Generics, R&D to Drive Indian Sector Consolidation

Reports in the Indian media continue to highlight an apparent trend towards consolidation in India's pharmaceutical industry. Speculation has focused on the recent announcement of a possible merger between APIs producer Matrix Laboratories and Strides Arcolab, but a growing number of mid-sized firms are forging new alliances to fund expansion and drug discovery efforts.

According to official statistics, pharmaceuticals accounted for the 2004 financial year's largest slice of foreign direct investment in India, at INR15.71bn (US$361mn). Indian firms are also investing abroad, especially through marketing alliances and strategic acquisitions in the key US market. Globally, recent expansions have focused on emerging markets offering real product opportunities, such as China, Latin America and South Africa.

A key factor driving a possible wave of consolidation is the growing threat from foreign generics makers. India remains price competitive in relation to alternative locations such as Hungary and Israel. However, the entry of companies such as Sandoz in the wake of the new patent law — directly seeking to replicate the "Indian generic revenue model" — poses real challenges for the local sector. Meanwhile, Israel's Teva is rumoured to be in merger negotiations with a number of Indian firms.

The direct impact of changes in the competitive environment has been seen in growing rationalisation, with domestic firms divesting non-core operations and seeking to boost technical capability through discovery alliances. Leading Indian firm Ranbaxy recently announced a new arrangement with the government's Science Department and state-held National Chemical Laboratory. Generally, India's research sector is set to become a major beneficiary of the proceeds of any mergers and acquisitions in the country, despite rising costs and regulation.

Despite Indian firms' headlong rush to boost discovery efforts, which has seen R&D spending soar despite falling revenues across the sector, India's traditional strength in generics also holds possibilities. With blockbuster products worth US$80bn set to go off patent in the next two years, local firms are unlikely to abandon their present core areas of competence.