pharma industry m&a activity analysis

Indian Pharma Industry

Mergers and Acquisitions

SL - PGSEM Q1 10-11

Instructor

Prof J Ramachandran

Submitted by: Group 9

Name Roll No.

Abhijeet Gokhale 2008072

Alok Chorghade 2008073

Pradeep Sundaram 2008136

Aurnob Chatterjee 2008077

M&A: Indian Pharma Industry

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Table of Contents

Context/Background ........................................................................................................ 3

Characteristics of Pharma Industry ................................................................................. 3

Indian Pharma Industry ................................................................................................... 7

Indian Market .................................................................................................................. 9

History and current Indian market ................................................................................ 9

Pre-Patent Regime ................................................................................................... 9

Post Patent Regime ................................................................................................ 12

Acute vs. Chronic ................................................................................................... 13

M& A activities in Indian Pharma Industry ..................................................................... 14

Why are MNC’s interested in Indian Pharma Companies ............................................. 15

Reasons for Indian Pharma Companies to merge/partner ............................................ 23

Conclusion .................................................................................................................... 23


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Context/Background

The Indian pharmaceutical industry is the world's second-largest by volume and is likely to

lead the manufacturing sector of India. India's bio-tech industry clocked a 17 percent growth

with revenues of Rs.137 billion ($3 billion) in the 2009-10 financial year over the previous

fiscal. Bio-pharma is the biggest contributor generating 60 percent of the industry's growth at

Rs.8,829 crore, followed by bio-services at Rs.2,639 crore and bio-agri at Rs.1,936 crore.

The first pharmaceutical company - Bengal Chemicals and Pharmaceutical Works, which

still exists today as one of 5 government-owned drug manufacturers, appeared in Calcutta in

1930. For the next 60 years, most of the drugs in India were imported by multinationals

either in fully-formulated or bulk form. The government started to encourage the growth of

drug manufacturing by Indian companies in the early 1960s, and with the Patents Act in

1970, enabled the industry to become what it is today. This patent act removed composition

patents from food and drugs, and though it kept process patents, these were shortened to a

period of five to seven years. The lack of patent protection made the Indian market

undesirable to the multinational companies that had dominated the market, and while they

streamed out, Indian companies started to take their places.

India's growing respect and legal / regulatory framework for IPR, favorable economic

policies resulting into attractive investment destination and availability of huge talent pool

for sustaining and growing operations is making India an attractive destination for

multinationals now.

The recent acquistion of Piramal by Abott makes foreign companies three of the top five

drugmakers in the country--and multinational drugmakers together now command 25

percent of the domestic drug market.

Multinationals' share of the market is only expected to grow. This trend reverses the gains

that Indian drugmakers have made over the last few decades. Some Indian drugmakers grew

so much that they began snapping up companies on other continents to gain strength in

markets such as the U.S. and Europe. The pharma industry became a source of pride for

Indian economic boosters. Now that generics and emerging markets are all the rage among

Big Pharma--which is looking to diversify to soften the oncoming onslaught of competition

for some mega-blockbuster meds--drugmakers are buying up and tying up in India.

Here, we analyze in detail the industry, markets, players, growth areas and recent

acquisitions to understand the rationale behind these mergers and acquisitions. We also try to

identify the key parameters that are causing the pharma sector to see further M&A activities.


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Characteristics of Pharma Industry

The Indian pharmaceutical industry is estimated at $19.4 billion (including exports). In 2008,

the domestic formulations market contributed only 1 per cent in value terms to global

pharmaceuticals market due to lower drug penetration and lower drug prices vis-à-vis the

developed markets such as US and Europe.

India’s healthcare spending is around 6 per cent of the total gross domestic product of India.

Bulk drugs can be defined as the raw materials used to make formulations.

Formulations (drugs) can be defined as the end products that are administered to consumers

i.e. the diseased population, and are ready-to-use forms of bulk drugs (including capsules,

tablets, syrups and injections).

Bulk drugs or active pharmaceutical ingredients (APIs) are made from two or more

chemicals or intermediaries. Bulk drugs are intended to have a direct effect on the diagnosis,

cure, mitigation, treatment or prevention of a disease. Out of the total Indian pharmaceutical

market in 2008-09, formulations account for around 65 per cent and bulk drugs for the

balance 35 per cent in value terms.


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Highly fragmented domestic formulation industry

The domestic formulations industry is highly fragmented both in terms of number of

manufacturers as well as the variety of products. There are about 300-400 units in the

organised sector and around 15,000 units in the unorganized (small scale) sector that form

the core of the industry. The industry has a wide range of over 100,000 drugs spanning

across various therapeutic categories.

