Profits nearer home

First, it was Piramal Healthcare selling its domestic formulations business to Abbott. Then came Paras Pharmaceuticals doing the same to Reckitt Benckiser. Now, it is the turn of Elder Pharmaceuticals to announce plans of hiving off assets and “other strategic options”, a possible precursor to another sale to a multinational corporation. The primary motive for all these deals, whether completed or in the making, is acquisition. They have more to do with grabbing a chunk of the local market for drugs than with the research or the niche manufacturing capabilities of Indian entities. The fact that the acquired entities had, over a period of time, built a good domestic marketing network and a brand portfolio in key therapeutic segments is what really makes them attractive to multinational pharma majors.

This trend of MNCs taking over Indian branded formulation and even generic drug makers (as in the case of Mylan's recent agreement to purchase Strides Arcolab's injectables business) is diametrically opposite to that which prevailed until recently. Then, many Indian pharma companies systematically combed through the patents of big-selling molecules of MNCs to identify loopholes and create competing generics, for which they filed abbreviated new drug applications (or ‘ANDAs’) to seek marketing approval in the US. This, of course, often was an expensive proposition with the average litigation challenging the validity, or claiming no infringement, of the patent of a blockbuster drug costing $15-20 million. As many Indian companies found this aggressive generic route increasingly risky and unaffordable, some of their promoters — notably in Ranbaxy — decided to exit at hefty valuations.

The MNCs’ acquisition spree is a result of their eye on the growing Indian market rather than their perception of India’s potential to become a global manufacturing hub. On the face of it, this may seem a bad thing, since the new owners are not keen on export or in developing generics. But it opens up opportunities for home-grown entrepreneurs, particularly those who develop drugs that cater to domestic market, to cash out. The valuations of Piramal Healthcare and Paras Pharma are proof of this. Just as in any other product, there is value in building brands and distribution networks in drugs, something that MNCs and other big players clearly don’t mind paying for.