INTERNAT IONAL drug makers have for years been uncomfortable while dealing with India. Though multinational pharma majors had a strong presence in the country, they were always wary of the unregulated market, where domestic players copied their formulations and sold low-priced generics, severely under-cutting the MNCs.

But things began to change about three years ago, when India finally accepted a new product patent regime, providing protection to international firms selling drugs here. More importantly, India was increasingly seen as one of the fastest growing pharma markets, a hub for research and development, and also home to a handful of sprightly drugs companies that were battling the global leaders in their home markets.

Significantly, soaring healthcare costs in the West was forcing governments and consumers to opt for generics; and India had emerged as a leader in this field, with many of the domestic companies pushing out the western MNCs from emerging markets in Africa, Latin America and Asia.

Indian pharma majors like Cipla, Ranbaxy Laboratories and Dr Reddy’s Laboratories have become global players, setting up a strong marketing network across continents, acquiring international drug makers, establishing plants even in countries like the US, and challenging the older players.

Companies like Ranbaxy have emerged as Indian MNCs with a presence across the world and with their global sales matching domestic revenues. Not surprisingly, even as the company was busy aggressively picking up firms elsewhere in the world it also became a prime target for acquisition.

Last week, Japan’s third-largest drug maker, Daiichi Sankyo, announced it would pay $4.6 billion to acquire a controlling stake in Ranbaxy. The Japanese company offered an over 30 per cent premium to the Singhs, the family that founded Ranbaxy, to buy a nearly 35 per cent stake in the company for about $3 billion. It will acquire the remaining shares from the market. Taking everybody by surprise, the Singhs accepted the offer.

Ranbaxy Laboratories was established by the late Bhai Mohan Singh and nurtured by his son, Dr Parvinder Singh. The company is currently being controlled by the grandson, Dr Malvinder Singh, who is the chief executive and managing director, and together with brother Shivinder Singh, ranks 462nd in the Forbes Billionaires list, with assets of over $2.5 billion.

The company is one of India’s most aggressive drugs firms, battling multinationals both in the domestic and international markets. In 2006, it acquired eight international companies, including Romania’s Terapia for $324 million. Even now, Ranbaxy is involved in a bitter fight with Pfizer over Lipitor its blockbuster, $12 billion cholesterol drug. It was also eyeing its global rival, Israel’s Teva Pharmaceuticals, another leading generics firm.

* * * * *

INDIA’S pharmaceutical sector is dominated by family-controlled groups like Ranbaxy, Dr Reddy’s, Aurobindo Pharma, Sun Pharma and others. There are nearly 350 large and medium-sized companies, besides over 10,000 small-scale units. Over 50 MNCs also operate in the sector, which is the fourth-largest in the world in terms of volume, and 13th in terms of value.

India’s homegrown drugs industry has thrown up some outstanding success stories of late. Many of the drug makers are billionaires today, including Dilip Shangvi of Sun Pharma (with assets of $4 billion), Cyrus Poonawalla of Serum Institute ($3.5 billion), Gracias Saldanha of Glenmark ($1.5 billion) and Habil Khorakiwala of Wockhardt ($1.1 billion), besides of course the Singh brothers.

The generics market is worth nearly $7 billion and the overall drugs market is expected to top $20 billion in about seven years. The Indian pharma sector is growing at a healthy clip of nine per cent per annum, and the industry is one of the most efficient in the world. International agencies including the US Food and Drugs Administration and Britain’s Medicines and Healthcare Regulatory Agency have approved many of the manufacturing facilities in India, which produce drugs that are exported.

In fact, India has the highest number of FDA-certified manufacturing facilities outside of the US. But intense competition at home is forcing many of the big companies to venture abroad. The Patents Act has made it difficult to churn out copycat formulations and sell them cheaply.

Ranbaxy Laboratories, which aims to be a $5 billion by 2012 and among the top five generic firms in the US, has seen remarkable growth in its overseas operations. It has led the Indian drugs industry in the filing of abbreviated new drug applications (ANDAs) in the US; Indian firms account for a quarter of ANDAs.

Despite its overseas foray, things have not been hunky-dory for Ranbaxy, which had also been acquiring domestic firms. It has a 46.95 per cent stake in Zenotech Labs, and an under-15 per cent stake in companies such as Orchid Chemicals, Krebs Biopharma and Jupiter Biosciences. Ranbaxy also has a financial services subsidiary, Religare.

The generics business has flowered globally and competition is hurting Ranbaxy, once a dominant player in generics. MNCs with their huge war-chests are dragging emerging market rivals from India and other countries to court over alleged violation of patent rules.

* * * * *

THE acquisition of Ranbaxy heralds a new era in the global drugs industry, say observers. Analysts expect significant restructuring and consolidation in the industry, both in India and abroad. Branded drugs giants like Daiichi Sankyo would increasingly seek out generics makers, as cost-conscious governments around the world (and especially in the West) opt for the cheaper versions of drugs.

With the patents on many of their products expiring, big pharma companies are reconciled to the inevitable rise of the generics makers. Many are, therefore, keen to acquire some of the leading generics firms, especially in India.

Israel’s Teva Pharmaceutical Industries, for instance, has been rumoured to be eyeing Cipla, India’s largest drugs-maker. Dr Yusuf Hamied, Cipla’s chairman and managing director, however, denies speculation that his firm is up for sale.

There are dozens of low-cost Indian generics makers who could soon be targets for MNCs. While there has been a sharp fall in the number of new blockbuster drugs (those with annual sales of over a billion dollars), margins are getting squeezed. International majors are seeking to cut down costs and would prefer to relocate plants and research and development outfits to countries like India, where R&D costs are a sixth of those in the US and Europe.

Many of the promoter families in India have relatively low holdings in their firms – the Singhs had just about a third of the stake in Ranbaxy – which makes things easy for potential buyers. International acquisitions are also not frowned upon any longer in India, with public sentiment having changed dramatically.

In the 1980s, there was a furore in India when NRI businessman Lord Swaraj Paul of the UK announced plans to acquire companies like DCM and Escorts. Today, with Indian tycoons on an international acquisition spree – Ratan Tata, for instance, acquired Jaguar and Land Rover models from Ford Motor Company recently, and last year bought Anglo-Dutch steelmaker Corus – there is very little resistance to foreigners buying up Indian companies.

There are no caps on foreign investments in the pharmaceutical sector, unlike in financial services, media and telecommunications, so acquiring a drugs firm is relatively hassle-free. While the Ranbaxy deal is the biggest so far, two smaller acquisitions had occurred in the India pharma sector of late. Mylan Laboratories of the US had paid $740 million to acquire Hyderabad-based generics maker Matrix Laboratories in 2006, while in April, Germany’s Fresenius paid $220 million for a controlling stake in Dabur Pharma.

The Indian pharmaceutical sector is indeed primed for a lot of action over the coming days, as global majors will increasingly seek out companies that will fit their strategies.