A report by Avendus Securities on the pharmaceutical sector has stated that after a subdued three years, the M&A activity has shown strong signs of a revival in the industry. While inorganic initiatives were concentrated in the hands of a couple of entities in FY12, participants appear to be more broad based over the nine months of FY13. Along with organic investments, capital deployment is at its highest level, as the industry builds blocks for future growth.
Currently, the industry stays net cash positive. However, the situation could alter if the announced acquisitions in the pipeline are concluded. Nevertheless, as a proportion of MCap, the net debt position stays firmly comfortable.
Investors’ reactions to M&A announcements have been mixed — warm, but not overtly so — as the reward to grow inorganically has probably been tempered down, to an extent, by the costly failures of the past. Nevertheless, the industry’s net cash position, along with scope for fund raising, supports an M&A theme through 2013.
According to the report, four of the seven deals in the past 15 months were followed by a significant stock out-performance in the immediate four weeks. However, there has been a subdued reaction to three announcements, indicating that investors’ reward and appreciation towards inorganic initiatives has been probably tempered down, to an extent, by the costly failures of the past.
Challenges in integration pose a prominent risk to M&A, particularly in a cross border acquisition; in the past, a combination of regulatory and price environment changes have resulted in costly failures in cross border acquisitions. As the industry builds blocks for future growth — in research, technology platforms, manufacturing, plugging portfolio loopholes and establishing a front end—M&A activity is likely to stay high through 2013 and would be among the key guiding posts in determining stock directions.
EP News Bureau – Mumbai