Wednesday, August 29, 2012

Resurrecting the Indian pharma growth saga

Ever since the growth models of the 1990s began to elude the big guns of Indian pharma, a sordid phase of consolidation seems to have set in; raising fears of total disaster for the players. However, there is a light at the end of the tunnel with an interesting clutch of mid-sized players showing the way towards future sustainability and growth.

It was a hot sunny afternoon in the summers of 1984. R. C. Juneja (now MD & CEO, Mankind Pharma) was roaming around the streets of Meerut district selling medicines in his capacity as a medical representative of Lupin. He was surprised to see that a majority of doctors in small villages were not visited by drug manufacturers. Suddenly, an idea struck his mind that led him to quit Lupin. In the same year, he started a company named BestoChem Formulations along with his brothers Rajeev and Girish. After going through the usual ups and downs through which any other startup would go, Juneja shut down operations and in 1995 went on to establish Mankind Pharma with the aim to provide society access to quality medicines at affordable prices. Today, his dream has become an undeniable reality and Mankind Pharma is ranked no. 1 in terms of prescriptions and doctors per month across India. The pharma giant generated a turnover of `12.5 billion in FY 2009-10 and is planning to take this figure to `16 billion in the current fiscal.

If Mankind Pharma's success story was that of inspiration, persistence and perseverance, Arch Pharmalabs was about a well-timed and precise business decision. Three friends – Ajith Kamath, Manoj Jain and Rajendra Kaimal laid the foundation of Arch in 1999 by acquiring an SME called Merven Drugs. They subsequently brought down the product count of Merven Drugs from 10 to just three Active Pharmaceutical ingredients (APIs) – Atrovastatin, Clopidogrel and Isoxazole Penicillins. Many criticised them for their move, but with a turnover of `12 billion, Arch Pharmalabs is today one of India's most sought after and largest contract manufacturers for global pharma companies.

While on one side, industry watchers view with dread a trend of sorts where Indian pharma companies capitulate in front of the competition (with Ranbaxy, Piramal Healthcare, Shanta Biotech, Dabur Pharma and Matrix going for sell off), the mid-sized pharma success story seems to provide a welcome sign of relief. But the question remains, what is it that has suddenly catapulted these companies into the limelight? And is their success story sustainable?

To answer this, we first need to look into what's going on with India’s big daddies. Further consolidation is anticipated in the Indian pharma industry as even some of the larger players view stake sales to global giants as a very lucrative option. There are a number of reasons for this on either side. Firstly, given the limited growth opportunities in their home markets and the slew of patent expiries, global pharma players are looking for opportunities in the international domain and are willing to shell out the dough quite generously if needed. Moreover, Indian pharma players have been strong competitors for Big Pharma in the past; both in the markets and in the corridors of law. Secondly, given the patent regime that came into power in 2005 and the fact that the big Indian pharma companies have expanded in a crowded market, there is little room to grow. Also the growing competition has driven margins down to quite discomfiting levels in the generics space; particularly in the lucrative American and European markets. On the R&D front too, the cost of inventing a new molecule is anywhere between $1.5-2 billion and 12-15 years, and Indian companies haven’t achieved much success in this area either. They did make some attempts at growing faster, including sizeable overseas acquisitions, but the lure of the exit route seems to have been to strong to resist ultimately.


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