Indian companies vs. multinational players

Indian companies dominate the global formulations market by occupying seven out of the

top ten spots. The formulations market in India is fairly concentrated. In 2008-09, the top

five formulations companies, Cipla, Ranbaxy, GlaxoSmithKline, Cadila Healthcare, and

Piramal Healthcare, accounted for about 22.2 per cent of the domestic formulations market.

Additionally, the top ten players control about 36.5 per cent of the total formulations sales

Concentrated manufacturing

In geographic terms, manufacturing operations are largely concentrated in Maharashtra,

Gujarat and Andhra Pradesh. However, many players have shifted their manufacturing bases

to excise free zones like Baddi (Himachal Pradesh), Haridwar (Uttaranchal) and Sikkim due

to the shift towards MRP based excise duty levy.


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Per capita annual drug expenditure in India was around $3 as compared to $412 and $191 in

Japan and US, respectively. This can be attributed to India’s large population and declining

health expenditure as a percentage of total government expenditure in India.

In India, majority (around 80 per cent) of the patients pay out of their pocket. Only 3 per

cent of the population is covered under health insurance. Unlike US, India does not have a

strong health insurance sector to share the healthcare cost with the patients.

Conversely, in the US, consumers do not directly pay for the medicines. Here, government

organisations and managed care organisations reimburse most of the drug cost to the patients.

However, with rising drug expenditure, patients are being asked to taken on a larger share of

their healthcare expenses. This has prompted consumers to opt for generic drugs over high

priced branded drugs.


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Indian Pharma Industry

Pharmaceutical companies in India are growing at a very fast pace and this has made the

Indian pharmaceutical industry as the second largest growing industry. Also the

pharmaceutical industry in India is the third largest in the world, which will be of US$20

billion by 2015. Mergers and acquisitions are the part of this growth. The compounded

annual growth rate of pharma in India is 12-15% and the global figures are 4-7% for the

period of 2008-2013. With such a profound growth of pharmaceutical companies in India

numerous pharmaceutical jobs can be seen. This in turn is helping biotechnology industry

and booming the biotechnology jobs in India.

Some Vital Information on Pharmaceutical Companies in India

In terms of volume - India's pharmaceutical industry is the third largest in the

entire world.

In terms of value - India's pharmaceutical industry ranks fourteenth

By 2015 - It will be in the list of top 10 global pharmaceutical markets and it

will touch US $ 20 billion.

2008-2009 - Saw 29% growth in exports of pharmaceutical drugs as

compared to 2007

2013 - Indian formulation market is expected to touch US$ 13.7 billion

The “organized” sector of India's pharmaceutical industry consists of 250 to 300 companies,

which account for 70 percent of products on the market, with the top 10 firms representing

30 percent. However, the total sector is estimated at nearly 20,000 businesses, some of

which are extremely small. Approximately 75 percent of India's demand for medicines is

met by local manufacturing.

Top 10 Pharmaceutical Companies in India are:

Ranbaxy

Dr Reddy's Laboratories

Cipla

Sun Pharma Industries

Lupin Labs

Aurobindo Pharma

GlaxoSmithKline Pharma

Cadila Healthcare

Aventis Pharma

Ipca Laboratories

Indian players have been looking to establish and enhance their presence in the US market

by obtaining ANDA approvals, which are mandatory to enter the retail market.

Country-wise ANDA approvals 2008-09


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India's pharmaceutical sector is currently undergoing unprecedented change. Much of this is

due to the country's introduction, on January 1, 2005, of a system of product patents; before

that, only patents for processes were permitted to be issued, a fact that has been instrumental

in the domestic industry's huge success as a worldwide exporter of highquality generic

drugs.

The new patent regime has also led to the return of the pharmaceutical multinationals, many

of which had left India during the 1970s. Now they are back, and looking at India not only

for its traditional strengths in contract manufacturing but also as a highly attractive location

for research and development (R&D), particularly in the conduct of clinical trials and other

services.

Both multinational companies (MNCs) and domestic players are also examining the

prospects offered by the local market as the government moves forward with initiatives

aimed at providing India's more than one billion inhabitants, for the first time, with access to

the life-saving drugs they need. A further huge boost to the local market is coming from the

rise of India's new affluent consumers, who lead more Western-style lives and are

demanding innovative drugs to treat the chronic illnesses that these changing lifestyles may

produce. India's leading drug manufacturers are becoming global players, utilizing both

organic growth, through the gradual development of their business, and mergers and

acquisitions (M&A) as they seek to boost their presence in existing markets and open up

new ones.

