M&A frenzy in pharma: Here to stay?

Mergers and Acquisitions (M&A) seem to be the flavour of the season. Sun Pharma took over Ranbaxy and Bayer acquired Merck’s consumer healthcare business. Pfizer bidding for Astrazeneca in what could be more than a $100-billion takeover offer, has also been in the news for quite some time. Leading manufacturer of generic drugs, Teva Pharmaceuticals persistent attempts to acquire Cipla has been a topic of discussion in the industry. The surge in M&A activities, is expected to have a significant impact on the way the Indian pharma industry would shape up in future.

M&A drivers

Though recent months have seen a spur in M&A deals, the reasons and motives behind each one of them vary.

“The focus now is more on the larger market opportunities, whereas, earlier it was directed at acquisitions of innovation-driven start-ups for technology platforms and early stage development product companies.” KV Subramaniam President & CEO, Reliance Life Sciences

KV Subramaniam, President and Chief Executive Officer, Reliance Life Sciences, analyses the development and says, “M&A activities have certainly accelerated in the first four months of this year, with several big ticket deals announced or are being currently pursued. Big pharma companies, who have largely stayed away from large deals in 2013, are looking at M&A route to expand into new product categories, new geographies and new technologies, besides focusing on growth in revenues and profits.” He adds, “The focus now is more on the larger market opportunities, whereas, earlier it was directed at acquisitions of innovation-driven start-ups for technology platforms and early stage development product companies.”

Patent protection was ensuring good profits to the innovator companies. However, post patent expiry profit margins started sinking considerably and pharma companies had to look for other avenues and alternate resources to earn money and stay afloat. This situation proved to be a precursors for the rise in M&A activities in the global pharma industry.

“Indian Big Pharma has definitely become an attractive buyer universe for prospective Indian sellers over the last one to two years.” V Krishnakumar Partner, Transaction Advisory Services – Lifescience & Healthcare, Ernst and Young

V Krishnakumar, Partner, Transaction Advisory Services -Lifescience & Healthcare, Ernst and Young, informs, “As the global blockbuster boom of the 1980s and 1990s ran out of steam and patent expiries started accelerating, big pharma has been forced to cut down on inefficiencies and focus on core competencies. Hence, there has been (and will continue to be) significant consolidation in the global pharma industry.” He adds, “This consolidation is enabling the rationalisation of various aspects of the business including product portfolios, R&D operations, manufacturing operations and investment on new product pipelines.”

“The recent M&As were an attempt to maintain the bottomline, and reduce costs rather than to increase the topline.” Ameesh Masurekar Director, AIOCD Pharmasofttech AWACS

Ameesh Masurekar, Director, AIOCD Pharmasofttech AWACS, informs that the driving factors behind M&As globally and in India are quite different. He opines that Daiichi may not have had pressing reasons to exit from Ranbaxy at such a low valuation if it had been a purely domestic Indian company. He states, “Globally, the blockbuster molecules are reducing in every decade. This has led to increased pressure on sales, marketing, manufacturing and all other indirect costs.” He further claims that the recent M&As were an attempt to maintain the bottomline, and reduce costs rather than to increase the topline. Sun and Ranbaxy deal is unique because of its valuation, its supposed ability to enhance topline purely because of the merger and its potential to reduce costs as well.

“The pharma industry is highly fragmented and clearly has been ripe for consolidation for quite some time. These recent M&As are clear indicators. There is always the possibility that there could be more M&As in the Indian pharma space and of course globally.” Ranjit Shahani Vice Chairman & Mng. Director, Novartis India

“The pharma industry globally is going through a challenging time with increasing public scrutiny and immense pressure on pricing,” feels Ranjit Shahani, Vice Chairman and Managing Director, Novartis India. He says, “M&As is one way for pharma companies to gain scale and have a strategic position in the market place as can be seen from recent examples where companies have either bought out brands, formed JVs or divested businesses that are not among the top three in the market. In some cases, companies have bought out stressed assets in an endeavour to turn those around and gain market share.”

A trend setter deal?

Ranbaxy’s acquisition by Sun Pharma is perhaps the most significant acquisition in the Indian pharma industry. However, experts do not deny the chances of more such acquisitions.

“Several M&A deals have happened in India involving MNCs as well as Indian acquirers in the past and we expect this trend to continue,” informs Subramaniam.

Masurekar echoes Subramaniam’s views and explains, “Ranbaxy and Sun Pharma deal will open the doors for several more acquisitions in India. The buyer may be an Indian company or an MNC.”

He adds, “The Daiichi acquisition of Ranbaxy was at five to six times the sales and Piramal acquisition of Abbott was at eight to nine times the sales. Due to these two deals there were high expectations and it was difficult for any buyer to match these. Now, with this deal, the expectations would be realistic, a new benchmark has been set and this would eventually open up more prospects for M&As.”

Krishnakumar also endorses the views of Subramaniam and Masurekar and says that the trend of M&As will continue. Discussing the rationale behind his views he says, “Indian Big Pharma has definitely become an attractive buyer universe for prospective Indian sellers over the last one to two years, because of the heightened regulatory scrutiny involving the sale of Indian pharma companies to MNCs. Besides, the case for domestic consolidation is becoming more and more significant in the context of heightened drug price controls.”

Domestic consolidation will help in keeping drug prices under control. However, multiple branded generic versions of new molecules will act as an obstacle in doing so. Krishnakumar explains, “Over 100 companies launch and try to promote their branded generic versions of each new molecule, which results in an enormous amount of wasteful activities and expenses in terms of manufacturing, distribution and doctor promotion. It also creates an unnecessary logjam of paperwork for regulatory authorities such as the State FDAs, DCGI, etc. Ultimately only the top 10-15 companies succeed in building large brands.”

