Not Reddy, yet

If you are attractive, you will be eyed,” a smiling G.V. Prasad, Vice Chairman & CEO, Dr Reddy’s Laboratories, told BT when asked if his company was being wooed by predators from the global pharmaceutical industry. It’s a perfectly legitimate question, considering the consolidation that’s under way in the global generics industry.

After Daiichi Sankyo’s purchase of Ranbaxy Labs, Teva Pharma, the world’s largest generics company, acquired Barr Pharma, the US’ fourth largest generics firm. There are two questions on pharma analysts’ lips these days: Who’s next? And will an Indian firm be on that sell list? To take Prasad’s answer further, there’s little doubt that Dr Reddy’s is attractive. However, the official view of the company is that its promoters will never sell out (in fact, founder chairman K. Anji Reddy clarified this in no uncertain terms to his shareholders at a recent annual general meeting).

Yet, that won’t stop potential buyers from “eyeing” the company. To be sure, Dr Reddy’s may not be the only Indian drug firm that’s in the sights of global generics giants. Emkay Research, in a recent report, says: “Large-cap companies like Dr Reddy’s, Cipla, Glenmark, Wockhardt and Lupin could be good acquisition targets… In mid-caps, companies like Cadila Healthcare, Aurobindo, Unichem, Orchid and Torrent Pharma could be ideal targets for acquisition…” How the analysts at Emkay arrived at this shortlist is unclear, but whilst no promoter is obviously revealing his cards, some of them don’t rule out a consolidation spree.

“This (attempt by global MNCs to acquire Indian companies) is inevitable as it will take companies to the next level; also many businesses, especially the family-led, have to get ready for a long struggle; and they do not have the resources or matching infrastructure. Therefore, an option for some of them will be to either get a strategic investor on board or sell out,” says P.V. Ramaprasad Reddy, Chairman, Aurobindo Pharma. Reddy is quick to clarify that none of what he says should be construed as a move by Aurobindo to sell out. “We have not given it (sale) a thought at the moment and it is not just my decision alone. There are other stakeholders and investors involved and their views would also have to be considered,’’ adds Reddy.

But then the writing may be on the wall. Large global innovator companies are facing an unprecedented level of generics exposure, with a string of blockbusters going off patent between 2010 and 2014. Analysts expect these companies to lose anywhere between 14 and 40 per cent of their revenues in this period.

Patents on drugs with an estimated market of $40 billion (Rs 1.72 lakh crore) are set to expire in 2008 and 2009. When the generics market for these opens up, this will translate into an opportunity of $2-3 billion (Rs 8,600-12,900 crore); also with the blockbuster pipeline virtually drying up, research & development productivity slipping, and the US Food & Drug Administration (USFDA) getting more stringent in granting product approvals, buying into generics firms is one clearcut strategy to hedge risks and ensure growth.

Falling prices have further put pressure on the global giants to look for low-cost manufacturing opportunities and also expand their footprint in developing markets. At the same time, Indian companies have realised the need for developing patent-protected novel molecules in order to grow bigger, and this requires huge investments.

Ranbaxy promoter Malvinder Singh expects the deal with Daiichi to be a trend-setter. But not everyone is in a mood to follow. Talking to BT just after the Ranbaxy-Daiichi transaction was announced, Yusuf Hamied, Chairman, Cipla, maintained that his family will not exit, “at least in his lifetime”. A few others believe that a clutch of wellmanaged Indian pharma firms could turn into buyers rather than being consigned to the sell list.

“None of these developments will mean much to those profitable Indian companies who have good vertically-integrated facilities, low cost of manufacturing, strong local market presence and footprints in key geographies,’’ says a spokesperson for Sun Pharma-ceutical Industries. She, for one, doesn’t expect global pharma to descend on India in droves. Here’s why: “Going by market estimates, generics contribute about 15 per cent (by value) to the total global pharma market of over $700 billion (Rs 30.1 lakh crore); the rest is accounted for by innovator companies. It would be quite challenging for those who control 85 per cent of the market (by value) to ‘hedge’ by purchasing generic businesses, partly due to their size and also because it will call for a radical shift in their business model.’’

—E. Kumar Sharma