Indian Pharma sector has been long under performing compared to various other sectors. This under performance is attributed to several reasons such as eroding margins in the US generic business, weakening dollar etc. The chart shows the beating Pharma stocks have taken on the NSE.Indian pharma companies are very good at producing quality generic drugs with continuous improvement and are also amongst the lowest cost manufacturers in the world. These companies are very similar in their operations, business model and to a large extent in the skill sets too. This seems to me the predominant reason for current under performance as these companies are competing fiercely not only in domestic market but also in the export market. This high competition is largely responsible for reducing margins and conceding all the 'low cost' Indian advantage to the world. The competition in the world generic market is further heating up and smaller Indian companies cannot sustain for long unless they get strong backup from Indian market.
With many players around the world going after generics, the margins are ought to fall. Companies are doing cross border M&A to access newer markets and capabilities. But this phenomena is causing problems because all companies in a way are becoming similar. Even the name is 'generics' but there is a critical need among companies to differentiate and to build scale. Acquiring companies abroad will help Indian companies in accessing new markets and counter the weak dollar effect, but to deal with margin pressures lot of domestic 'big deals' would be required. Currently there are some 15+ companies supplying bulk drugs largely to US market and it makes a very good case for these companies to come together and benefit from economies of scale to efficiently manufacture while also efficiently maintain large R&D pipelines.
but why is it already not happening?
Almost all Indian pharma companies are family owned. Is this ownership structure impeding domestic M&A?
A similar situation can be soon expected in IT sector also when margins will start shrinking when Indian service providers start competing vigorously against one another. But will we see M&A sooner there for them being largely professional companies?
With many players around the world going after generics, the margins are ought to fall. Companies are doing cross border M&A to access newer markets and capabilities. But this phenomena is causing problems because all companies in a way are becoming similar. Even the name is 'generics' but there is a critical need among companies to differentiate and to build scale. Acquiring companies abroad will help Indian companies in accessing new markets and counter the weak dollar effect, but to deal with margin pressures lot of domestic 'big deals' would be required. Currently there are some 15+ companies supplying bulk drugs largely to US market and it makes a very good case for these companies to come together and benefit from economies of scale to efficiently manufacture while also efficiently maintain large R&D pipelines.
but why is it already not happening?
Almost all Indian pharma companies are family owned. Is this ownership structure impeding domestic M&A?
A similar situation can be soon expected in IT sector also when margins will start shrinking when Indian service providers start competing vigorously against one another. But will we see M&A sooner there for them being largely professional companies?
