner — it also distributes the risks due to lower marketing costs.

While most Indian companies are bullishly pursuing their plans, the recent spate of activities has revealed that the predator can also become the prey. Daiichi Sankyo’s acquisition of Ranbaxy is a case in point. While announcing the stake sale, Ranbaxy’s promoters had justified their decision by highlighting the synergies from combining a company that was focused on the generics business with an innovation-based company like Daiichi. As Indian companies acquire a reasonable size, they are becoming vulnerable targets for global pharma giants. While many industry leaders call it an exception, a potential threat will always be there.

(Inputs by Amriteshwar Mathur)

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