THE figures are astounding. In 1993, the total value of strategic alliance deals in the global pharmaceutical industry amounted to $34.8 billion (Rs 132,000 crore). In 1994, the value of only the top 25 deals was $46.2 billion (Rs 150,000 crore). Detailed figures are not yet available for 1995, but the year will be remembered for a series of mega mergers in the industry, with Glaxo's bid for Wellcome topping them all at $14.2 billion (Rs 50,000 crore). And last month, the boards of Sandoz and Ciba-Geigy met in Switzerland to put the final touches on the merger of these two giants, which will create a new entity called Novartis (a Latin word meaning 'new ability').
The mega-mergers and strategic alliances in the last couple of years have redefined the global pharmaceutical industry. And the Indian industry is being rocked by the tremors. Chief executives of Indian subsidiaries have had to go at places, causing a virtual exodus of senior management teams. Expatriate managers have suddenly had to be transferred to give way to Indian CEOs, to make for a smoother transition period. Units have been closed down. Voluntary retirement schemes (VRS) have been floated, businesses have been de-merged or outright sold.
Confusion reigns. Says D.K. Bose, ex-managing director of Burroughs Wellcome who left the company after the merger with Glaxo to head Lloyds Laboratories, a new company launched by the Lloyds Industries group: "Even though some of the global activities have been announced more than a year ago, there is still confusion in the Indian operations. The morale, especially among the senior management of the affected companies, is pretty low." Adds Dr V.S. Sohoni, managing director of Hindustan Ciba-Geigy, brought in three months ago from Sandoz US to replace the earlier Ciba-appointed CEO Richard Hartland: "I must admit that we as yet do not have any idea what's going to happen to our operations after the merger with San-doz. Logic would dictate that the merged company would be called Novartis India and there will be an exchange of shares to maintain the shareholding pattern abroad. Apart from this we don't know anything."
As a first step, Ciba-Geigy has announced its plan to increase its stake in the Indian subsidiary to 51 per cent. Following the global de-merger of the industrial dyes and chemicals division, Sandoz India has hived off its chemicals division into Clariant India. The Glaxo-Wellcome merger happened over a year ago. So far the two companies' Indian operations have decided to share production facilities and distribution channels, and are rationalising the product range. Glaxo's VRS has succeeded in getting rid of over 600 people. By the end of the year, the company may be able to trim its workforce from 5,503 two years ago to almost 4,750. The company is closing down its 21 sales depots across the country and is appointing 24 new carrying and forwarding (C&F) agents on a commission basis to distribute its products. However, it is also beefing up its sales force.
Following the $7.1 billion takeover of the US-based Marion Merrell Dow-Roussel (MMD), Roussel India's parent company, by Germany-based Hoechst AG, Hoechst India has been rechristened Hoechst Marion Roussel India (HMR). Roussel India presently is a subsidiary of HMR but the operations of the two companies are still separate. A new board will be formed to look after the day-to-day operations of HMR in India.
The worst-hit victim of all these realignments is the workforce which will have to be rationalised. Says Bose: "These alliances may appear to work fine on paper, but in reality integrating two cultures is not an easy task." Bose should know. Even though both Glaxo and Wellcome are British, it hasn't been an easy task. Some 7,500 jobs are scheduled to be chopped by 1998; 6,000 have gone already. With the exception of Glaxo CEO Richard B. Sykes, all Glaxo and Wellcome staffers have had to reapply for their jobs, leading to severe disenchantment.
Why this wave of alliances? "The compelling needs for companies to continue to discover new drugs and bring them into the market and the escalation in costs and risks associated with this process have been the major driving forces," explains T. Thomas, chairman, Glaxo India. It is estimated that it takes over 12 years and about $300 million to bring one new drug from conception to prescription. And the chances of success are extremely low. Of the 10,000 new chemicals examined, as few as 20 may reach the animal testing stage, of which only 10 may come up for clinical trials and only one of the original 10,000 substances may be approved by the US Food and Drugs Administration (FDA). Says D.B. Gupta, chairman, Lupin Laboratories: "In the last 20 years, not more than two newly-discovered molecules have garnered sales worth $100 million while the input costs for the discovery of new drugs would amount to an average of $400 million each year."
Adds Bose: "With increasing costs, greater control by governments on the pharma industry, and dwindling new products—a patent lasts only for 20 years after which the product becomes generic—the industry has indeed had its back against the wall. It is left with little option but to integrate either vertically or horizontally." The present acquisition spree is the industry's attempt at integrating. Those with R&D plans are looking for alliances with strong marketing and distribution companies and vice versa. Companies have also attempted to acquire or merge with large health insurance companies for a distribution stronghold. The other alternative is horizontal integration to pool combined resources and cut costs.
Bose also cautions against a dangerous trend looming on the horizon. The way pharmaceutical companies are being merged or acquired, often under the euphemism of strategic alliances, the day is not far when the global pharmaceutical industry, presently pegged at around $240 bil-lion (Rs 840,000 crore), may be dominated by just four or five mega-corporations. "Once that happens, it will take a great amount of anti-trust laws and government scrutiny to prevent a cartelisation by these giants," he says. Others, though, do not agree. Says Sohoni: "Such apprehensions are unfounded. Competition, even among the few conglomerates, will restrict any such cartels from being formed."
How are fully Indian pharmaceuticals being affected by the spate of global alliances? Indeed, the prime reason behind the mergers—rising costs of operations—may present the Indian industry with a golden opportunity to develop and expand. Says Gupta, whose Lupin is one of the fastest growing Indian companies: "This augurs very well for us. Mark my words, India will become a major sourcing point for supply of bulk active substances for the whole world." Agrees Thomas: "One of the likely agendas would be for Indian drug companies to strengthen their links with international companies in supply of generic drugs and in joint funding of R&D work in India to take advantage of lower costs, with the understanding that the Indian company would acquire marketing rights for India and some other neighbouring regions."
"Right now we are seeing the first phase of the consolidation," says Bose. "The second phase will include the separation of production from marketing and R&D. Most alliances are market-based strategies. Almost all the big companies are outsourcing their bulk drugs requirement. They may even hive off their formulation plants with a firm and priority commitment to themselves. It wouldn't surprise me if even the R&D units became separate profit centres some time in the future." That may be too far ahead, but several Indian companies have already read the writing on the wall and begun accessing international technology through tie-ups, equity participations and technological collaborations "to create" in the words of Thomas, "a critical mass that can afford to support R&D and marketing in future".
Delhi-based Ranbaxy has teamed up with Eli Lilly of the US. Gujarat-based Torrent Labs has tied up with Novo Nordisk of Denmark and Sanofiof France. Lupin Labs itself has an arrangement with Merck of Germany, while Max India has collaborated with Geest Brocades. Ranbaxy has even set up generic drug companies in China, while Wockhardt, Lupin and Ranbaxy have acquired generic companies in the US and Italy. Takeover-turnaround artist Ajay Piramal's Piramal Healthcare has sought expansion through acquisition of Roche's business in India. The situation is best summed up by Gupta: "By next year, many high-selling drugs are coming off the patent list in the US and Europe. We at Lupin have decided to hit the $4 billion generic market for anti-infection and heart-related drugs which are being thrown open after the patents expire. India has some of the richest flora in the world. Apart from herbal patents, the industry will be forced to invest in R&D to be at par with the international standard." Given that, all its ills will be cured.