Following inflection points could be seen in the growth of Indian Pharma Industry –


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Indian Market

History and current Indian market

The evolution of the Indian Pharma market has seen major changes from its humble

beginnings post- independence to moving into the global industry to becoming a major

player in the generics market. The evolution of the industry can be clearly divided in to two

epochs. The Pre-Patent regime and the Post-Patent regim. This section describes the

timeline of the Indian Pharma industry with focus on major events during the timeline

mentioned.

Pre-Patent Regime

Pre 1970s

The immediate post-independence era saw the Pharma industry in its nascent form. Most of

the critical drugs were still being imported form abroad. In order to improve self reliance, the

Govt. embarked on a process of creating home grown pharma companies. Hindustan

Antibiotics Ltd and Indian Drugs and Pharmaceuticals Ltd were a result of such aspirations.

The local manufacturing was highly fractured with around 2000 odd players. The field

however was dominated by MNCs who imported formulations from abroad.


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1970 - 1979

Two major developments during this time period influenced the nature of the industry for the

next three decades

Indian Patents Act 1970

This act created a patent regime in the country wherein only manufacturing processes were

protected by patents. The product itself was not protected by a patent. The result of this was

that the Active Pharmaceutical Ingredient ( API ) was not protected by patent. This resulted

in many Indian manufacturers producing bulk drugs through their own customized process.

This was a major blow to MNCs whose strength lie in the discovery and commercializing

of innovative APIs.

Drug Price Control Order ( DPCO ) 1970

The other major law that was passed during this era was the DPCO which brought in the

regulation of the prices of many critical drugs. There were two major results from this new

law

Decline in share of multinationals

- Multinationals found that their major block buster drugs were no longer

profitable due to the price control

- Multinationals found it hard to compete due to the new regulations.

- They hence focused on therapeutic preparations like vitamins and pain killers.

- However MNCs continued to build their brand equity in the country.

- The Foreign Exchange Regulations Act (FERA) in 1974 also saw the MNCs

needing to dilute their equity holdings

Growth of Small Scale Industries ( Pharma Companies )

There was a spurt in small pharma firms in the country due to the following reason.

- Low entry barrier

- Abundant bulk drugs available to be imported.

- Govt. support for small scale industries to improve employment and self-

sufficiency.

1979 - 1987

This era saw the number of drugs under DPCO reduced from 347 to 163. Additionally the

mark up limit allowed for retail sales changed from 40-60% to 70-100%. This improved the

profitability of the pharma companies allowing them to channel the surplus funds for

further expansion, both domestically and internationally.

The key features of this era are,


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- Growth in Cipla, Ranbaxy, Lupin and Torrent (due to aforementioned better

profitability)

- Increased spending on research for re-engineering products thus

introducing new drugs into the market.

E.g. Lupin from Rifampicin and Torrent from Ranitidine etc.

- Increased investments in Bulk Drug (API) production saw the capability in

this field improve

- Continued decline in the share of multinationals.

Multinationals continue to focus on therapeutic preparations.

- One key aspect of this era was the steps towards exports by the Indian

Pharma companies. Exports rose from 5% in 1980-81 to 19% by 1986-87.

The spend on re-engineering research paid off during this era.

1987 - 1994

Continuing on the growth path set in the 80s, the Pharma industry improved on its API

exports which grew at a CAGR of 40% during the 1987-94 period. Additionally, the

formulations market saw increased growth as the profitability of bulk drugs decreased Investments increased in capacity from Rs.7000 Mil to Rs 13800 Mil

The most important aspect of this period was the liberalization of economy by Narasimha

Rao Govt. It reduced tariff barriers for MNCs. These actions saw renewed interest of MNCs

in the Indian market. The advantages for the Indian Pharma companies by the new laws was

that they were freer to import equipment and bulk drug intermediaries which improved their

own competitiveness in the exports market. What this era also saw was increased

competition from small domestic players which now increased from 10,000 to 20,000.

1994 -2004

The number of drugs under DPCO was further reduced from 146 to 74 during this time with

only 40% of the market was covered by DPCO. This opened the field once again for

profitability. Additionally India joined WTO. The TRIPS regime which would make

product patent protection effective from 2005 was introduced. This increased interest

from multinationals who found entry into the Indian market by way of increased equity in

partnerships. E.g. Eli Lilly-Ranbaxy , Sanofi-Torrent etc. The MNCs viewed India as both

a market and low cost mfg hub. These can also be seen as part of the global consolidation

of pharma industry that affects India too.

