Billionaire businessman Malvinder Singh's decision to sell his stake in Ranbaxy Laboratories signals a possible end of the generic-focused, conventional drug-making business in India.
According to industry leaders, the decision also indicates that pharma companies will have to rethink their strategy.
"Following a model with focus only on generics is unsustainable. At this stage, promoters need to rethink about diversification," Piramal Healthcare Chairman Ajay Piramal said.
"Once the pipeline of drugs going off patent dries up, the generic business becomes commoditised. It will require volumes and lower pricing. India can maintain its low-cost advantage, but few companies can produce volumes that can sustain them," he added.
Companies in the generic business need to have a long-term view as against seeking short-term gains. Sujay Shetty, Associate Director of PricewaterhouseCoopers, explains that generic business is attractive only for the next five years.
"Most of the money-spinning, blockbuster drugs will expire in the next five years only," Shetty says.
Globally, the generic business is expected to grow annually by at least 11 per cent to reach $94 billion in 2010 from about $70 billion now.
According to a KPMG-Confederation of Indian Industry study, India accounts for about 10 per cent of the global generics business while the US has a 28 per cent market share.
"Generics business is complicated and companies need to have their fundamentals correct for sustained growth. Managements need to look at pharmaceutical business with a long-term vision," Glenn Saldanha, CEO and Managing Director of Glenmark Pharmaceuticals, said.
Ranbaxy was under pressure to meet its growth targets, analysts say. When Malvinder Singh took over Ranbaxy in 2003, he wanted to double the sales to $2 billion in three years and grow the revenues five-fold to $5 billion by 2012.
But margin pressures in the US limited its revenues to only one-fourth of the turnover. In generics business, the cost of production is rising year-on-year as regulatory standards are getting more stringent worldwide and employee costs are rising.
Against this, the margins are becoming thinner, notes K R Ravishankar, Director, Strides Arcolab.
"Generics have big potential worldwide and it is natural for global companies to look at strong Indian generics companies. Companies focused on common generics, which are sold among general practitioners, will have a different valuation and those having speciality and proprietary pipeline will have a higher valuation.
Whether to sell the business at a good valuation or continue with it depends on the view and vision of the managements," says Dr R B Smarta, MD, Interlink Marketing Consultancy.
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