Glenmark PharmaceuticalsGlenmark Pharmaceuticals is planning to list its generics subsidiary — Glenmark Generics — and has filed a draft red herring prospectus with SEBI.

While industry players see this as a positive move for the generics business, which is typically a market for cheaper version of innovative drugs and was always valued together with the R&D businesses, there are concerns on lack of institutional investors for a pure-play generics business.

Industry executives and analysts say that despite strong growth potential for generics businesses in India, local companies could learn from trends in the US — the world’s largest generics market — where strong competition among an increased number of large generic companies for the same market, has put pressure on margins.

According to Swati Piramal, director (strategic alliance and communications) at Piramal Healthcare, “Because of the changes in the US which allow more than 10 companies to compete for one product on day one, of it going off-patent, prices have been brought down drastically. A pure-play generics model is not sustainable.”

India exports about Rs 30,000 crore of generics every year, a majority of which goes to the US. The industry is currently growing at 9-10% every year, which is still higher compared to the US market which has stagnated and the European markets which are on a decline, although it is still lower than what it was two years ago.

Neelkanth Mishra, a research analyst at Credit Suisse, says: “Companies that are into branded generics are showing strong growth as are those which focus on the dermatology market in the US where they have a technology advantage. It depends on the company in question. However, for a pure-play generics company, there is a question of liquidity. Retail investors won’t buy this stock as there is less liquidity. It is more attractive for long-term investors who don’t mind holding on to the stock for at least three years,” he added.

However, institutional investors say the party for generics is almost over and that it’s time to invest in research-based companies. According to Nitin Deshmukh, CEO (private equity) at Kotak Investment Advisors, whose firm views bio-generics as the next space with big opportunities and has invested in Intas Biopharmaceuticals and Bharat Serums & Vaccines, feels that while most players will be able to sustain themselves, some will find the going tough.

Generic companies, however, say that the return on investment won’t be affected. DG Shah, secretary general of Indian Pharmaceutical Alliance, says: “Generic companies make money on volumes and not margins. With 98% of the Indian drug market being a generic one, there is continuous growth in the domestic market. It is true that prices have fallen in the US with increased competition but this is for drugs where the entry barrier is low.”
According to industry executives, Indian companies should focus on the Japanese market, which is virtually untouched by generics — it accounts for only 7% of the entire pharma market. Europe should also be a growth area for Indian companies as the market there is not as competitive as the US, the executives added.

“While the generics business has moved to a competitive phase, players who have accomplished production scale and leadership in specific generic molecules will continue to dominate for quite some time,” said Mr Deshmukh. Mid-sized players who are in the small volume segment, high value niche generics, will be able to sustain for the next couple of years. However, most other marginal players will find it difficult to survive in the long run,” he added.