For Indian Pharma, a Demoralizing Ranbaxy Deal

Posted by: Bruce Einhorn on June 12, 2008

The news that Japan’s Daiichi Sankyo has acquired Ranbaxy, the leading Indian drugmaker, is a major blow to India’s pharmaceutical ambitions. For many boosters of India’s pharma industry, it’s a given that of course the company’s drugmakers are going to become global players. Yes, they’ve made their name mostly as low-cost manufacturers of generics. That in itself is no small accomplishment. But the generics business is not all that lucrative, since competition is pretty strong worldwide and Big Pharma companies fight relentlessly in court to obstruct them.

Moreover, being a copycat king is a little bit embarrassing, since even though making generics now is all on the up-and-up, the business serves as a reminder that companies such as Ranbaxy became successful thanks to a 1970 move by the Indian government that, in the words of the Hindu, “effectively ended patent protection” in the country. With that change, “domestic manufacturers were now able to produce low-cost, generic versions of popular, yet expensive drugs.” Today, the Indian government has a much stronger patent-protection regime, and there’s no longer anything disreputable about the generics business in India.

Still, Indian pharma execs have much loftier ambitions of coming up joining the likes of Pfizer, Novartis and Roche by coming up with new drugs of their own rather than making inexpensive versions of drugs developed by others. Ranbaxy and other companies such as Dr. Reddys have been throwing money at R&D programs focusing on new drug discovery and they’ve been teaming up with foreign drugmakers to pool resources. As my BusinessWeek colleagues Pete Engardio and Ben Rissing wrote here hopes are high for India – and China, too – becoming a force in the global pharma industry, although they caution patience. “When will a new blockbuster come out of India or China? It is far too early to say. It typically takes more than a decade to develop a newly discovered compound into a commercial drug that can win approval from the Food & Drug Administration, and most of the current strategic development deals are less than three years old.”

But it’s not so easy for the Indians to join the world’s drugmaking elite, as my BW colleague Nandini Lakshman wrote here. Their budgets are tiny compared to those of Big Pharma rivals. Developing new drugs is extremely risky compared to the relatively secure generics business. By selling to Daiichi Sankyo, Ranbaxy’s owners decided not to wait and instead take the money.

And Ranbaxy was supposed to be India’s champion, the top player and most ambitious globally. What sort of message does the deal now send? Perhaps that India may be fertile ground for new drug discovery, but Indian companies won’t be in charge of those discoveries. Here’s what the Economic Times has to say: “According to ChrysCapital MD Sanjiv Kaul, an ex-Ranbaxy executive and a sector analyst, the deal may dampen the spirit of other Indian pharma majors who have global aspirations. ‘Commercially, it is an awesome deal. However, Ranbaxy was the all-conquering Indian hero and should have been the last man standing instead of being the first to capitulate. A huge positive for Ranbaxy but a negative for Indian pharma.’”

Reader Comments

cav

June 12, 2008 12:35 PM

The Chinese Pharmaceutical Industry is already world renowned for its excellent medications containing ingredients such as snake venom, scorpion excreta, cockroach dung, spider eggs, bear bile, tiger testicles, rhinceros horn & human-fetus extracts.

RG

June 12, 2008 4:22 PM

How, all Indian generics will be priced too high for the poor masses. The Indian government should have put some protection to ensure the drugs remain afforable for the Indians. Now, the Ranbaxy head honchos get rich and the poor lose access to cheap drugs. Just waiting for the patent wars to see who dies.

Pavan

June 12, 2008 4:26 PM

That shows the immaturity of Indian MNCs. They just caved in to some fast money (which made sense in one way) instead of holding on to their own and push for more R&D and try for new drugs.
Hope others would not buckle and set a trend. Look at IT companies. They are atleast trying to compete with MNC's instead of just being bought out by some good money.
thanks

Squeezebox

June 12, 2008 4:40 PM

India needs to get past it's nationalist thinking. Transnationals are not American or Swiss or Japaneese, they're nations unto themselves. They buy companies and talent wherever they find them. If you're the best of the best, chances are, they'll come knocking at your door with a deal you can't refuse. Transnationals would rather buy ideas and talent than develop it in-house because their corporate culture just doesn't support the kind of free thinking needed to generate blockbusters.

