Readying for battle

The decision by the global parent GlaxoSmithKline to merge its Indian Glaxo subsidiary with Burroughs Wellcome India, is on the face of it nothing more than a follow through of the global merger, delayed till now because of trade union resistance.

But it has a greater significance. The international drug firms operating in India are preparing themselves, by shedding deadweight capacity and expensive staff, for 2005 "" when they will shake off their current somnolescence and begin what should be a more productive phase.

In the past, a variety of factors (foreign exchange shortage, the resultant import stringency, control of drug prices and the Patent Act of 1970) had put a damper on their works.

But there were positive side-effects because Indian-owned firms got the opportunity to establish a business base and today the India pharmaceutical industry is a major player in the generics segment of the global drug business, and seeking a toehold in new drug discovery.

The last couple of years have been particularly depressing for the international pharmaceutical firms in India as they have had no incentive to keep pace with rapidly growing Indian companies that have emerged as least cost producers of both bulk drugs and formulations. The same skills have enabled them to copy new molecules and launch them in unregulated markets with considerable speed.

The absence of patent protection and the resultant inability to earn the intellectual property mark-up have prevented the global drug firms from introducing new products in India.

In this scenario Indian companies have achieved sharp increases in turnover, margins and valuations. Quite oddly, poor valuations have not prevented many MNCs from distributing very high dividends to please their principal overseas shareholders.

There have also been instances of the following sequence "" poor financial results, a hike in the promoter stake and then a return to good results. Indian shareholders have naturally looked askance at such firms.

Much in this scenario will change from next year, when new patent laws will give international firms the incentive to put their best foot forward, and there is evidence that at least some of them are getting ready to do so.

But it is doubtful if the international firms will have a cake walk in the marketplace. They will certainly be able to introduce new molecules at high prices without the risk of the market being cut from under their feet by copied drugs.

But it is also true that the Indian market has matured in recent years. Drug prices have often come down, even where there has been no price control, owing to falling input costs (process chemistry skills again) and intense competition.

Despite the low prices, the better companies have done well for themselves and been amply rewarded with attractive price-earning multiples. The period ahead will continue to be marked by intense competition.

If the international firms wish to avoid becoming niche players, they will have to compete with the better Indian companies in the price-cum-quality battle.

The government on its part will have to fight the menace of spurious drugs more vigorously, and work the patent and new drugs approval machineries efficiently.

It should also look approvingly at the ongoing consolidation in the industry which is eliminating small, inefficient and low-quality players kept alive by state government purchases.

If all this is done, most Indians will continue to be able to access vital medicines of acceptable quality at about the lowest global prices.