Re-evaluating Indian Pharma in Light of the Abbott – Piramal Deal

by Rina Pal

Traditional markets for big pharma, including North America, Europe, and Japan, are under pressure from slowed growth, patent expirations, and policy changes promoting the use of more affordable generic drugs.  While big pharma and makers of generic have long been rivals in emerging markets, a new appreciation for affordable drugs is now bringing these two together in cost-conscious markets like India.  In 2008, Japan’s Daiichi Sankyo paid $4.2 billion for a majority stake in India’s Ranbaxy Laboratories.  GlaxoSmithKline acquired exclusive rights to the pipeline of India’s Dr. Reddy’s Laboratories, which sells over 100 generics in emerging markets.  The most recent example of the emerging relationship between big pharma and generics makers is Abbott Laboratories’ recent acquisition of the domestic healthcare business of India’s Piramal Healthcare Ltd., a leading branded generics company, for $3.72 billion.

India became a leader in generics after Prime Minister Indira Gandhi decided in 1972 not to recognize patents on drug products.  This allowed Indian companies to copy expensive branded drugs as soon as they came to market, so long as the drugs were manufactured in a novel way.  India eventually ended its copycat generics market edge in 2005, when it adopted a World Trade Organization condition to guarantee twenty-year patents on new drugs, except for exceptional cases.  This provision brought India’s patent laws in compliance with the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which sets the minimum criteria for its signatory countries.  The recognition of product patents has provided global companies with better intellectual property rights  and, as a result, has opened up a new segment for the Indian pharmaceutical industry in contract research and manufacturing services.  Today, India continues to produce roughly one-fifth of the world’s generics.

The Abbott – Piramal Deal

Abbott, based in North Chicago, Illinois, has been operating in India for 100 of its 122 years, and has popular pharmaceutical brands including the antacid Digene and painkiller Brufen.  Piramal’s pharmaceutical products span dermatology, anti-infectives, and nutritional drugs, while Abbott India is focused on gastroenterology, pain, neurosciences, and metabolic disorders.  A McKinsey study predicts that drugs for diabetes and cardiovascular disease will see the fastest growth among all therapeutics in India during the next two years.

Abbott will pay $2.12 billion up front, plus $400 million annually for four years, for Piramal’s domestic healthcare business.  Abbott said it plans to fund the Piramal acquisition with cash from its balance sheet and does not expect it to impact earnings.  The deal will put Abbott ahead of market leaders Cipla and Ranbaxy, giving it a 7% market share in India’s fast growing market.  Abbott expects pharma sales in India, which are on track to hit $8 billion this year, to more than double by 2015.  “With this deal, the combined Healthcare Solutions and Abbott businesses will become the clear market leader in India,” said Piramal Group Chairman, Ajay Piramal.

What Lies Ahead

Previous pharmaceutical acquisitions have been targeted at buying Indian generics to serve Western markets, but the Abbott-Piramal deal is primarily focused on the domestic market, according to Business India.  “Big pharma will stay big only by selling its wares in India and China.”  India offers a large and growing market with rising incomes and increasing health insurance coverage, although the potential to expand to very high priced specialty products is seriously limited.

“Emerging markets represent one of the greatest opportunities in health care,” Abbott chief executive Miles White said in a statement.  “It’s a race,” he stated in a conference call after announcing the deal.  One appeal of emerging markets is that individuals, and not governments, pay for a big portion of health-care costs. Because 70% of the Indian market is self-pay, Abbott’s business there won’t be as vulnerable to the budget restraints seen in European health programs.

In fact, 10 days before the Piramal acquisition, Abbott announced a licensing and supply deal with Indian pharmaceutical company Zydus Cadila.  It allows Abbott to commercialize Zydus Cadila drugs in emerging markets.  The Piramal and Zydus Cadila deals are consistent with Abbott’s purchase in September 2009 of Belgian drug company Solvay, for roughly $7 billion. Abbott bought Solvay in its quest to enter emerging markets in Asia and Eastern Europe.

Abbott is not alone in pursuing growth in places that large pharmaceutical companies once feared to tread. Almost all big pharma companies have predicted that emerging markets will constitute 30-40% of growth in the next decade.

Indian companies can only hope to become truly global pharmaceutical companies through drug discovery, says Piramal, and, “No Indian company has done that in the last 60 years.  Now, Piramal has that opportunity.”  There are a limited number of countries with the required capabilities for the development of new pharmaceuticals, namely, the United States and a few western European nations.  Still, Piramal already has 400 scientists working on 14 molecules in cancer, diabetes, inflammation, and infectious disease research.  In addition, the cost of clinical trials in India is cheap.  “It takes globally about a billion and a half dollars, they say, to develop a new drug, in India you could do it probably at one-tenth the cost,” Piramal says.  India offers global pharma companies both quality and cost advantages.  Already, India has the largest number of U.S. Food and Drug Administration-approved plants outside the U.S., with over 100 facilities.  The key domestic players are Biocon, Serum Institute of India, Intas Biopharmaceuticals, Bharat Serums, Orchid Pharmaceuticals, Panacea Biotech, and Torrent Pharmaceuticals.  Apart from these, there are five government-owned companies in the Indian public sector, including, Indian Drugs and Pharmaceuticals, Hindustan Antibiotics Limited, Bengal Chemicals and Pharmaceuticals Limited, Bengal Immunity Limited, and Smith Stanistreet Pharmaceuticals Limited.

Protecting Intellectual Property and Other Rights

The Piramal Group has agreed not to enter the generic pharma products business in India or other emerging markets for eight years.  Instead, it will continue research in new drugs through an affiliate, Piramal Healthcare.  Big pharma companies are facing intense competition from generic players, and many existing top-selling drugs are facing patent challenges and thus competition from generic players.  In order for the Abbott’s acquisition of Piramal and future pharma acquisitions to be successful, key intellectual property matters must be addressed at the outset.  Intellectual property assets that are currently active must be evaluated and trade secrets must be studied to see if the seller has an active and documented program.  Unregistered intellectual property assets must also be analyzed.  Of course, the acquirer should confirm in its due diligence that it has a complete accounting of all intellectual property assets from the target.  The acquirer also needs to confirm if there are any non-disclosure and non-competition agreements in place with current officers and employees.  While transactional attorneys need to be aware of regulations unique to India, it is especially important to follow the Department of Chemicals & Petro-Chemicals’ Pharmaceutical Policy, which updates priorities for pharmaceuticals in India.

The pharmaceutical industry today faces challenges worldwide.  Alliances between big pharma and generics in India appear to be part of the new business plan to address these challenges.  While this will change access and prices in emerging markets, it remains to be seen how this will affect the model for how drugs are sold in the U.S.

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