As a part of the coming patent regime Indian companies had reinvent themselves. The Indian

companies started to have a global outlook by setting shop overseas throught JVs. There was

also focus on improve of capabilities to make them world class. The generics market in

developed countries especially the US through ANDA filings became a major source of

revenue and competitiveness for Indian Pharmas. Another key change in India industry was

the development of clinical trials in India to help MNCs reduce development costs. Many

companies including Piramal see this as a key growth sector.


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The overall industry profitability was reduced during this period due to high competition in

the bulk drugs space. This has seen companies increase their presence in the formulation.

Post Patent Regime

The Post Patent regime saw the enforcement of product patent protection.The copying of

drugs patented after 1995 is now illegal. This era has seen 15 patented pdts hit the Indian

Mkt.

2005-2010

A series of regulatory changes including VAT and Shift in excise duty levy to MRP based

levy has improved profitability. Customs duty on bulk drugs and lifesaving drugs reduced

improving the position of MNCs. Additionally, the implementation of Schedule M, a set of

norms for small scale companies to comply with in order to follow Good Manufacturing

Practices (GMP) has seen the reduction in competition from the small unorganized players.

With an already well established presence in APIs and Generics (In 2009, 29% of all

ANDAs in US were received by Indian companies), Indian companies already made a name

in APIs and Generics, Indian companies are seeking to create a name in outsourced clinical

research and contract research and mfg services (CRAMS). 2006 also saw the introduction

National Pharma Pricing Authority (NPPA) is regulatory body for price control.

All these changes strongly point to the growing strength of MNCs in India.


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Acute vs. Chronic

The following table depicts the differences between acute and chronic ailments which are the

two areas of treatments that the Pharma industry focuses on.

Due to their nature and prevalence, acute disease drugs see a lot of sales but also see intense

competition as wells as reduced margins. Conversely, chronic ailments see higher margins.

India has historically been a country where the acute disease treatment has mostly been the

focus of the Pharma industry. However increasing economic prosperity has seen the share of

chronic treatment increase. This is expected to continue in the years to come as shown in the

below data,

The nature and competition in the acute disease space requires the presence of a robust

sales force as well as a good distribution network in order for a company to be successful.


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There is a major amount of path dependency in developing these capabilities. The Indian

Pharma players have developed these through the years, when they had to expand into the

Indian market.

M& A activities in Indian Pharma Industry

The recent past has seen a spate of M&As in the Indian Pharma market. Where the Indian

Pharma companies were once the hunters, acquiring small Pharma companies abroad, the

tables have now turned with Indian companies being acquired by global majors in multi-

million dollar deals. Given below is list of recent acquisitions.

Of these, the biggest deal yet, has been the acquisition of Piramal Healthcare by Abbott Labs.

Piramal itself has been famous for using the acquisition way to grow. 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. This has been controversial in some

circles who see the valuation to be on the higher side. However, Miles D. White, Chairman

of the 120-year old 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, stresses that,

"the combined businesses will become the clear market leader in India."


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Mr. 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. The primary focus of

the Piramals is now molecule research and clinical research.

Abbott see the following rationales behind the acquisition,

- Acquire Indian pharma industry's largest sales force of around 4000.

- Piramal has one of the fastest growth rates of 17.5 per cent (against the

industry's of a little under 14 per cent)

- Piramla boasts portfolio of 350 branded generics, including such bestselling

brands as Stemetil (to treat dizziness/ vertigo) and Stator (a statin drug to

check cholesterol). Growth in capabilities in generics is seen by

- Leverage low-cost manufacturing abilities. Buyout includes Piramal

Healthcare's plant at Baddi in Himachal Pradesh, a facility approved by the

US Food and Drug Administration.

- Emerging top dog virtually overnight. Was till then the behind most

companies in India.

The flip side of these acquisitions as feared by Mr.Hamied from Cipla is 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.

Why are MNC’s interested in Indian Pharma Companies

Mega Patent Expiries As per industry estimates, nearly 41 molecules worth US$ 57 billion in sales in the

biopharmaceutical space are expected to go off patent over the next six years. Generic

majors as well Indian generic companies (Dr. Reddy’s, Biocon and Lupin are amongst the

front runners) have stepped up investments in this space and expect to tap the emerging

opportunity.


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Sluggish Global Growth Rates

Organic growth can deliver only limited market share gains; even in a fragmented market,

<3% market share may be sub-optimal to deliver long-term strategic goals.

