The year 2005 has been quite significant for the Indian pharmaceutical segment when the world's top drug companies were facing problems like stiff competition for their blockbuster drugs, limited success in launching new blockbuster products and removal of some leading products from the markets. Expiry of patents for several drugs in next couple of years will create new opportunities for research based Indian companies. The new Patent regime, introduced from January 2005, has brought many challenges as well as opportunities.
Efforts of Indian companies towards globalization will start yielding results in next couple of years. There are more than 70 US FDA approved plants and over 200 GMP compliant facilities in India. Several companies are expanding their manufacturing bases to tap global market. The outsourcing activity is increasing very fast in order to reduce manufacturing and other costs. With their world-class manufacturing bases, Indian companies are now easily attracting multinationals as their partners.
Towards achieving globalization, Indian companies have adopted a new strategy of acquisition of medium and small companies overseas during recent years. The total size of overseas acquisitions by Indian companies during last three years estimated at more than Rs 2000 crore. Recently, Dr Reddy's Laboratories acquired Mexican API unit of Roche for a consideration of US $ 59 million and Nicholas Piramal India (NPIL) acquired Avecia Pharma for US$ 16.25 million. Earlier, Matrix grab DocPharma for worth $ 263 million and Ranbaxy taken over RPG Aventis for a price of US $ 80 million. According to analysts the M&A activity will intensify in coming days as the consolidation will play crucial role. The size and economic scale does matter in the highly competitive environment.
The major acquisitions are in the area of marketing, but some Indian companies are investing in building manufacturing capacities in developed markets. Indian companies have already installed plants in US, Europe, Brazil, Russia and China. Analysts pointed out that the medium scale Indian companies will first strengthen their marketing activity in these countries and then they will set up manufacturing units to improve supply chain. The Indian companies have already set up huge capacities in the domestic area.
Further, the Indian companies are well set to overcome problems and move ahead strongly with major focus on R&D, tie-ups, contract research and manufacturing services, aggressive marketing, increasing numbers of filing of DMFs and ANDAs, and launching of cost effective products. To move towards globalization and create strong supply chain, the companies expanded their manufacturing base and also commissioned manufacturing facilities abroad.
The major Indian companies like Ranbaxy Laboratories, Dr Reddy's Laboratories, Matrix Laboratories, Sun Pharmaceuticals, Nicholas Piramal India, Cipla, Jubilant Organays, Stride Arcolab, Lupin, Glenmark Pharmaceuticals, Cadila Healthcare, Wockhardt Ltd, Biocon, Dishman Pharmaceuticals and Torrent Pharma have established own brand image in the international market and taking steps to consolidate their activities. Besides these top companies, several other companies have set up R&D centers and cGMP facilities and working with global giants.
Though adverse fluctuations in exchange rates, stringent approval procedures, legal hassles and limited financial resources as compared to cash rich MNCs, the Indian pharmaceutical segment is set to achieve better growth rate in 2005 with the improved financial health of several mid-cap players. Based on the financial results of leading 50 companies for the first half of 2005-06, the Indian pharmaceutical segment is set to achieve sales and profit growth of around 20 per cent and 25 per cent respectively, despite heavy expenditure on R&D, marketing and approvals. However, export earnings will be under pressure due to stiff competition in regulated markets.
The high cost of medical products in the regulated market like USA, Europe and Japan, and expiration of patent of several leading drugs pushed the demand for low cost generics in these markets. Several governments also started to reduce medical expenditure. To tap these opportunities, the Indian companies started focusing more on R&D and are receiving recognition in the developed countries. The biotechnology is another segment Indian companies are stepping up their investments. Biocon, Wockhardt, Shanta Biotech and many other companies are focusing on biotech products for future growth.
The R&D expenditure by 25 Indian companies went up sharply by 42 per cent to Rs 1814 crore from Rs 1279 crore in 2003-04. Indian companies are mainly focusing on Novel Drug Delivery Systems, New Chemical Entities, synthesis & discovery of new drug molecules, and GLP/cGCP complying clinical studies. The R&D focus is mainly on areas like infectious diseases, urology, metabolic diseases and inflammatory/respiratory diseases. With the help of R&D activities, Indian companies have filed several DMFs and ANDAs in regulated market during the year 2005 and getting necessary approvals for new products.