Vivek Wadhwa

June 12, 2008 9:15 PM

Bruce, I don't think so!

Look at the fire that acquisitions light under tech companies in this country -- VC's smell opportunity and invest large amounts of money because they see exit and upside. The Raxbaxy deal showed that India's pharma industry has come of age -- that it can produce world class players. (This was one of the things which our research showed -- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1143472)

My prediction is that you will see many other acquisitions, some going the other way. I can see a company like Dr. Reddy's acquiring one of the weaker American pharma firms to get a toehold in this market. Don't forget that with the growth rates of firms in that part of the world (and the declining dollar), their valuations are higher and therefore they have more purchasing power than American firms do at present.

One thing that many commentators missed is that this is a Japanese firm which is teaming with an Indian firm to address the global market. That is new.

Vivek Wadhwa

June 12, 2008 9:16 PM

Bruce, I don't think so!

Look at the fire that acquisitions light under tech companies in this country -- VC's smell opportunity and invest large amounts of money because they see exit and upside. The Raxbaxy deal showed that India's pharma industry has come of age -- that it can produce world class players. (This was one of the things which our research showed -- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1143472)

My prediction is that you will see many other acquisitions, some going the other way. I can see a company like Dr. Reddy's acquiring one of the weaker American pharma firms to get a toehold in this market. Don't forget that with the growth rates of firms in that part of the world (and the declining dollar), their valuations are higher and therefore they have more purchasing power than American firms do at present.

One thing that many commentators missed is that this is a Japanese firm which is teaming with an Indian firm to address the global market. That is new.

chetan

June 13, 2008 2:56 AM

Ranbaxy was not a well professionally managed company, it was a family run business & in the 21st century its quite difficult to maintain a family run business (like's of Ranbaxy). agreed it was a Indian company, but how many Indian companies are really helping its people to flourish, its always only the top management that will grow, not the employees. And India is a typical example for labor exploitation. hope this deal goes good for the Ranbaxy employees in India.

RK

June 13, 2008 4:38 AM

I agree with Mr. Wadhwa -- the article misses out on the positive upside that a tie-up with a Japanese firm has to offer (and anyone who has followed what Japanese firms like Takeda, Daiichi Sankyo and others have achieved in the pharma field knows that the Japanese side will bring a lot to the table).
Ownership matters little in today’s global marketplace and especially for this industry which has changed radically over the last few decades -- the probability of a product becoming a blockbuster are becoming smaller, while the money, efforts and time that have to be invested in R&D, taking a drug from lab. to market through Phase I, II & III trials, and in global marketing and distribution, etc., have increased substantially over time.
Increasingly, those players in this industry who want to thrive rather than just survive over time will have to look for alliances with other globally distributed players who have complementary upstream/midstream/downstream strengths and that is what Bhai Mohan Singh’s grandsons have wisely done. They have cashed in on the equity gains attributable to their grandfather’s and father’s efforts and even if they individually exit the business and take their billions to play in the financial marketplace (with Religare, etc.), the core strengths of Ranbaxy will not disappear or wither away overnight – rather we should expect it to be augmented by the injection of Japanese know-how, managerial oversight and talent, over time. This will turn out to be a case of 1 + 1 being much more than 2 over the long haul.

Ex-Ranbaxy/ Now Global Pharma MNC employee

June 13, 2008 10:06 AM

A) i think its a highly innovative deal - gives a Japanese innovator company acess to over 50 emerging countries in one shot.

B) Gives Daiichi access to low cost of innovation (that Ranbaxy has built over the years) and manufatcuring (That a base in India has to offer)

C) Gives Daiichi a good play in the generics segment - something that will open up big time in Japan soon. Imagine if a Pfizer had done this with Ranbaxy a decade ago, it might just hv been in a slightly better position than where it is today purely in terms of financials.

Now - all that is good for Daiichi - but why did the Singhs do this? There are any number of theories, i believe there is something more personal to it in terms of the family and the pain / gain equation that Ranbaxy gave it and what they saw the future for the next generation, plus how (and what) Dr. Singh left them when he was dying from cancer.

I just hope and pray that the money is used properly and they build a world class hospital chain in India - somthing that the Apollo group promised and has squandered away - with no quality and no professionalism - buts that another story.

Thanks,

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