Pharma cos recast European operations to protect margins

Indian pharmaceutical companies are reworking their strategies for Europe to cope with the intense pressure on drug prices because of changing trends in the key market.

As Europe transforms from a lucrative market for branded generics to one where unbranded generic drugs predominate, Indian firms are cutting costs by restructuring operations and shifting manufacturing units to keep their heads above water. The changed situation has been brought about by European governments introducing reforms aimed at cutting healthcare costs. Germany, Europe’s largest drug market, has been transformed into a commoditised generic tender market. The introduction of ceilings on prices of generic drugs has also increased the pressure on margins.

Ranbaxy, the eighth-largest generic company in the world, has been bleeding in European markets since 2008. It has seen a 14% drop in its European business during the quarter ended March 2009. Wockhardt, which earns 50% of its revenues from Europe, has seen significant erosion of profits from its operations in the region. The price war in European markets is also likely to hurt companies, which have acquired assets in the region. These include Torrent Pharma, which acquired Pfizer’s generic arm Heumann, Wockhardt’s French acquisition Negma Laboratories and Biocon’s German acquisition Axicorp. The Indian acquirers would find it difficult to break-even on their investments and many are likely to undertake impairment of goodwill for their European acquisitions. Ranbaxy, which found that higher sales only meant bigger losses because of price decline, is transforming itself from being a volume-based player to one protecting the bottomline. It has trimmed its product portfolio to focus on profitability even if sales decline. Dr Reddy’s Laboratories’ (DRL) German subsidiary Betapharm has managed to break-even, only after restructuring its operations and shifting manufacturing to India.

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