Mumbai: India's Rs 90,000-crore drug industry is heading for a challenging 2012 after two key policy changes this year—greater scrutiny of foreign direct investment in local pharma companies and a proposal to expand price controls to contain healthcare costs.
Profitability of drug makers will be under pressure as the focus turns to affordable medical treatment. Volumes and smart product mix may become key to sustainable growth as India and some key export markets expand healthcare budgets, said industry experts.
India's generic drug industry grew 16% between April and December over the same period a year earlier, according to industry data.
The domestic industry—an established maker and supplier of inexpensive copycat drugs to several global markets, including the US and Europe—has been growing at the same rate in the past couple of years; the pace of growth is expected to be maintained or accelerate.
Still, the year 2011 saw the share prices of many top pharma companies drop as an economic slowdown, foreign exchange losses and quality compliance and regulatory issues hit their profitability.
"Across the globe it's been a very tumultuous year… but the (domestic industry held up, which means that it has done well and has withstood (the tumult," said Ramesh Swaminathan, president of finance and planning at drugmaker Lupin Ltd.
A dampener for the industry was the draft national pharma policy that is committed to increase price controls to at least 400 drugs from 74 now in the country's essential medicines list.
This will cap the prices of about 75% of the drug formulations sold in India.
The Indian Pharmaceutical Alliance, an association of local drugmakers, has estimated the revenue loss to the industry because of the expanded price controls at about Rs 3,000 crore.
In October, India notified its decision to reverse a law allowing 100% automatic approval of foreign investments in existing pharma units by bringing these under the scrutiny of the Foreign Investment Promotion Board (FIPB—a decision likely to dampen deal flow in the industry.
Since the move was essentially a result of concerns over increasing foreign ownership in the country's drug industry, FIPB's role will be soon transferred to the antitrust watchdog Competition Commission of India.
In the last five years, the Indian drug industry has seen half-a-dozen big takeovers by foreign companies.
They include the $3.6 billion acquisition of the promoters' stake in India's largest drug maker Ranbaxy Laboratories Ltd in 2008 by Japan's Daiichi Sankyo Co. Ltd. US drug maker Mylan Inc. paid $734 million to acquire Hyderabad-based Matrix Laboratories Ltd in 2006. Last year, US drug and nutrition firm Abbott Laboratories paid $3.72 billion to acquire Piramal Healthcare Ltd's domestic drug formulation business and spent $726 million to buy out Ahmedabad-based consumer health company Paras Pharmaceuticals.
The industry saw eight acquisitions and 17 collaborations or partnerships in 2011. The generics-led sector has at least 15,000 drugmakers and is bound to see more consolidations involving local as well as international deals, experts said. Corporate advisers say a majority of the consolidation activity expected in 2012 will revolve around small and medium companies.
"One reason for this is that bigger companies getting acquired would lead to smaller and medium sized companies fearing whether they can survive (on their own and exiting or positioning themselves as a service (provider to the bigger companies," said Muralidharan Nair, head of the healthcare practice at the consultancy Ernst Young pvt Ltd. "This will naturally offer more acquisition and merger opportunities."
Even as mergers and acquisitions continued in healthcare services in 2011, corporate involvement in the essential primary and secondary healthcare services remained dismal.
Next year, however, will see more investments from the corporate sector into these areas as the government moves to double the country's healthcare budget to 2.5% of gross domestic product, said Tapan Ray, director-general of the Organisation of Pharmaceutical Producers of India, which represents foreign drugmakers in India.
Private equity firms invested about $283 million in the Indian healthcare industry across 25 deals this year, according to VCCEdge, a database of mergers and acquisitions. The number and the value of deals have more than halved over the past five years.
"Healthcare continues to be a large opportunity. However, given capital intensity of most parts of healthcare, investors continue to look for verticals which can generate higher return on capital," said Abhay Pandey, managing director of Sequoia Capital.
"It is a very important sector for us, has been a good place for us so far with a few very good investments, and we are aggressively scouting for and evaluating opportunities," he said.
ch.unni@livemint.
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