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Pharma industry focusing on core business to better gains

Recent overseas acquisitions by Indian pharmaceutical companies point to the industry’s sharpening focus on its core strength—manufacturing.

While research-based multinationals are exiting manufacturing to focus on brand-building and research, Indian generic makers are counting on their cost advantage to venture into mature markets.

“Manufacturing comes with a lot of supply-side pressures, such as rise in raw material prices and manpower liabilities,” said Surya Patra, an analyst with Networth Stock Broking. “Indian companies, with low-cost manpower and state-of-the-art machinery are poised to do the job.”

The acquisition by Nicholas Piramal India of Pfizer’s manufacturing unit in Morpeth, UK, is a case in point.

There are concerns Nicholas may have to shell out large sums of money towards pension for 450 employees in Pfizer’s UK unit. Companies in the UK have been fretting over ballooning pension liabilities on account of a higher mortality rate in the country.

However, analysts still see hope for Nicholas, India’s leading contract manufacturer of drug formulations and active pharmaceutical ingredients. “The costs they (Nicholas) incur by acquiring Pfizer’s UK unit will be largely offset by the cost-saving they do in India,” said an analyst with a domestic brokerage.

“Add to it the business it may spawn in the country ( UK) and the markets around it, and you see the value for Nicholas,” he added.

Nicholas’ case holds true for several other Indian pharma companies, which have resorted to acquisitions to get exposure to the regulated markets.

Earlier this year, Bangalore-based contract manufacturer Kemwell Pvt Ltd acquired Pfizer’s facility in Sweden to augment its contract manufacturing business.

Dr Reddy’s Laboratories acquired Roche’s active pharmaceutical ingredient unit in Mexico last year hoping to boost its custom pharmaceutical services business to US $100 million by mid-2007 from $10 million in November.

Many of these deals also bring an assured supply contract to Indian players from multinationals whose units they acquire.

For instance, Nicholas has an assured contract from Pfizer till 2011 to supply active pharmaceutical ingredients. While good services ensure repeat contracts, the association also gives Indian firms an edge when they pitch for fresh contracts with other large clients.

On the other hand, research-oriented multinationals are getting to free up cash to deploy in areas like research and development and product marketing.

“Profitability is an issue for the entire industry and multinational companies are trying to focus on their core businesses, outsourcing the rest,” said Sanjay Aggarwal, analyst, KPMG India.

Till not too long ago, prescription drug makers had been saddled with over-capacity at their plants, as new drug approvals sharply went down.

 

(www.business-standard.com)

 
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