Pharmaceutical industry in India may witness a consolidation phase soon as it is passing through a period of transition triggered by a set of external and internal factors. That is going to result in disappearance of a number of medium and small scale companies either through acquisitions or by way of closures. Three major reasons for this state of affairs are: 1. A steady appreciation of Indian rupee. 2. Erosion in margins from generic exports. 3. A steady drop in share values of companies. Rupee appreciation against dollar during last one year had seriously hit the profitability of most of the large and medium scale Indian companies. And there is no indication of rupee weakening in the near future. That will mean the pharmaceutical companies will have to live with this reality in the years to come. Today, Indian pharmaceutical sector is an export intensive industry with almost 50 per cent of its production is going to the US and European markets. In the case of companies like Ranbaxy and Dr. Reddy's, export dependence is 80 per cent or more. Increasing domestic sales is not going to be an ideal alternative to export business for these companies as there is always a government intervention in pricing of drugs for the local market. Increasing competition in the generics in the US and Europe is another blow to Indian companies. It is not only the generic companies in the US which are competing with Indian companies but the brand companies also by launching what is known as authorised generics.
Indian pharmaceutical sector already witnessed closure of a good number of SSIs since 2005 with the commencement of implementation of Schedule M norms by most state governments. The total number of working pharmaceutical units in the country has come down to just 5000 from 9000 existed two years ago. A few hundreds of SSIs are waiting to be closed because of unviable operations in different parts of the country. New regulatory compulsions are expected to add more capital costs for SSIs. That apart, the domestic market situation has dramatically changed over the years with huge costs of trade margins and promotional costs for small operators. The crash in stock prices in the country during last four months has posed another threat to medium scale companies which are listed in the stock exchanges. Several of these listed companies have very low promoters' holdings making them vulnerable for take over by financially strong large companies. And for large companies acquisition of smaller companies is the new mantra for growth and expanding market share. Recent acquisitions of nearly 15 per cent stake of Orchid Pharma by Ranbaxy and Dabur Pharma selling of its 73.3 per cent stake to the Singapore unit of Germany's Fresenius Kabi AG for Rs 878.2 crore are just the initial signals of this consolidation process. Promoters with low equity stakes are in danger of losing control over their companies. They may try to resist initially but finally they will have to succumb to the pressures of financially strong.