After the initial spurt of acquisitions that started in 2003, Indian pharmaceutical companies are increasingly focusing on alliances to scale up global presence. An example of this is the recent tie-up of Dr Reddy’s with Merck Serono, a subsidiary of German pharma multinational Merck KGaA, to develop and market biosimilars worldwide. While this underscores the scope in the market for biosimilars, alliances in the traditional generics route, too, have seen a rise, with companies focusing on markets such as the Commonwealth of Independent States, Brazil, South Africa and Mexico.
Subrata Ray, senior vice-president and co-head (corporate sector ratings), Icra, says, “After preferring acquisitions in the initial phase, Indian companies are entering into tie-ups with MNCs (multinational companies) to scale up presence in these markets. These include Dr Reddy’s-GSK Pharma, Sun-Merck and Cadila-Abbott.”
The emerging markets pie
Indian companies are eyeing emerging markets, as these are expected to grow from the current $150 billion to $285-315 billion over the next three years, according to an Icra report on the sector. Developed markets, however, are likely to record low growth and the patented product portfolio in these is drying up. “Indian companies could adopt any of the three options for ‘pharmerging’ (non-US, non-India) expansion,” says Balaji Prasad of Barclays Research. These could be alliances with global pharmaceutical majors, acquisitions or organic expansion.
|PARTNERING FOR GROWTH
The alliances and their scopes
The list is only indicative, reflecting major deals
Acquisitions: Mixed bag
With the exception of Sun Pharma’s takeover of Taro, acquisitions, the route preferred earlier, did not deliver the desired results. Dr Reddy’s, which acquired Betapharm for $570 million, is struggling with the tender-based model in the German market. Wockhardt’s $265-million acquisition of Negma Labs, too, hasn’t lived up to expectations. Big-bang acquisitions carried out without testing the waters have hurt companies and analysts now expect them to adopt a more cautious approach.
Alliances: Preferred route
What led to the spurt in alliances between Indian companies and innovator MNCs was a ‘win-win’ situation for both, believe analysts such as Anubhav Aggarwal at research firm Credit Suisse. While MNCs with a ready sales and distribution set-up have more products to sell in emerging markets, Indian companies can bank on the network without the added cost of setting up their own front-end in new regions, he says. Barclays’ Prasad agrees, saying he expects more alliances. He adds organic expansion would be the option preferred least, given the complex regulatory processes, as well as market dynamics.
Not according to plan
However, in the case of some alliances, things have not turned out as anticipated. Consider the Pfizer-Biocon alliance. The two companies had called off their $350-million alliance for developing and marketing biosimilar insulin. With Pfizer shifting its focus from insulin products, Biocon would now have to seek another partner to market its insulin products globally. The Napo-Glenmark alliance, too, hit a roadblock, as the foreign licensing partner terminated the agreement. Analysts say many alliances would take time to develop, given marketing products across boundaries requires knowledge of legal nuances and registration, a time-taking process.
|KEY EMERGING MARKETS|
|Countries||Market Size||Generics market||% of total||Major presence|
|Brazil||23.0||12.0||50.0||Torrent, Cadila, Ranbaxy, Glenmark|
|Mexico||10.0||4.0||40.0||Ranbaxy, Torrent, Glenmark, Sun|
|Russia||14.0||5.0||35.0||Dr Reddy's, Ranbaxy|
|South Africa||4.0||1.0||30.0||Cipla, Ranbaxy, Lupin|
|The Philippines||3.0||0.5||15.0||Lupin, Glenmark|
|Figures in $ billion
Source: Barclays Research, other reports
Going it alone
Some companies are also considering going solo, and it is expected many others would follow suit. Aggarwal of Credit Suisse says companies are probably using alliances as the first step to building long-term presence in new markets.
However, given the difficult patent scenario, which is likely to lead to a fall in exclusive generic opportunities in the US, front-end presence in emerging markets would be required, as this would lower risks to growth in the event of a break-up with a partner company. Hitesh Mahida of Fortune Research, says, “Companies which invest in front-end infrastructure would be able to benefit the most, as this turns into a major revenue source that could partly make up for off-patent opportunities.”
Another factor favouring direct presence in emerging markets is marketing control, rather than contractual manufacturing.
Companies such as Glenmark, which are present in various emerging markets, favour setting up their own front-end infrastructure. Says its chairman and managing director Glenn Saldanha, “This business model takes some time for fruition. But this, we feel, is more sustainable and it also reaffirms our commitment to the market.”
Other companies, however, are adopting a twin strategy of direct presence in markets where they are entrenched and tying up with pharmaceutical majors in other markets. Consider Dr Reddy’s, which has strong front-end presence in Russia. The company has tied up with GSK Pharma to market products in emerging markets such as Africa, West Asia, Latin America and the Asia-Pacific — regions in which the company does not have significant presence.