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Big Pharma's Love-Hate With India

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The country produces both competition and opportunity.

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The focus will be on India in 2010 as the country's pharmaceutical market continues to reap the benefits of Big Pharma's hard times.

For the last decade, the Indian pharmaceutical market has expanded as its companies make cheap generic drugs that have been reverse engineered from Big Pharma's blockbuster medications. As more and more of those highly lucrative drugs face patent expiration in the next few years, Big Pharma struggles to fill the gaps in revenue that will be left behind.

Yet, Indian Pharma will reap the rewards as the drug companies capitalize on the low cost of production and the ability to easily enter the generic market, which is currently worth more than $100 billion worldwide. According to a recent report by Research and Markets, the US generic drug market is expected to grow by 9.2% during 2011 to 2012.

There are 25 major Indian drug firms, which are mostly independent and highly entrepreneurial, that compete in this area. The two exceptions are Ranbaxy Laboratories, which was bought by Japan's Daiichi Sankyo in 2007, and Matrix Pharmaceuticals, a subsidiary of generic drugmaker Mylan (MYL).

(See, How to Play Generic Drug Stocks)

But generics aren't the only direction for these blossoming Indian companies to take. According to a poll conducted by Pharmabiz, an Indian pharmaceutical website, the top 25 Indian pharmaceutical companies have been growing their research and development efforts. Total R&D spending accounted for 7.75% of sales in the last year, or $638 million, up from 7.6% in the year-prior. The money spent on these activities has allowed these companies to get better access to highly regulated markets, as well as in their domestic market.

Jubilant Organosys, Matrix, Sun Pharma Advance, Ind-Swift, Stride Arcolab, and Piramal Healthcare all boosted R&D spending by 40% over the course of the year, according to the survey, while Lupin, Cadila Healthcare, Biocon, Ipca Laboratories, and Fresenius Kabi Oncology increased their efforts by 15% to 40%.

The biggest spender was Ranbaxy, which paid $100 million in R&D costs over the course of the year.

Many of the companies have also been striking outsourcing deals with Big Pharma that allow both parties to benefit. In July, GlaxoSmithKline (GSK) struck a deal with Dr. Reddy's Laboratories (RDY). The transaction has Glaxo footing the bill, while Dr. Reddy's handles the manufacturing and gets a pre-determined share of the revenues. Meanwhile, Glaxo profits from the access to emerging markets.

"We are extremely pleased to combine forces with GSK, a global leader, to fully realize the potential of our strengths in technology, product development and manufacturing across a range of high growth emerging markets," said Dr. Reddy's Chief Executive GV Prasad. "We hope to take our purpose of providing affordable and innovative medicines to a much wider population through this partnership."

Analysts applauded the deal. "The DRL-GSK deal is positive over the long term, with $25 million revenue from 2011 and the full impact will be witnessed by 2013. This deal enables the company to get strong exposure to emerging countries without any investments," analysts with Centrum Broking noted, according to the Business Standard.

Glaxo isn't the only Big Pharma getting in on the Indian action. Pfizer (PFE) garnered a deal with Claris Lifesciences in May to commercialize injectable medicines after the products have lost market exclusivity in North America, Europe, Australia, and New Zealand. Pfizer already pulls in about $10 billion annually from sales of established products that have lost market exclusivity.

India is poised for a pharmaceutical explosion as the low cost of entry to the market becomes evermore appealing, access to the talent pool increases, and the strong scientific base becomes more evident.
No positions in stocks mentioned.

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