Is Indian pharmaceutical industry losing its sheen? Promoters exit for attractive alternatives

MUMBAI: For years, the Rs 871 crore JB Chemicals and Pharmaceuticals, a Mumbai-based generics drug company, rode on the success of its cough and cold syrup, Doktor Mom, in Russia. Last week, it sold the brand and two others to Johnson & Johnson of the US. The three brands accounted for some 35% of JB's revenues. Competition forced its hand.

Multinationals keen to shore up their presence in emerging markets were "splurging" on new product offerings, says Pranabh Mody, president, JB Chemicals. "And there we were, basically trying to just protect our brands." The company couldn't match spends, so its owners decided to sell when the going was good.

They didn't fare badly at that, though. J&J paid $260 million, an amount close to JB's market capitalisation, and will manufacture the product at JB for five years. JB Chem is but the latest instance of pharma promoters taking a long, hard look at their businesses as the environment around them changes dramatically. Alongside, there are the promoters of India's most valuable pharma company, Sun Pharma, who want to grab highgrowth opportunities in non-related sectors even as they stay committed to pharma.

In April, Sun founder Dilip Shanghvi said he would invest in power generation. "The promoters of Sun Pharma see a good opportunity in the power business hence they are investing in it," says a Sun spokesperson. "The investment has nothing to do with Sun Pharma." Mumbai industrialist Ajay Piramal, who a year ago sold a local branded prescription drugs unit—that accounted for half of Piramal Healthcare's revenues—to US drug maker Abbott Labs, recently said he would foray into a range of financial services. Piramal will receive some Rs 17,000 crore from the sale to Abbott.

Others who have cashed out in the past include N Prasad of Matrix in 2006; Malvinder and Shivinder Singh of Ranbaxy in 2008; and Anand Burman of Dabur Pharma in 2009—all at mouth-watering valuations. Is Indian pharma losing its sheen? The question is not whether the business per se is attractive, but whether it is so for everyone, says Hitesh Sharma, partner and national leader (healthcare practice) at Ernst & Young.

Many attractive options

"The promoters who are selling out and entering other businesses are taking a strategic call on the long-term value drivers of pharma," he says. They are also comparing the value they might get by monetising today to what they will create over a period of time, he adds. All of these deals have been done at record multiples. Abbott, for instance, will end up paying Piramal nine times the current sales of the business it has purchased.

Pharma promoters built their businesses in different times-when India's patent rules were lax; this allowed them to copy products fresh out of MNC labs. However, mounting global pressure compelled India to tighten its patent laws in 2005 just as MNCs were waking up to the potential of emerging markets.

To their credit, though, a clutch of promoters had begun to invest through the nineties for life in the new patents regime. Ranbaxy, Dr Reddy's, Sun Pharma, Glenmark and Piramal ploughed money into new drug discovery, seen so far as an MNC game. Most-with the exception of Piramal-also aggressively branched out into Western markets for off-patent drugs, taking on MNCs in their backyard. Piramal became a contract manufacturer for MNCs hoping to cash in on the outsourcing wave in pharmaceuticals.

Yet, there are very few Indian drugs in the development pipeline, and none on the market. While exports of generic drugs to the US proved lucrative and grew exponentially lately, the markets have grown more challenging and less rewarding.

Healthcare reform has put pressure on prices in the West-regulators are getting more vigilant, forcing product recalls and plant shutdowns for apparent quality gaffes at companies ranging from Ranbaxy to mid-sized generics producer Aurobindo Pharma. MNCs have got into off-patent drugs or generics in a big way to make up for fewer new drugs coming out of their pipelines and to score in emerging markets.

More recently, the much-touted pharma outsourcing business-of contract research and manufacturing-has been bruised by the global recession and roiled by large-scale mergers and acquisitions among its Western clientele.

Given the challenges, if promoters already have an alternative business, the decision to sell becomes that much easier. For instance, when the Singh brothers sold Ranbaxy, they already owned Fortis-a hospitals business-and Religare-a broking and investment banking firm. Both are now on an aggressive growth path. And though Ranbaxy's dispute with US drug regulators-reportedly threatening to balloon into a billion-dollar fine-has also been speculated upon in hindsight to be the reason for their exit, the Singhs themselves have never said so.

As the economy grows, more opportunities such as infrastructure and consumption-led sectors like retail and hospitality are presenting themselves as attractive alternatives. Some of these might prove "less of a management challenge" for the scions of some pharma companies, says one investment banker who spoke on the condition of anonymity. To illustrate, it is easier to attract "high-flyer" professionals to a "glamorous" sector such as financial services than a stodgy one such as pharmaceuticals, he believes.

Some of these businesses may not even better pharma on parameters such as return on capital employed, but that may seem like an acceptable trade-off, he adds.

The scenario isn't all bleak. In October 2010, McKinsey predicted the Indian pharmaceutical market would grow from $13 billion to $55 billion by 2020. "We still think we are okay for the next couple of years," says Mody, whose family has also recently invested in a company building a special economic zone in partnership with a real estate company. "We have to keep looking for interesting niches."

Then there is the exports opportunity-between 2010 and 2015, drugs worth $157 billion are set to lose patent protection in developed markets. "The next three years are the golden period for generics," says GV Prasad, vice-chairman and CEO, Dr Reddy's.

There is still potential to create a world beater in generic drugs itself from India, feel some. "I don't see why some companies are cashing out mid-stream other than because they are getting exceptionally good valuations," says Ajit Kamath, chairman, Arch Pharmalabs, a mid-sized Indian bulk drugs supplier and contract manufacturer.

"There is still potential to create a Teva out of India." Israel's Teva is the world's largest generics producer with revenues of $16 billion; it has grown via an aggressive acquisition strategy. Kamath points out that India is a large sourcing base for Teva.

Others such as Glenn Saldanha, chairman, Glenmark, have stepped up their commitment to new drug discovery even as others pedalled down. "There is no substitute to innovation if you want to survive in the long run," he says. Glenmark is a top earner of fees from licensing, promising new drugs for human trials to MNCs that can be sold jointly if they make it to market. Though most of these drugs have so far been killed in development or returned, Saldanha says his company is "totally committed" to research and has followed up with more licensing deals to prove it.

To be fair, the number of complete exits is still small though the companies themselves are high profile. And some large companies appear to still have plenty of fight left in them. For instance, Dr Reddy's is investing in biosimilars, or biotech copycats, a more expensive, less certain pursuit than vanilla generics. "We have attained scale in the last few years and are actually in a better position to face challenges," says Prasad.

Others are partnering aggressively. Zydus Cadila spun off its local business into a joint venture with Germany's Bayer. Sun recently entered into a joint venture with the US' Merck to bankroll the trajectory of some of its innovative products in emerging markets. "You will see a lot more collaborative play to reduce risk," says Utkarsh Palnitkar, executive director, Centrum Capital, and a former industry consultant.

For many promoters, there's not much beyond pharma. "This is our life," says Prasad. "This is a business we know well, and have been successful at and there's enormous opportunity in it still."

JB Chem's Mody readily admits that pharma is all that seven of his family members have been occupied with and says the sale proceeds will be used to strengthen what's left. Then he adds: "But if someone offers me a seven or eight multiple on sales, it would be difficult to say no."