Fear not takeovers

The takeover of India’s best-known drug maker, Ranbaxy Laboratories, by Japanese innovator company, Daiichi Sankyo, may have evoked a sense of disbelief all around. Yet, fears about the end of cheap drugs seem misplaced. True, Indian pharma manufacturers have been the price warriors for a long time, both domestically and internationally.

Think Cipla (and Ranbaxy), and its pathbreaking low-cost anti-AIDS drugs come to mind. However, it would do us well to remember that Indian pharma companies honed their copycat skills in an era when process patent was the norm. Now, with the era of product patents having arrived, it is a long, bruising haul up the value chain for Indian drug makers. Thanks to growing competition, prices of generic drugs have declined alarmingly over the recent year. Ranbaxy discovered that sometime ago, as its US sales flattened. Other Indian companies, too, are facing identical pressures. Ranbaxy has just been the most proactive in seeking a solution.

Does the present deal really mean the end of inexpensive drugs in India? One would imagine not, since globally there is mounting pressure to reduce healthcare costs (read: lower drug prices). Innovator companies are under pressure to cut costs of drug discovery. Take the case of Japan, where the government is promoting generics in a big way. According to estimates, the country’s medical costs are expected to swell by 70 per cent to 56 trillion yen by 2025 from 33 trillion yen in 2005. It is a no-brainer that the Japanese government wants generics to account for 30 per cent of prescriptions by 2012, up from the current 17 per cent at present. No surprises then that the present deal, sewed up in less than six months, is said to have been helped along by Japan’s political leadership.

The same issues abound in other parts of the developed world. Moreover, it would be worthwhile to remember that India’s pharma industry is highly fragmented. Ranbaxy, despite being the largest company in India in terms of sales, did not have a market share beyond single digits. Daiichi, which had no presence whatsoever in the generics space, has bought Ranbaxy as much for its low-cost structure as for the Indian market, which will boom in the years to come. Will that low-cost structure be disrupted by the deal? Not at all.

And even in case of new patented drugs, innovator companies do desperately want a piece of the growing Indian market. Consider Merck, which has decided to sell its patented drug, Januvia, for Type II diabetes, in India at nearly a fifth of its price in the US.