Dealing with generics firms

The offer period is underway for Japanese drugmaker Daiichi Sankyo’s bid for Ranbaxy laboratories -– India’s largest drug firm by sales. Daiichi plans to acquire 20% of the firm in the open market, with private deals making up the rest of its eventual majority stake. The offer forms part of a trend in which established drugs firms deal with the threat of developing-world generics firms by buying, or copying, them.

GlaxoSmithKline announced plans last month for generic joint ventures in South Africa, and others are launching generic versions of their own products -- so-called ‘authorised generics’ -- winning a slight reprieve from the losses that come with the end of patents. This signals a change of approach (or at least a new front) in the war between established pharma and generics, previously fought in the courtroom (or settled there: in some cases, large pharmaceutical firms simply paid their developing-country rivals to delay releasing drugs). A motivating factor, too, is the changed international political environment as firms become fearful of forced licenses in developing countries. Swiss drug firm Novartis was forced in February to expand provision of free Leukaemia drugs in Thailand, for fear that the government might authorise local production under an emergency license.

Ranbaxy is a tempting prize. With operations in 56 countries, it will substantially increase Daiichi’s geographical reach, and its manufacturing costs are substantially lower than those incurred by the Japanese firm. It has authorisation to distribute from 2011 the first copies in the US of the world’s bestselling drug, cholesterol control pill Lipitor. As generics markets liberalise and grow, the firm will also benefit from substantial economies of scale.

However, the advantages of the deal are not one-way: larger drugs firms offer support in areas such as lobbying and regulatory compliance, given that fears exist in Western governments as to the safety of drugs produced by generics manufacturers. 18 generic drugs produced by Ranbaxy were approved on August 13, despite concerns regarding the documentation the firm provided to certify its products were safe. The US Justice Department warned in July that some of Ranbaxy’s production practices risked creating “adulterated” drugs. Still, the risk remains that the combined firm loses Ranbaxy’s dynamism while keeping its reputational issues, rather than vice versa as is hoped. Seeking growth through acquisition and grappling with multiple acquisitions, the generics sector will only grow more similar to the world of big pharma.