While sales of top pharma companies have grown marginally at a CAGR of 1.6 per cent

during 2004 to 2008, their operating margins have plummeted from 27 per cent in 2004 to

19.7 per cent in 2008.

Operating Margins of top 5 Pharma players

Trends in Growth for Domestic Formulation Industry


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Cost Arbitrage The cost of manufacturing in India is significantly lower as compared to that of US and

Europe. Global Pharma companies, which are looking for cost competitive destinations, can

reduce their cost substantially by outsourcing bulk drug manufacturing to India or China.

Quality

Indian Pharma Companies account for nearly 50 per cent of DMF filings


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This rise in proportion suggests that Indian players have been able to maintain the required

quality standards to export to the regulated markets.


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Indian as an Emerging Market

High Growth Potential of Emerging Markets

India in Top 5 in the Emerging Market


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Shift in disease profile towards chronic ailments

Even though presently acute therapies account for over 68 per cent of the total domestic

formulations market, in the next 5 years, it is expected to move toward the chronic portfolio.

Chronic drugs give higher returns, and players in this segment are more likely to outperform

the industry and register strong growth.

Leading Indian players in chronic therapies – Sun, Torrent, USV, Lupin, Zydus and

Unichem.


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Role of Complementary Assets

An MNC player would typically look for the following complementary assets:

1- Companies with strong presence in domestic formulation space

Ranbaxy, Cipla, Piramal Healthcare etc.

2- Presence of Indian Pharma Companies in the Emerging Markets

Ranbaxy has a well-diversified presence with products in over 100 countries and a

ground presence in 34 countries. Sales growth of 9% YoY from BRIC nations.

3- Companies offering presence in high-margin and faster growing chronic therapy

segments

Leading Indian players in chronic therapies – Sun, Torrent, USV, Lupin, Zydus and

Unichem

As already discussed in the section “Acute vs Chronic”, Piramal’s strong sales force

helps Abbott improve its reach. At the same time it brings in complementary assets in

the form of drugs for chronic illnesses. Thus with both strengths in acute and the

chronic market, Abbott is well positioned to dominate the market.

4- Companies with strong business momentum

Piramal Health Care


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Value Innovation World over, major Pharma companies are known for their expertise in new drug creation.

Conversely, by virtue of the process patent regime, large Indian Pharma companies in India

have mastered re-engineering and process innovation. This coupled with the low cost

manufacturing advantage of India, MNCs that acquire India companies can leverage India as

a manufacturing hub. This is especially true for the patented innovator drugs which MNCs

were apprehensive to bring into the country, but with the new product patent regime in place,

they can now become price leaders in the innovator drug categories.


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Reasons for Indian companies to Merge/Partner

The Indian pharma companies see following challenges in future -

1- Increasing competition in domestic market

o Most mid-large size companies beginning to refocus on the domestic market and

invest aggressively

o MNCs clearly stepping up from steady state to high investment phase.

2- Mid-size companies face question of survival, given…

o Drying product pipe lines - post product patent regime (in 2005)

o High promotional costs on the back of increased competition

3- Alternate business interest of promoters or second generation

o Ranbaxy promoters diversifying into healthcare and financial services

o Piramals & Dabur Pharma’s Burman family have other interests

4- Attractive valuations

o Piramal–Abbott transaction at 9x sales

o Ranbaxy–Daiichi transaction at 5x sales

Conclusion

Based on our analysis, we have come to the conclusion that the following are the key reasons

for active M&A activity,

Existence of complimentary assets between the local sales force/ process

capabilities of Pharma companies and innovator drugs of MNCs.

Attractiveness of India as a market

Ability to improve the value offered to customers through value innovation.

We also conclude that this trend of M&As will continue in the near future.

Hence we have the following recommendations which can serve as guidelines

for MNCs looking for acquisitions.


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Rationale Seller/Local Enterprise Characteristics

Tap into Local /

Emerging markets

• Sizeable market share in local market. Presence

in other EM markets is an added bonus.

• Leaders in higher margin segments as opposed

to lower margin ones.

• Companies which are cash strapped/higher debt-

equity ratio due to previous acquisitions.

• Possible promoter conflicts. DRL?

Leverage process

capabilities

• Existing ANDA filings.

• Previous record of ANDA filings.

• Number of FDA approved plants running.

References –

1. Crisil Research reports on Pharma Statistics, Pharma Opinion and State of the industry

www.crisil.com

2. Research reports – Great Indian Sale is On by IDFC India Research

www.idfc.com

3. Publicly available information from blogs, reviews and news

http://www.crisil.com/

http://www.idfc.com/

pharma industry m&a activity analysis

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