ImageA spate of mega mergers has kicked off big-ticket consolidation in the global pharmaceuticals industry, as companies search for ways to deal with a rapidly declining pipeline of new drugs.

In contrast, Indian drug industry remains fragmented, lacking scale to invest significantly in innovation. Even in these difficult times, there have already been three large M&As in the pharma space this year.

Pfizer acquired Wyeth in a $68-billion deal, Merck bought out Schering-Plough in $41.1 billion and Roche got hold of Genentech in a protracted takeover saga. Pharma industry has its own dynamics and is usually not much affected by general business cycles.

But that is only part-explanation for the competitive consolidation. The more important driver is the search for future growth engines. Big pharma is set to lose nearly $100 billion in sales as many blockbuster drugs are set to lose patent protection over the next five years.

And the pipeline of drugs to replace them looks very thin. Through M&As companies are aiming to acquire potential drugs of the future and also to cut costs, particularly in research. Drug trails have in general become more extensive with regulators becoming more demanding. In such a situation, size increases the chances of success.

The large number of drugs going off patents in the coming years is a big opportunity for Indian generic players. Through their low-cost but quality manufacturing they can corner a sizeable portion of the market. But beyond these few years, this business model is likely to face stress.

Indian drug companies have to invest in R&D, more so given the competitive edge the country has in carrying out research at a fraction of the cost incurred in the developed world.

Indeed, clinical research for third parties is rapidly gaining ground. But the idea should be to leverage this expertise to develop new drugs, particularly for tropical or third world diseases. That requires size and balance-sheet strength, which most Indian company’s lack.

Indian pharma companies would do well to explore the opportunities for inorganic growth or to acquire niche skills. The attractive valuations and somewhat easier availability of capital for the largely recession-proof sector provides the right backdrop.