All opinions are my own.

Tuesday, July 22, 2008

Reshuffling of the global pharmaceutical drug deck

In the last five weeks, we have seen the global generic pharmaceutical playing field change with the acquisition of Ranbaxy and Barr.

Until recently, the blockbuster model has worked for the ethical pharmaceutical companies, but with about $80 billion of ethical drug patents expiring in the next four years and with not much in the pipeline of major pharmaceuticals their business model needs a re-look.

Major pharmaceuticals need to consider a strategy that would allow them to develop new drugs and also serve a large market that needs low cost drugs whether they are patented or otherwise. It could be the last opportunity for the majors to get in the generic business (similar to Novartis).

Recently Merck US took a bold step in this direction without declaring a shift in its blockbuster model (Merck’s low-priced diabetes drug might change a few rules). If they are successful, it would have other majors consider similar options. Acquisition and assimilation of the generics could be an option also.

In order for Merck to have success in selling their patented drugs at a lower price and maintain their profit margins, they will need to lower their API manufacturing and formulation costs. This will require a complete overhaul of their manufacturing technologies i.e. moving from “quality by analysis” to “quality by design.” Depending on Merck’s success, other companies could follow the lead. This would be a giant leap for the pharmaceutical companies from their current manufacturing practices.

Thursday, July 10, 2008

Opportunities for Private Equity companies in India

Ranbaxy-Daiichi deal has opened many doors and possibilities especially for the private equity (PE) companies in India (PE firms review plans after Ranbaxy deal). Some PE companies are participating in the pharmaceutical ventures. However, there are large number of Indian companies that could be ripe for PE participation.

The opportunity:

Many of the Active Pharmaceutical Ingredient (API) and Pharmaceutical companies have been producing API and generic drugs before India joined WTO. These companies have flourished as they were supplying to major pharmaceuticals, competing against them, and satisfying the need of low cost generics and ethical drugs. Entrepreneurs who are now approaching their golden age started these companies.

With WTO participation, new set of entrepreneurs have joined in to capitalize on the growing opportunities. These new companies are based on narrow niches.

Entrepreneurs who started many of the companies have majority holdings in these companies. As the time has progressed, succession has been an issue and will continue to be an issue. This is especially true in India. Recent examples are Singh’s at Reliance, Birla’s, Singhania’s, Bajaj, Piramal and the list goes on. Lupin Pharmaceuticals, Sun Pharmaceuticals, Wockhardt, Neuland Labs, Shasun Chemicals, Dr. Reddy’s, Biocon, Hetero Group, Cipla, Cadila Pharmaceuticals, Aurobindo Pharma Ltd. etc. for that matter any of the Indian companies with a majority single family holding can be in play.

With India’s pharmaceutical companies participating in the competitive global world, it is necessary for them to operate at their peak levels even if there are succession issues. Sometimes it might become necessary for the promoters to dilute their holdings or bring in an outsider (e.g. Mittal Steel diluted their holding as part of the Arcelor acquisition, Ranbaxy brought in a GSK veteran, Dr. Brian Tempest), to placate the markets or the corporate governance needs.

PE firms have invested in Indian companies as long as they have confidence in original entrepreneurs/promoters (Emcure Pharmaceuticals-Pune: Blackstone Gr.; Granules India- Hyderabad: ISP Investco, Ridgeback Capital Investments).

PE firms are well versed with Specialty Chemicals. Thus, their foray in API (specialty chemicals with a disease curing value) companies in India is the easiest entry and presents them with a huge opportunity. In India, PE companies could hold a majority position but the operations might have to be operated by the local management as they know the political and social climate and can maneuver in it. Individual options will have to be reviewed.