The Hindu Business Line : No easy growth prescription for pharma industry in 2009

Mumbai, Dec. 29 If there was a show-stopper of sorts in the estimated Rs 76,000-crore pharmaceutical industry this year – it was undoubtedly when the promoter family of Ranbaxy sold its entire stake to Japanese drug-maker Daiichi Sankyo in June.

Ranbaxy is now a subsidiary of the Japanese company, and though, a random poll of top officials differ on whether the development was a high point or a low for domestic drug-makers, they are unanimous in that it was a “significant” one.

Acquisitions and consolidation are likely to continue into the forthcoming year, as well, though probably not at the scorching pace seen in the last couple of years when domestic drug companies had stepped out with their shopping bags to scout for opportunities in the overseas market.

Like other businesses, the pharmaceutical industry too, will have to run its shop in the shadow of the global financial crisis into 2009, and the road ahead looks fraught with challenges. As funds run dry and valuations become attractive, companies with their backs against the wall are vulnerable acquisition targets, while those sitting on cash are scouting for good buys.

In 2008, Israeli generic drug company unilaterally snapped Sun Pharma’s $454-million proposal to acquire it. The deal, and its abrupt termination, is still being fought in the courts of Israel and the US. But some drug industry representatives observe that Sun Pharma’s pushing ahead with a hostile takeover is an indication of the “perseverance” that Indian drug makers are willing to show in challenging environments.

Global hurdles

And the challenges in the global environment are only mounting, with the rupee volatility and crude price fluctuations adding to the industry’s inherent pressures of patent litigations, stringent global regulations, increasing research costs and decreasing pipeline of new products.

Generic drug producers are facing rough weather in global markets, where attempts are made to equate them to counterfeit medicines.

The local drug industry, along with the Indian government, is working to get clarity on the definition of spurious and counterfeit medicines, to prevent it from being used as a non-tariff barrier against generic drugs.

But the market for generic drugs is set to increase, as governments across the world, be it the US, Europe (the UK, Germany etc) and Japan, for instance, come under pressure to bring down the cost of healthcare for its people.

Generic drugs are medicines chemically similar to innovative medicines, though they cost much less than the innovator drug, as there is less research involved in making them.

But since the stakes are high, more innovator companies are looking to have their foot firmly in the generic space as well.

Drug companies are also facing regulatory challenges in the US, the most high-profile in 2008 being the US Food and Drug Administration’s ban on 30 of Ranbaxy’s medicines.

There were regulatory issues with the US FDA, albeit of a lesser nature, with medicines from Sun Pharma’s US subsidiary and Lupin as well. And on its part, the US FDA is set to start its offices in India this year.

Fluctuating prices

Pharmaceutical exports are pegged at about Rs 33,000 crore this year, with Indian drug companies such as Cipla, Sun Pharma, Dr Reddy’s etc, exporting to overseas markets.

Others like Dishman or Piramal Healthcare, for instance, export to clients with whom they have deals. But either way, companies have had to live with the vagaries of a fluctuating rupee.

Companies importing active pharmaceutical ingredients from China have felt the pinch of increased input prices. The dramatic drop in crude price – from $147/barrel earlier in the year to sub-$40 has also impacted drugmakers.

Adverse market conditions too impacted companies such as the Wockhardt group that had to scrap its IPO in January, because of weak investor response.

The company was looking to raise about Rs 800 crore for its hospitals business.

Research rigours

On the domestic terrain, the liquidity crunch has put pressure on drug companies and their research efforts. Sun Pharma, Piramal Healthcare, Dr Reddy’s, Glenmark, Lupin are just some of the companies with ambitious research plans. And though there are no indications yet on cuts in research spending, the funds crunch would put immense pressure on drug-discovery and clinical trials – that are time and capital consuming efforts.

The flip-flop policies on special economic zones has added to the uncertainty. For instance, Cipla’s plant was to come up in an SEZ at Goa, but local protests and subsequent litigation have affected capacity expansion here.

The domestic market has also yet to see finality on patent-related litigation on Novartis’ cancer drug Glivec. In fact, more patent-related litigation has surfaced on other drugs as well, such as Roche’s cancer drug Tarceva and HIV-related drug Valganciclovir.

Though much has not changed on home-ground with regard to the price-control that the Centre has on medicines, the industry has now got a new department for pharmaceuticals. But with industry of the opinion that polices regarding controlling medicine prices are arbitrary – the challenge for the Government, as always, will be to bring level-headed policies that encourage the growth of industry, even as it keeps medicine prices in check for the consumer.

But whether that will be possible in an election year, is what will be watched closely by stake-holders.