He adds, “We need to see more domestic consolidation happen so that the inefficiencies in the industry can get minimised, which in turn will increase the ability of pharma companies to provide cheaper drugs to patients without having to sacrifice profits. We believe that having eight to 10 companies selling a molecule provides for adequate competition; we don’t need to encourage the launch of 100+ brands for each molecule.”

Shahani says, “The pharma industry is highly fragmented and clearly has been ripe for consolidation for quite some time. These recent M&As are clear indicators. In life there are no permanent competitors so there is always the possibility that there could be more M&As in the Indian pharma space and of course globally.”

According to Sun Pharma spokesperson, each situation is very specific. Whether it will spark off a trend is difficult to say.

Potential targets

Pharmemerging markets like India are considered to be the next big ground for M&A activities. It will be interesting to see the kind of Indian companies that are going to be the targets of potential bidders.

Subramaniam says, “Against the backdrop of subdued growth in developed markets such as the US and the EU, pharmemerging markets continue to show a robust growth. This would be one of the key reasons for M&A deals in these markets. The other reasons could be access to low-cost R&D or manufacturing base which would help the acquirer company to cut costs aggressively and achieve synergies with its existing business.”

According to Krishnakumar, two categories of Indian companies are likely to be the targets for potential bidders. He says, “The first category would consist of companies who have low-cost and world-class R&D as well as manufacturing capabilities, such that potential bidders can leverage the Indian infrastructure as global (or regional) supply bases. The second category would consist of companies who have market-leading positions in the domestic branded formulations market, in high-growth chronic specialities like cardiology, endocrinology, chronic pain, chronic respiratory and oncology.”

According to experts, more M&As will happen in future, however, bidding for the pharma companies in the emerging markets like India, also involves post-acquisition risks/challenges. Masurekar explains, “More than which Indian company would be the target, the key question will be who would be interested in a buy-out. MNCs have done big ticket, premium buyouts but looking back they feel the deal was not worth that valuation, as post buyout they have struggled to beat the pharma market growth rate. So on the buyer side, that leaves out some top Indian companies looking to consolidate and some MNCs who have a research pipeline in specific niche areas but have not fully entered into India.”

According to Masurekar, options available are licensing the drug to a leading Indian player and enjoying royalties or fully entering into India with a field-force, the second of which will open a buy-out option rather than rebuilding from scratch.

Mixed package for service providers

Service providers of the pharma industry will also be directly getting affected by the M&A deals in the pharma industry.

“M&As are very beneficial to us. They give us an opportunity to create an environment conducive to new requirements.” Archana Sohoni Principal Architect, Arena Consultants

Archana Sohoni, Principal Architect, Arena Consultants, says, “M&As indicate growth, expansion. Whatever strategy a company would prefer to adopt, the outcome is a change towards progress. The effect of M&As is change in company policies, resources, operations, market share, revenue, infrastructure etc.”

Arena Consultants are laboratory planners and designers. For a service provider like them, it means they are prospective clients. It is a favourable event for them.

“For us it translates into building infrastructure to a scale bigger than the existing one or rebuilding the existing set up to suit new requirements. When two companies come together in whatever format, change in company culture is inevitable. There are hierarchies or matrix patterns which need to be reflected in company layouts. Many times companies decide to go for accreditation to attract foreign investors or buyers. So the accreditation process governs the layout and infrastructure planning,” says Sohoni. She adds, “New divisions are set up. Each R&D head or user has his own way of working. In that case the layouts change. In addition to this, with globalisation, there is lot of awareness in work environment. Researchers, analysts, technicians travel to their Western counterparts, see their infrastructure and aspire to have similar set-ups. This too influences our work. Thus M&As are very beneficial to us. They give us an opportunity to create an environment conducive to new requirements so that it helps the company reach higher goals than before.”

“Such consolidations can enable the Indian pharma industry to initiate more projects of drug discovery, thereby creating more opportunities for CROs.” Narendra Deshmukh Director, Intox Labs

Intox Labs, Pune, does toxicology studies for the pharma companies. Consolidations in the pharma industry would benefit CROs like Intox, feels Narendra Deshmukh, Director, Intox Labs. He says, “Such consolidation can enable the Indian pharma industry to initiate more projects of drug discovery, thereby creating more opportunities for CROs. For routine regulatory studies, ongoing M&As could further widen pipelines thereby increasing the opportunities.”

“If the merged entity changes the business focus and decides to stop certain ongoing projects or reduces its scope,it can adversely affect service providers.” Salil Sansare Director, Labguard India

Salil Sansare, Director, Labguard India, opines, “The merged/acquired entity looks for expansion/ modernisation of its plants/R&D centres. It definitely creates more opportunities for service providers- it can be a green field project or a total revamp of existing facilities. Also the new entity may ask for a lot of global compliances, which means the service provider can implement latest technologies which will benefit customer in cost and speed.”

However, service providers may also have challenges to deal with. M&A deals would encourage sharing of resources between the pharma companies which may reduce the need to hire service providers for different purposes.

Sansare points out another challenge and says, “If the merged entity changes the business focus and decides to stop certain ongoing projects or reduces its scope, it can adversely affect service providers.”

In times to come

Sun Pharma-Ranbaxy acquisition deal was unique in a sense that it was the largest such deal that took place between two Indian pharma companies. Though experts have predicted more such consolidations in future, a section of the industry also feels that in future the Indian pharma companies would be in a position to take on MNCs. In fact, as pointed out by Shahani, the world has changed and today you have Indian companies that have acquired global companies in other sectors. We need to change our mindset and be open to what is best for all stakeholders, particularly the patient. Looking at ever growing pharmemerging markets, a time will come when a Indian pharma company would pocket a pharma MNC.

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