The huge selling and marketing expenses are putting pressure on earnings of pharmaceutical companies in the foreign countries. To reduce these expenses and strengthen presence, Indian companies started establishing wholly owned subsidiaries in the foreign countries. So far top 15 companies have set up 84 subsidiaries in various countries and their investments in these companies moved up to over Rs 1500 crore as compared to 1070 crore during 2003-04. DRL has set up 11 subsidiaries in foreign with a total investment of Rs 143 crore. Similarly, Ranbaxy stepped up its investments in foreign subsidiaries to Rs 573 crore from Rs 233 crore in the last year. Sun Pharma, Wockhardt, Aurobindo Pharma and Cadila also invested huge funds in subsidiaries
The multinational companies are now considering outsourcing their final products to reduce rising cost and overcome labour problems. The analyst said that the Contract Research and Manufacturing Services (CRAMS) is gaining ground and Indian companies have emerged as preferred partner on account of huge cGMP facilities. Multinationals are entering collaborations with Indian companies for CRAMS and the turnover from this activity is going up every year.
Indian companies have built up strong brand image and known for the cost effective quality products in the international markets. Easy availability of talent and skilled labour at a very low price give Indian companies upper hand in competitive international market. Analyst expressed views that an affordable cost of quality product from Indian manufacturers is giving tough time to international giants. Multinational companies have to reduce their prices drastically to fight with the Indian products.
Though the Indian companies are enjoying benefits of large manufacturing base with R&D back-up, strong portfolio of cost effective products, well-built talent pool and easy availability of raw material, they are facing teething problems like stringent approval norms in the regulated markets. Further, the uncertainty and lengthy process attached to R&D activity for successful development of products is restricting the growth. The analyst said the fast launching of new products in the international market is important for future growth. The loss of few legal battles for the popular patented products during last couple of years is part of the business, but Indian companies have able to show courage.
After establishing better track records and brand image in the regulated markets, several Indian pharma companies entered the foreign capital markets like New York, London, Luxembourg and Singapore with ADR/GDRs. The companies like Ranbaxy Laboratories, Dr Reddy's Laboratories, Wockhardt, Ind-Swift Ltd, Granules India, Orchid Chemicals, Apollo Hospital, Elder Pharma and Morepen Laboratories issued GDR during last couple of years.
Similarly several companies are raising funds through FCCBs to part finance acquisition or investments in subsidiaries. Recently, Sun Pharmaceuticals and Lupin Ltd raised $350 million and $100 million respectively through FCCBs. Glenmark and Stride Arcolab also issued FCCBs worth $ 70 million and 40 million in the first quarter of 2005. This shows that the Indian companies have built up confidence in international area and getting necessary feedback from individual as well as institutional investors.
The year 2005 was marked with volatile movements in the stock prices. Compared to 2004, pharma scrips moved up very fast during the year 2005 on account of better financial performance, higher filing of DMFs and ANDAs, reach product pipeline, new business opportunities and large scale buying support from foreign financial institutional and individual investors. The adverse UK & US Court ruling against Ranbaxy in connection with lawsuit filed by Pfizer, put pressure on share movements.
As compared to major companies, the mid-cap pharma companies shown excellent growth in market capitalization during 2005. The BSE Healthcare Index of 23 major pharma companies touched to 3086 points as on December 15, 2005 as against 2428.77 points as at the end of April 2005 on strong support from FIIs and domestic investors. This will give necessary support while entering into international market.
Few factors like adverse fluctuation in currency rates, price control by several governments, reduction in medical budget by many developed countries and spurious products will impact the business operations of pharma companies. However, with large domestic market, rising aged population, rising medical awareness and upcoming new diseases like HIV/AIDS will give necessary push for globalisation efforts of Indian pharma companies.