Some Indian drugmakers see M&A preferable to investing in plant upgrades

Data suggest that investments by Indian drugmakers in upgrading plants and equipment to hit higher quality may be paying off. Last year, the FDA issued import alerts banning products from 8 Indian plants. That was a dramatic improvement over the 21 that were issued the year before, when Ranbaxy and Wockhardt each had two plants added to the list, moves that whacked their revenues.

Consultants tell Reuters that large Indian companies are heeding the warnings from regulators and investing more in equipment and training. Those investments are running between 6% and 7% of sales. But for some small to medium-sized companies, that is a stretch. That has left them to decide whether to pour money into their operations, retreat from high-profit but regulatory-heavy markets like the U.S. and Europe or cash out, as Daiichi Sankyo did when it sold Ranbaxy Laboratories to Sun Pharmaceutical this year for $4 billion. That deal came after more than 5 years of FDA restrictions on Ranbaxy, including a $500 million fine and having four of its key plants banned from selling into the U.S.

Cipla CEO Subhanu Saxena

Markets like Latin America offer growing demand and perhaps less oversight, but also thinner margins. "If they want to have a presence globally, they have to make investments," Subhanu Saxena, CEO of Cipla, India's fourth-largest drugmaker, tells the news service. "If they can't, then they'll have to focus on other markets or scale back their ambition outside of India, and that's probably what will happen."

While the number of plant bans by the FDA has slowed significantly since two years ago, the FDA is still finding issues with some of India's drugmakers. It issued a ban in 2014 and then a warning letter earlier this year against an Aarti Drugs plant. Lupin received a Form 483 this year, and in May, FDA inspectors reportedly issued a Form 483 following an inspection at a Claris Lifesciences plant in India. That came just weeks after reports that Claris was close to a deal to sell its generic sterile injectables business to India's Zydus Cadila.

Ashok Anand, president of Mumbai-based Hikal, tells Reuters some of his peers have indicated they are looking for buyers rather than having to make large investments. "If they cannot deal with the stricter regulations, they might just prefer to sell out," he said.

- read the Reuters story