Tighter drug quality norms, price controls open route to M&A deals

Stricter drug quality norms, especially in the United States, the major market for India's generic pharmaceutical products, and price controls in India are forcing smaller generic drugmakers in the country to look for an exit route.

Amidst tougher drug regulation in the United States and not-so-good reputation at home, pharmaceutical companies in India are considering looking for new markets or submit themselves to larger rivals.

With bigger drug firms like Ranbaxy and Cipla still not out of the US FDA's hit list, smaller firms, several of them contract manufacturers to larger firms, are either looking for new markets or selling themselves off to bigger rivals, domestic or foreign.

India's $15 billion generic drug industry is faced with the daunting task of rebuilding its image in the international market two years after the $500 million fine by US drug regulator imposed by the US Food and Drugs Administration (FDA) on India's biggest pharma company, Ranbaxy Laboratories, over drug safety violations.

And now, as the US FDA tightens checks and its approvals process and the Indian government placing curbs on drug pricing, pressure is piling up on smaller drug firms to quit or sell themselves off to bigger rivals.

"If they want to have a presence globally, they have to make investments. If they can't, then they'll have to focus on other markets or scale back their ambition outside of India, and that's probably what will happen," said Subhanu Saxena, CEO of Cipla, India's fourth-largest drugmaker by revenue.

Some of its peers are putting themselves on the block, says Ashok Anand, president of Hikal Ltd, a Mumbai-based drugmaker with a market value of $167 million.

"If they cannot deal with the stricter regulations, they might just prefer to sell out," he said.

The effect of a US sales ban on bigger firms has now percolated into the whole industry after the FDA delayed its approval process amidst an overhaul of the drug regulator's overhaul of its review process.

Growth in US revenue for drug makers slowed to 14 per cent in the year ended March 2015, less than half of that for the year ended March 2012, according to brokerage Edelweiss.

The low price regime, according to the brokerage is a godsend opportunity for larger players who want to plug gaps or want to grow big in the united states or the likes of Glenmark and Aurobindo who aim to grow in the United States.

Merchant bankers are now expecting this to pave the way for attractive M&A deals.

"Now that some of the smaller companies are reeling under intensive regulatory scrutiny and want to cash out on their investments, valuations would be much more realistic," said the head of India M&A at a large European bank in Mumbai.

The cost of manufacturing has gone up for the Indian drug manufacturers as they have spent millions in high-end testing equipment, improved training and hired larger teams in quality control since Ranbaxy was fined for manipulating clinical data.

Some consultants estimate spending on compliance has more than doubled to reach about 6 to 7 per cent of sales for the larger companies.

Although the number of US export bans issued to Indian companies fell to eight in 2014 from 21 in 2013, FDA data shows the agency continues to find manufacturing violations at the plants of some of the biggest drug makers in the country, an indication of the pervasiveness of the problem.