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Takeover therapy

E. Kumar Sharma     June 9, 2010

The headline numbers are eye-catching: A $30.8-billion pharma major pays $3.72 billion for a 7 per cent share of a highly-fragmented $8 billion (around Rs 42,000 crore) Indian pharmaceutical market. It's a big deal all right, with a skyhigh price tag: The acquisition of Piramal Healthcare's formulations portfolio by the Illinois, US-headquartered Abbott Laboratories, at nine times sales, is the most expensive acquisition by a global pharma firm of an Indian drug business.

Miles D. White, Chairman of the 120-yearold Abbott Laboratories, feels the $2.12 billion upfront payment plus $1.2 billion over four years (starting from 2011) is indeed money well spent. "India pharmaceutical sales are expected to more than double in the next five years. With this acquisition, Abbott gains immediate market leadership in India. Abbott India expects sales to exceed $2.5 billion by 2020 (up from just Rs 761 crore or around $162 million that it reported for the year ended November 2009)."

Ajay Piramal, Chairman, Piramal Healthcare, a dyed-inthe-wool takeover tycoon himself, stresses that "the combined businesses will become the clear market leader in India." Piramal prefers to see the transaction as a transfer of assets rather than a sell-out, as he still has seven other businesses and 11 other plants to run (see The Magic Pill Gambit).

For Abbott, it's a huge ramp-up in size and scale. It will now have the Indian pharma industry's largest sales force, in addition to the highest market share, one of the fastest growth rates of 17.5 per cent (against the industry's of a little under 14 per cent), and will bag a portfolio of 350 branded generics, including such bestselling brands as Stemetil (to treat dizziness/ vertigo) and Stator (a statin drug to check cholesterol).

Abbott also gets an opportunity to leverage low-cost manufacturing abilities—the buyout includes Piramal Healthcare's plant at Baddi in Himachal Pradesh, a facility approved by the US Food and Drug Administration.

Indeed, for a multinational that as a standalone company ranked behind several domestic majors like Cipla and Sun as well as Big Pharma MNCs in India like Glaxo-SmithKline (GSK) and Pfizer, emerging top dog virtually overnight is something special —and could well explain the princely sum paid.

"I think the deal signifies the value of the Indian market, which is justified by the high growth rate at a time when growth is drying up in mature markets," says G.V. Prasad, Vice Chairman and CEO, Dr Reddy's Laboratories. Growth rates hover around 1-3 per cent in the US and between 4 and 6 per cent in the eurozone.

"What makes India attractive is that it is still a branded generics market (paracetamol to treat fever is still popularly known as Crocin) as against pure generic markets that are witnessing price erosion globally," adds Ajit Mahadevan, Partner, Life Sciences Practice, Ernst & Young.

If Abbott's White didn't baulk at the price tag of the transaction, it's because takeovers of Indian drug firms have been happening thick and fast over the past four years. In August 2006, Mylan Laboratories of the US bought up to 71.5 per cent equity in Hyderabad-based Matrix Laboratories for $736 million. Less than two years later, Fresenius Kabi, a wholly-owned subsidiary of German health care group Fresenius SE, acquired 73.3 per cent of the share capital of Dabur Pharma for an estimated Rs 870 crore or $185 million.

Then, in June 2008, came the big bang when the Singh brothers of Ranbaxy sold their shareholding (34.8 per cent) to Japanese major Daiichi Sankyo for a jaw-dropping figure of around $2.4 billion (around Rs 9,000 crore). That was followed by the Hyderabad-based vaccine maker Shantha Biotechnics getting acquired by French pharma major Sanofi-Aventis's vaccine entity, Sanofi Pasteur.

And this March, Orchid Chemicals & Pharmaceuticals, the Chennai-based pharmaceutical major, announced the completion of a transaction for sale and transfer of its generic injectable finished dosage forms pharmaceuticals business to Hospira India, a subsidiary of Hospira, Inc., a leading global specialty pharmaceutical and medication delivery company.

Add to all of these a string of global alliances that has already been launched—Pfizer with Aurobindo and GSK with Dr Reddy's, among others—and the changes are evident. The urgency is reflected in the gradual increase in valuation—the Ranbaxy-Daiichi deal was done at four times sales, the Sanofi-Shantha one at eight times sales and, now the Abbott-Piramal transaction is valued at nine times sales.

"The prices are going up like those of flats in Mumbai," quips Yusuf K. Hamied, Chairman, Cipla, India's #2 pharma firm in the domestic market. Hamied, a veteran of the Indian pharma industry, isn't particularly surprised by the trend of consolidation. "I had said in 2005 that the three leading Indian companies—Ranbaxy, Cipla and Dr Reddy's —will not exist as they are and will have to undergo a change in form. Ranbaxy is sold. I am not selling but I am looking for partnerships. I do not mind a joint venture to take up newer products that I cannot market today. And perhaps Dr Reddy's may also have partnerships."

