Rationale and impact of pharma mergers

CHENNAI, MAY 8.The global pharmaceutical industry which has been characterised by high levels of fragmentation is now moving towards consolidation, primarily driven by the need to support the increasing research and development (R & D) costs.

In its latest issue of Crisil Insight, the Credit Rating Information Services of India (Crisil) examines recent trends towards consolidation in the global and domestic pharmaceutical industry and analyses the rationale and impact of recent mergers.

The increase in time taken by a typical drug discovery process due to stringent requirements from the regulatory authorities coupled with increased competition in industry and better research techniques have resulted in reduced exclusivity period for original molecules.

R&D efort

Hence, R & D activity is expected to move away from the traditional drug discovery process to newer and quicker methods such as genomics and combinatorial chemistry.

This necessitates huge R & D expenditure by companies that will yield results only after a few years. Hence, companies have resorted to mergers in order to increase their sales base so as to support the high R & D expenditure.

Mergers are also driven by the need to reduce costs through economies of scale or for strengthening the marketing network.

Global mergers of companies are expected to result in mergers of their Indian subsidiaries too. However, the rating agency states that Indian subsidiaries of MNCs may not be able to fully derive the synergies arising out of the merger of their parents.

This is because in the global arena companies merge primarily with the intention of owning a richer research pipeline post- merger.

However, owing to the existing process patent regime in India, very few companies have demonstrated the commitment to introduce patented products in India.

Hence, global mergers are not expected to have a substantial beneficial impact on the growth prospects of their domestic subsidiaries in the medium term.

Domestic scenario

In the domestic industry also, the current fragmented structure is expected to change as Indian pharma companies consolidate in order to widen their therapeutic coverage and increase their sales base so as to support basic R & D, which will be essential in the product patent era.

Consolidation activity is also witnessed among Indian companies which want to strengthen their marketing and distribution networks and achieve cost savings through economies of scale.

The mergers among Indian companies are driven by issues pertaining to local conditions and are therefore likely to be more successful than those of MNC counterparts in India.

In the post-2005 period, that is, after the introduction of product patents, Crisil however expects that India-based MNCs will receive parent support by way of introduction of patented molecules and this will enable them to benefit from the synergies arising out of mergers between their parents.