It was supposed to be the Next Big Thing from India: Its pharma companies would do to the drug industry what Bangalore did to software and the back office. And in fact, rival Indian drugmakers Dr. Reddy's Laboratories Ltd. (RDY) and Ranbaxy Laboratories Ltd. have turned into some of Big Pharma's fiercest competition. The two have plowed huge resources into the generics business, providing U.S. consumers with low-cost versions of brand-name drugs such as Prozac and Augmentin -- and sapping profits at the major pharmaceutical companies that once held the patents to those formulas.
But this is not a story of untrammeled triumph for the subcontinent; the big Indian pharma companies are now getting a taste of their own medicine. The success of Dr. Reddy's and Ranbaxy has inspired a wave of copycats. A dozen or so Indian companies now sell generics in the U.S., and Indians today account for $8 billion of the world's $48 billion market for generics. "There is a huge gold rush into" the U.S., says G.V. Prasad, chief executive of Dr. Reddy's.
It's getting harder to find the gold, though, as major Western drugmakers fight back. For instance, Ranbaxy recently lost a high-profile battle with Pfizer Inc. (PFE) over generic rights to the cholesterol drug Lipitor. And Big Pharma companies have started selling their own generic versions of blockbuster drugs once their patents expire. The result has been "pricing pressure that is quite brutal," says Brian W. Tempest, executive vice-chairman at Ranbaxy. A few years ago companies launching a generic of a big-name drug could expect to make about 25% of the original price. "Today it is south of 5%," says Prasad.
That's hitting the two companies where it hurts. In mid-January, Ranbaxy announced that fourth-quarter profits dropped 56%, to $15.5 million, largely because of falling prices for U.S. generics. Dr. Reddy's reported a big jump in profits to $14 million, but that was driven mostly by one-time savings from the sale of a facility in India and other cost-cutting measures. Indian drugmakers "have to be sprinting to stay in the same place," says Vinay Parikh, a fund manager in Bombay.
What to do? Cut deals, for one thing, especially in the U.S. Last year, for instance, India's Sun Pharmaceutical Industries acquired Able Laboratories, a generics maker from New Jersey, and bought an Ohio factory from California-based Valeant Pharmaceuticals International (VRX). In December, Bombay's Glenmark Pharmaceuticals announced a deal with InvaGen Pharmaceuticals, a New York producer of generics, to work together to sell seven drugs in the U.S. And on Feb. 1, Dr. Reddy's reached a deal to sell authorized generics of Merck & Co.'s (MRK) cholesterol drug Zocor and prostate formula Proscar in the U.S.
TROUBLE AT HOME
Europe beckons, too. Both Dr. Reddy's and Ranbaxy are bidding to acquire German generics maker Betapharm. On Feb. 10, Aurobindo Pharma, based in the southern Indian city of Hyderabad, announced it was acquiring Milpharm, a British generics maker. And other Indian companies are raising funds for overseas deals.
Even as they explore markets abroad, though, the Indians are facing increased competition at home. India is opening up, and foreign generics makers are eager to take advantage of the low costs that have helped the locals. Israel's Teva Pharmaceutical Industries Ltd. (TEVA), the world's No. 1 maker of generics, is on the prowl. And Teva's biggest rival, Novartis (NVS) subsidiary Sandoz Inc., has more than 1,000 employees in India working on product development and manufacturing. Big Pharma's enemies, it seems, are facing a big-time brawl of their own.
By Bruce Einhorn and Manjeet Kripalani, with Kerry Capell in London