While Biggies Merge To Boost Pipeline; Debt, Low-Valuations Make Indian Cos Target
While merger-mania is gripping the global pharma industry, a similar trend may soon spill over to the Indian market, with pharmaceutical companies quoting at low valuations and saddled with huge debt.
Recently, there have been a spate of deals in the pharma space led by Pfizer Inc’s acquisition of Wyeth for $68 billion, followed by the merger of Merck and Schering Plough. Experts believe that Bristol-Myers Squibb may be the next target of an acquisition, and many more deals are inevitable.
Back home, there has been speculation about Wockhardt and Piramal Healthcare being potential acquisition targets.
Analysts believe that the trend may intensify in India. “Due to global consolidation, pricing pressures, regulatory compliance issues and leverage taken on books for past high-priced acquisition, large Indian pharma is feeling the pressure and there will be substantial consolidation within the Indian market,” says Sujay Shetty, associate director, PricewaterhouseCoopers India.
The primary drivers of global mergers and acquisitions are falling revenues of Big Pharma due to slowdown pressure and a shrinking block-buster drug pipeline. Pharma consultancy IMS Health estimates that by 2011, drugs worth some $60 billion will come off patent.
So MNCs are trying to augment revenues by acquisitions and alliances with generics and other companies where they see additional businesses like vaccines, biotech drugs and specialist therapies. For instance, Pfizer gets the biotech business and OTC business of Wyeth to increase its revenues through the acquisition.
Pipelines have been stag nating, hence there is need to replenish them. In the recent Merck-Schering Plough deal, Mercks pipeline will double to 18 late-stage drugs with a formidable research and development pipeline.
In the current economic environment, big mergers and deals are a good strategy to improve bottomlines and cut costs. Research and development and marketing expenses account for a whopping 35-40% of total expenses. These deals will allow for synergies and cost reductions when a merger happens.
Pharma biggies like Glaxo are trying to bolster their presence in emerging markets and in generic companies. There are many Indian companies whose valuations have reduced by 70-80%.
Experts believe that some of them will fall prey to either big Indian companies or foreign players.
“This is the perfect time to shop for companies that are strategically highly compatible and are available at much lower valuations. Companies with a reasonable risk appetite make best use of such opportunities and the phenomenon is quite apparent with number of deals happening in global pharma space. Pharma is still perceived as the industry, which is relatively immune to any downturn, and hence most M&A activity is happening in this space while earlier it used to be services or technology. As for trend spilling to India, I think companies are taking a wait and watch approach as of now,” says Zydus Cadila executive director Ganesh Nayak.
As far as availability of funds is concerned, Big Pharma, for all its problems — does have massive cash resources and can do these blockbuster deals as well as attract the needed bank-funding, as pharma has been less affected by the downturn on account of the defensive nature of the industry.
Big Pharma M&A deals, a booster shot for contract manufacturers
The third mega pharma merger deal was done last week with Roche buying a controlling stake in Genentech for $47 billion. This follows Merck’s $41 billion deal to combine with Schering-Plough and Pfizer’s game changing $68 billion buyout of Wyeth in January this year. While the recent consolidation in pharma industry is an outcome of the challenges faced by the global pharma companies over the last few years, this spells good news for Indian pharmaceutical contract manufacturers such as Piramal Healthcare, Jubilant Organosys, Divis’ Labs and Dishman Pharma.
With these large acquisitions being focused on reducing costs and increasing revenues, Indian companies think they will get more contract deals. Pharma contract manufacturers either supply formulations (finished dosages) or active pharmaceutical ingredients (drug raw materials) to global companies. The phrase Big Pharma is often used to refer to companies with revenue in excess of $3 billion.
According to industry estimates, outsourcing helps Big Pharma cut costs by 30-50% due to cheap labour in India. For instance, Pfizer-Wyeth combine expect to save $ 3 billion by 2010 end and Indian pharma contract manufacturers could play an important role. “Going forward we expect that manufacturing will be more skewed towards India and China. Chinese players lose out to Indian companies on quality and adherence issues. Recession cannot wipe out Big Pharma and Indian pharma outsourcers stand to benefit as these dinosaurs merge,” N Santhanam, chief operating officer of Rs 2,800 crore Piramal Healthcare, said. Piramal’s Pharma Solutions provides end-toend support for bringing a drug to market or managing the life cycle of a launched drug.
R Sankaraiah, executive director (finance) of Jubilant Organosys, observes: “Slowdown has put further pressure on the margins as governments worldwide aim at bringing down overall public health care expenditure. This trend of consolidation and collaborations will continue and is likely to have a positive impact on the Indian CRAMS sector.” In the first nine months of FY09, Jubilant’s contract manufacturing business grew by 61%. Analysts feel several India-based companies are well positioned to leverage their competitive advantages in terms of low-cost business model, knowledge-based talent pool, efficient innovative technologies and large patient population to deliver cost effective solutions. In fact, as luck would have had it, most Indian contract manufacturers are at the fag end of their capex cycle (indicating minimum requirement of more capacities).
On the short-term, these big mergers may not play out well for Indian contract manufacturers but the longterm story remains very much intact. “Big Pharma’s focus on rationalising working capital needs and reducing stocks from the system would result in lower offtake of sales in the next couple of quarters...but the focus on optimising will lead to more outsourcing,” pharma analyst Rohita Sharma at Enam Securities said.
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