The pharma industry’s love for mergers and acquisitions is not something new. Companies have in the past taken this route to grow. But while the M&A frenzy had almost always been restricted to the US and Europe, what’s notable now is that India too is getting its share of the action.
With Dai-Ichi Sankyo snapping up Ranbaxy Labs, Frensius Kabi buying Dabur Pharma and Mylan now seeking to de-list Matrix Labs, M&A activity in the Indian pharma space is beginning to pick up speed. We take a look at what’s driving the industry’s consolidation moves and what implications this can have on Indian pharma stocks.
Of products and patents
The current spate of mergers and acquisitions has mostly been driven by the need for global pharma majors to deal with receding product lines and patent expiries. According to Data Monitor, the top-50 global pharma companies face patent expiries on 36 drugs worth $115 billion from 2007-2012, leaving them open to incursion by generic players.
The recent Pfizer-Wyeth deal is a case in point. Driven by the need to combat revenue slippages, Pfizer acquired Wyeth in January 2009 as it otherwise would have seen a significant dent in revenues from the expected arrival of generic versions of its blockbuster cholesterol drug Lipitor in 2011.
With global revenues of $12.4 billion, this drug alone accounted for over 28 per cent of Pfizer’s total prescription pharmaceutical sales in 2008. Merck and Co.’s merger with Schering-Plough can also be partly explained by a similar threat of declining sales. Four of its brands (Singulair, Cozaar/Hyzaar, Fosamax and Zocor) were slated to take on generic competition post-expiry. Pfizer estimates the off-patent prescription drugs market, worth about $270 billion now, to nearly double to more than $500 billion in the next five years, highlighting the growing clout of generics.
Going gaga over generics
The lure of getting on the generics bandwagon also drove Sanofi-Aventis SA to acquire the Czech pharmaceutical firm Zentiva N.V, which markets generic drugs in Central and Eastern Europe. Dai-Ichi Sankyo’s purchase of majority stake in Ranbaxy was also driven by similar motives. The deal between Pfizer and the Indian generic player Aurobindo Pharma also underscores a similar trend.
This deal will provide Pfizer ready access to the growing generics market even as Aurobindo Pharma will benefit from greater revenue visibility and improved cash-flows. However, such marriages of convenience are not new to the pharma industry. Switzerland-based Novartis has sold generics for many years through its Sandoz unit, which in turn has continued to grow through acquisitions in the generics space. But what’s notable is that this trend appears to be gathering momentum in India too. Besides Ranbaxy-Dai-Ichi deal, other instances that reinforce this trend are Sun Pharmaceutical’s relentless efforts to take over the Israel-based generics drug company Taro, or the speculated bidding war for Piramal Healthcare between Sanofi and GlaxoSmithKline (later declined by Piramal), and latest in the offing — Mylan’s announcement to de-list its subsidiary Matrix Laboratories.
Buying into or striking partnership deals with the Indian companies’ promises global pharma companies’ access to the former’s low-cost production and R&D capabilities and seamless entry into the fast-growing emerging as well as domestic market.
What also strengthens the case for Indian generics is their stable growth outlook. According to pharmaceutical research firm ORG IMS Research, the Indian pharma industry is likely to grow by 12-13 per cent in 2009. While this is shade lower than its earlier growth projections for the industry (14-15 per cent), it still appears healthy considering that the global pharma growth has been declining in the past five years.
While some companies (such as Sun Pharmaceuticals, Dr Reddy’s and Lupin, with strong balance-sheets and global presence) have acquired global assets in the past and may continue to do so in future to fill gaps in their value chain, but there is a lurking possibility that a good number of the rest can become potential takeover/ partnering candidates.
Companies grappling under debt pressure appear suitable targets as such proposals of stake sales, strategic partnerships or even licensing deals may eventually mean a much-need liquidity shot.
Companies such as Aurobindo Pharma, Jubilant Organosys, Orchid Chemicals and Wockhardt, with high debt, fit the bill well.
While Aurobindo Pharma has, in part, solved its problem by partnering with Pfizer, Jubilant Organosys and Orchid have been buying back their FCCBs. The only exception is Wockhardt, which is yet to mobilise funds to retire its debt. The company has only about six months to go before its FCCB of about $100 million mature in October 2009. Indian generic plays with a good grip on the domestic market (such as Piramal Healthcare) may also figure among the possible takeover/partnering candidates.
And what may also persuade global players to look at Indian firms are their current throwaway valuations. Sample this. Dai-Ichi Sankyo had in August 2008 valued Ranbaxy as high as 40 times its 2008-09 earnings per share at its open offer price of Rs 737.
The stock is currently trading at one-fourth that price. Matrix-Mylan is another case in point. However, the final veto power in such case always lies with the promoters.
While Indian promoters may now be more open to considering such proposals of stake sale (given the current economic scenario), differences in valuations and product overlaps can come in their way.
Companies with presence across varied business segments such as branded generics, CRAMs and innovation research may have more to offer than what may be needed. This can lead to spinning-off of certain verticals on a case-specific basis.
Low valuations and the good potential offered by the domestic market also prompted MNCs operating in the India to increase stakes or even de-list their arms. MNC major Novartis earlier last month, offered to hike stake in its local subsidiary to 90 per cent at Rs 351 per share, for a total bid amounting to about $87 million. The offer values the company at about 11 times its trailing fourth-quarter earnings. Mylan has followed suit and offered to de-list Matrix Labs.
While its previous open offer (at Rs 306) in December 2006, to pick 20 per cent stake, was valued at about 26-27 times Matrix’s trailing four-quarter earnings, its latest de-listing offer is pegged at an indicative price of up to Rs150 a share.
This trend also puts in spotlight MNC subsidiaries that sport high promoter holdings — such as Abbott India (which, in the last three years, made buyback offers twice), Astra Zeneca (90 per cent), Aventis (50.1 per cent) and GlaxoSmithKline Pharmaceuticals (50.6 per cent).
Playing the M&A wave
While there is no telling whether Indian companies will down the M&A tonic or concoct their own growth remedy, investing in firms with strong presence in the domestic market and relatively stable revenue growth potential (such as Sun Pharmaceuticals, Cipla, Piramal and Lupin) appears a safer bet. Pharma MNCs too offer promise, given their steady earnings, lower capex and high cash on balance sheet.