Indian Pharma – Real Excitement yet to begin – Who’s next

Abbott Laboratories did not mind paying 9x sales (US$ 3.72 billion) to acquire Piramal’s core business of domestic formulations. Earlier Daichi did not mind paying ~5x sales to acquire majority in Ranbaxy.

The question arises that why will these large multinationals pay exorbitant prices to acquire assets. The rationales in my mind are absolutely simple.

These multinationals are not concerned about the acquired asset starting to add to bottom-line right from the word go but rather they are looking at extremely long term (may be better than 10-20 years). You would pay 9x of sales for any company, only because of few compulsions, compulsions such as:

• A need to be present in one of the largest growing Pharma market,
• The world needs cheap (which are effective as well) drugs and what better than India to provide the world with these cheap drugs,
• With skilled talent availability, why not replicate the same model which India actually taught the world i.e. Outsourcing, outsourcing all high cost activities by making India their global center and apart from bringing in their own cost down, opens a whole new line of business for Abbott
• A leadership or established footprint at one go in one of the largest growing Pharma market with unmatched potential (over 1.2 billion people),
• Finally for a company having market cap of US$ 75 billion, revenue of US$ 30 bililon and US$ 10 billion in cash, paying US$ 3.72 billion hardly has any impact on the company balance sheet that too for such lucrative propositions, as mentioned above.

In my opinion, the Pharma market will see even more costlier deals with a number of Pharmaceutical company across verticals an acquisition target. This in my opinion, also includes, Pharma companies having larger research focus. This is all mainly due to two reasons 1) can you ignore to be in a market having 1.2 billion population and 2) the world needs cheap drugs (outsourcing).

While putting my thoughts together, came across one of the article on web, which I found extremely useful and thought of sharing. Hope you like it…

As top Indian pharmaceutical companies sell themselves off, India’s Rs60,000 crore drug market seems harking back to the 1970s, when it was dominated by foreign multi- nationals.

Just six of India’s top 10 drug makers by market share are controlled by domestic promoters today, down from nine in December 2008.

“At least two more deals (of foreign firms acquiring Indi- an drug makers) are likely in the next 18 months,” said Tarun Shah, founder, MP Ad- visors.

His firm advised Japan’s third largest drug maker, Dai- ichi Sankyo Co. Ltd in acquiring the stake owned by promoters in India’s largest drug maker, Ranbaxy Laboratories Ltd. The $4.6 billion (Rs21, 620 crore) acquisition was the first of the three deals that have changed the equations in the Indian drug industry since December 2008.

It was followed by Hyderabad based Shantha Biotechnics Pvt. Ltd’s acquisition by Sanofi-Aventis AG.

Last week, US drugs and nutrition company Abbott Laboratories announced a Rs17,000 crore acquisition of the domestic formulation business of Mumbai-based drug maker Piramal Health- care Ltd, the largest player in the local market with a market share of 7%.

Global acquisitions have also changed the structure of the Indian market. The acquisition of US multinational Wyeth by the world’s largest drug maker Pfizer Inc. has led sales of their Indian subsidiary Pfizer Ltd to increase. The combine of Pfizer and Wyeth in India has now be- come the eighth largest player with a market share of 3.5%.

And US drug maker Merck and Co. Inc.’s acquisition of Schering Plough worldwide has made the company the 10th largest in India, with a market share of 1.03%, ac- cording to retail market statistics of IMS Health until September 2009.

The combined share of top 16 drug makers in the local market is 56%, or worth Rs33,600 crore, according to retail audit data compiled by IMS Health.

Since new acquisitions and mergers have changed the ownership base in the industry, 23% of this market is now controlled by six multinational companies.

Until December 2008, British drug maker GlaxoSmithKline Plc-promoted GlaxoSmithKline Pharmaceuticals Ltd was the only foreign firm in the top 10, with about 4% market share in the Indian drug market till 2008.

“Till the end of 2008, there were nine companies owned by Indian entrepreneurs out of top 10 with a combined market share of 32.67%. But the new constitution is that top 10 command 41.06% of total market , and four of the them are MNCs (multi-national companies),” said Shah of MP Advisors.

Rajiv Dalal, partner, life sciences practice at audit and advisory firm Ernst and Young India, said the drug market in India will grow exponentially due to increased awareness and economic growth.

“With multinationals’ interest to grow in this market and Indian entrepreneurs’ willingness to en-cash, there could be more acquisitions happening, which will lead to MNCs increasing their market share in the domestic market,” he said.

Thanking You,

Personal Regards,

Vinit Tulsyan

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