INNsight article by Peter Wittner, Interpharm Consultancy, July 2010

I thought that readers would be sick by now of my repeating this theme but, when I checked, I found that it is over a year since I last touched on the topic so here is another dose. At that time Pfizer were chasing Ratiopharm and other multinationals were reaching deals with generic manufacturers to pad out their product ranges for emerging markets.

This time the trigger was Abbott’s $3.72 billion acquisition of the Indian company Piramal which, when combined with the existing Abbot India company, will make it the local market leader. The suggestion that Abbott paid a high price for the company was confirmed both from the outside and the inside. The outside comment came from Malvinder Singh, who was behind the sale of Ranbaxy to the Japanese Daiichi-Sankyo for $4.6 billion. His comment, according the Indian “Economic Times” was “It is a damn good deal. I called up Ajay (Piramal) and congratulated him.” The comment from the inside came from Michael Warmuth, senior vice-president, at Abbot who said during an interview “If you want the best companies you will pay a premium; however, we feel it was the right price”.

The impression that comes over is that this is turning into a seller’s market with Indian companies lining up in a Beauty Parade while admiring buyers queue up to put in their ever higher bids in order to win the hand of an Indian (generic) beauty. Malvinder Singh was also of the opinion that other Indian companies secretly want to be wooed by foreign buyers but are trying to be discrete about it. Playing “hard to get” perhaps in order to push up the price? The rumour mill in India is suggesting that GSK may be moving towards a deal to buy part or all of Dr. Reddys, although other Big Pharma companies are also interested. The Economic Times when looking at the topic picked out Cadila , Dr. Reddy’s, Elder, Mankind and Torrent as the next potential targets.

Apart from those companies trying to buy a partner in the emerging markets, there are also plenty of Big Pharma companies that are going halfway by buying products rather than the companies themselves. The idea seems to be that Big Brands + Cheap Generics will make a wining combination in markets where the Big Brands by themselves would price the company out of the market.

GSK has already done such a deal with Dr, Reddys, Pfizer with Aurobindo and Claris, AstraZenecea with Torrent and Abbott had bought in a range of generics from Zydus Cadila before buying Piramal.

One obvious question that must be asked about the companies doing the deals to buy in generics is how they think that they are going to compete with their suppliers when the supplier is probably a much lower cost operator than his Big Pharma customer?

As a general rule (to which there are of course exceptions), generic companies are small, agile, and responsive and much better equipped to do deals on generics than Big Pharma companies. Furthermore, their generic cost of goods is going to be lower than that of the companies that buy generics from them to add to their product range.

Add these factors together and it is difficult to see how the Big Pharma companies are ever going to become significant players in the generic industry until more of them copy what Abbott have just done with Piramal, Daiichi did with Ranabxy and Novartis did before that with all the companies that ultimately became Sandoz. Trying to buy in generics and then sell them cheaper than the companies from whom they originated just does not seem to make sense as a viable basis for a generics business.

If you have any questions or comments on this article, please feel free to contact me.