Magazine
A Twist in Generics Sales
Are Indian CMO factories the key to global forays?
by S. Harachand
Rumors have been growing rife by the day that Mylan could make an open bid to buy the remaining 24% public holding in India's Matrix Labs. The U.S. generic major had picked up a 71% stake in Hyderabad-based Matrix in August last year. Even though both Matrix and Mylan scotch the reports as 'baseless rumor,' analysts predict that the offer can come at any time soon. The reason? Such a total buy-out (including the nearly 5% held by its founders) and the subsequent delisting of Matrix from Indian bourses would give Mylan a more hassle-free integration of their manufacturing operations.
Following the $6.63 billion Merck KgaA's generic business buy in May, Mylan wanted to transfer more of its manufacturing activities, including that of Merck, to Matrix's low-cost facilities. This, along with aligning their R&D platforms, would save about $250 million in costs. Explaining the synergy, Mylan chief executive officer Robert J. Courey said the Merck acquisition would bring more volume to Matrix, allowing it to achieve greater scale. "Matrix will be hub of the world for us," he noted.
Similarly, soon after the big-ticket acquisition of Betapharm Arzneimittel of Germany, Dr Reddy's announced the decision to shift all of Betapharm's manufacturing operations to India to hasten its returns. India's second largest drug maker paid $570 million -- nearly thrice the amount of Betapharm's yearly sales -- for the buy. Through transferring manufacturing back to India, Dr Reddy's felt, Betapharm's performance could be bettered.
Low-Cost Forte
No matter whether it is inbound as in Mylan / Matrix or outbound like Dr Reddy's / Betapharm, an Indian presence looks imperative for any major acquisition in the generic space to be fruitful, analysts point out.
Inorganic routes may give them volumes and immediate access to newer markets, but costs have become a gripping concern in the extremely competitive generic business. Constrained by ever falling margins, generic makers are constantly on the lookout for cheaper production sources to balance their revenues. Cost-effective technologies by Indian companies, developed through decades of generic experience, have become important in this context.
Indian drug makers' ability to produce even complex, difficult-to-synthesize APIs at far lower prices is quite well known. They manufacture and supply 200-odd APIs, and a few among them claim to rival in certain segments. Matrix, for example, is one of the largest producers of anti-retrovirals. So is Mumbai-based USV in metformin; Shasun of Chennai in ibuprofen, etc. Low-cost processes for sustained release oral solids have become the forte of several formulators too. Trying a hand in steriles, select formulation specialists have already proved prowess in injectables, as well (see India Report, March 2007, 'Striking the Vial of Gold').
From Tactical to Strategic
Global generic majors have kept a feeder-line from India alive far before Mylan's landing. Novartis-Sandoz and Barr-Pliva run operations through own facilities in Mumbai and Goa respectively. Teva acquired APIs and intermediates maker JK Drugs of New Delhi in 2003. While Actavis of Iceland made a series of acquisitions – biostudies CRO Lotus Labs (2005), tablet maker Grandix Pharma (2006) and most recently the API division of Sanmar Specialities from southern India.
Not limited to generics, a large number of domestic companies are working closely with almost all drug giants either as manufacturing partners or suppliers of APIs and intermediates. Nicholas Piramal, which leads the segment, registered revenue of $19 million from CMO business in current fiscal year -- a jump of more than 200% from the previous year. With facilities in UK (Avecia and Morpeth) and Canada (Torcan), Nicholas has liaisons with at least half a dozen of the world's drug majors including Pfizer, AstraZeneca and Allergan.
Nicholas, Dr Reddy's, Divis, Dishman, Shasun are the ones who made it big in an industry which has more than 400 such players. Services are offered through integrated companies, their separate subsidiaries and as 'pure players' dedicated exclusively to contract manufacturing. With widening production bases and expanding clientele lists, manufacturers claim nearly 70% of India's $900 million contract services pie. Growing at a pace of 33-34% the CRAMS sector (so-called because several CMOs also offer contract research services) could reach $6.6 billion by 2013, according to a report by Frost & Sullivan.
However, the present cost-based model could change in future, the report observes: "Outsourcing is emerging to a strategic move rather than a tactical one, participants will therefore, have to offer value as a strategy than cost."
With all essential ingredients and formula -- strong chemistry, technical know-how, good price points and quality -- in place, CMOs could well be heading to the paradigm shift, observers aver.