Five years from now, the Indian pharma landscape will be totally different. "This is a highly-fragmented market and, clearly, consolidation is waiting to happen," says Ranjit Shahani, Vice Chairman & Managing Director, Novartis India and President of the Organisation of the Pharmaceutical Producers of India or OPPI. "The share of the top 20 pharma companies in India today (including global MNCs) is around 58 per cent; the rest is controlled by small and mid-size domestic pharma companies," he adds.

Indeed, data from IMS, a pharma market research company, shows that 439 companies from a set of 459 companies that it tracks in India, have a market share of 41.4 per cent. And don't forget the thousands of small-scale units that aren't tracked by IMS, which only highlights the fragmented nature of the Indian pharma market.

Shahani has little doubt about which way the wind is blowing. "The share of global pharma MNCs in the Indian market is 18 per cent and I see this going up to 35-40 per cent in the next five years."

Novartis is just one of the many Big Pharma companies that has plans for emerging markets. Over the past few years, along with Novartis, Novo Nordisk, GSK, Bayer Schering and Bristol-Myers Squibb have reportedly sought to expand in China. The agendas for various markets could be different. For instance, both Novartis and GSK have set up R&D arms in China. What's more, China is roughly a $20-billion (Rs 94,000-crore) market today—one that Big Pharma can ill-afford to ignore (the global market is about $825 billion).

The same applies to India. Although R&D is less of a focus for global MNCs in India—most tend to have issues with the intellectual property rights regime here. (Novartis, for instance, has been fighting a long battle for the patent of its cancer drug Glivec.) But sooner than later every Big Pharma firm worth its salt will be making a play for the domestic market.

So what do the MNCs have to choose from? Plenty still, the burst of acquisitions notwithstanding. A cursory glance through the top 20 (by value of products sold—see Abbott Races to the Top) reveals the names of plenty of Indian companies with a strong domestic presence: There's Cipla at #2, which sold a little over Rs 2,500 crore worth of drugs in the Indian market between May 2009 and April 2010, and which grew at close to 15 per cent in that period. Sun Pharma is at #5, Lupin at #8, Dr Reddy's at #13...the options are plenty.

The billion-dollar question, of course, is whether the respective promoters are willing to sell. A clutch of Indian drug firms that faced a few hiccups along the way would appear like the more likely sellers. Dr Reddy's, for instance, stumbled after it made India's largest pharma acquisition in 2006—of betapharm of Germany, for Rs 2,550 crore. The Hyderabad-based company had to rue the decision once the German government's healthcare reforms sent drug prices crashing down.

The value of betapharm eroded and Dr Reddy's had to make huge write-downs in its books and ended up in the red in 2008-09. Another Indian firm, Wockhardt, got caught in a debt tangle, which compelled it to consider selling some of its assets. Wockhardt, as a part of a debt restructuring plan, was set to sell its nutrition business, but the deal didn't go through. The interested buyer: None other than Abbott.

A section of analysts sees a fair chance of Dr Reddy's being a candidate for a stake sale, although the company has been duly denying such rumours. Chairman K. Anji Reddy, in fact, sees brighter days ahead. "There is now an opportunity for a leader to emerge as a true Indian multinational company that is both sizeable and has discovered a drug," says the patriarch.

He feels things will fall in place by the time Dr Reddy's reaches a size of $5 billion, with $1 billion coming from a new drug. Dr Reddy's reported revenues of $1.56 billion in the year ended 2010, and has set a goal of hitting $3 billion in three years. It is the only Indian drug discovery firm to have a molecule in phase III of clinical trials (balaglitazone, to treat diabetes). Cipla and Aurobindo Pharma are two other names that are crackling on the buyout grapevine, although both their chairmen vehemently deny such a likelihood.

Who will be next is a subject of debate. What isn't a debate is that there will be more acquisitions of local pharma firms. Cipla's Hamied fears that the MNCs will launch new-generation drugs at high prices; one way to bring down those prices, he feels, is for the government to impose a pragmatic compulsory licensing system and to allow Indian pharma companies to copy innovator drugs after paying a royalty to the innovator company.

The MNC view predictably is in sharp contrast. "(MNC) products will have to compete and survive in this highly fragmented market where there are still 5,000 small-scale manufacturers and 300 large and mid-size companies; and then there are the price controls imposed by the government which keep prices in check," says Novartis' Shahani. Whatever the fallout, the writing is on the wall: Big Pharma's buyout brigade has arrived, and many more are at the gate.


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