Putting the spotlight back on domestic consolidation

The Indian pharmaceutical space has long been waiting for consolidation, Torrent Pharmaceuticals Chairman Samir Mehta had told BusinessLine ’s Pulse last month.

Torrent itself, for instance, was on the prowl for “value” targets locally and overseas, he said. So it was not much of a surprise when, just weeks later, Torrent Pharma announced its agreement to buy Unichem’s businesses in India and Nepal in a ₹3,600-crore deal.

Could this transaction, which has been billed as one of the largest acquisitions in the domestic pharmaceutical space, be a forerunner of the much-anticipated consolidation in the local industry?

Faced with a new Pharmaceutical Policy on the anvil, which promises an expanded control on the prices of more medicines, and regulatory challenges in export markets like the United States, the domestic drug market is indeed bracing for consolidation, say industry insiders.

“In the domestic market, there has been a squeeze in the margins of pharma companies, primarily because there are now extended price controls. If a company has lots of products that went into the price control category, there is no benefit in staying in that business in India. This prompts consolidation, and we see that continuing in the coming days,” says Sunil Parekh, corporate strategist and advisor to the Zydus Group, Crisil and Suzlon Energy.

“The regulatory restrictions on prices and quality may get further extended, and only those companies that have (an) economy of scale and strong financial muscle to bring efficiency will remain in the fray,” Parekh says, drawing a parallel with the post-1912 history of automobile consolidation in the US.

It is an emotive issue for most promoters, and will be decided when promoters “see the need to exit,” Torrent’s Mehta had said, explaining the mindset of promoters looking to sell.

Spend on research or exit? Stricter regulatory requirements, price control and increasing competition will lead to promoters having to step up their research spends or move out of the domestic pharma space altogether, say observers. The latest wave of consolidation, which started in the last few years with deals such as Torrent’s buy of Elder Pharma’s businesses in India and Nepal and Sun Pharma’s merger of a troubled Ranbaxy, has its roots in company-specific issues rather than larger industry issues, says Praful Vora, a pharma analyst with Equirus Securities. Elder had working capital issues and Ranbaxy faced regulatory bans in the US on products from four of its plants. And while consolidation is imminent, he adds, the domestic market continues to be an attractive bet with 12-13 per cent growth.

Sandeep Narula, an associate professor at IIHMR University in Jaipur, attributes consolidation to the drying up of the patent pipeline, a situation faced largely by innovative drugmakers who are finding it tough to bring out new drugs and sustain the market they address. The cost of compliance with government regulations and overseas authorities such as the US Food and Drug Administration is also imposing additional burden on companies, he adds.

Research and development (R&D) in next-gen segments such as biosimilars (products that are similar to biologicals made from natural sources like human, animal or microorganisms) require many approvals and technical qualifications. “Also, it requires great amount of investments, which are not everybody’s cup of tea, and only big pharma players can afford to do it. The smaller companies will have to identify alternative business, which is generics,” explains Narula, and that comes with its own regulatory requirements.

But the generics segment lacks a credible and lucrative future. In fact, Zydus group advisor Parekh adds, “Without R&D, there is no survival. For innovation, the requirement of resources is of prime importance. And M&As (mergers and acquisitions) are one way of doing it.”

The acquirer becomes more efficient with increased economies of scale and reduced per-unit cost; the promoters of the acquired companies can independently focus better on other businesses, he says, giving a peep into the possible action to come.

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