Overdose?

The company is bidding for Merck's generics unit even though its European operations are not doing too well.

Having cut eight deals last year, the $1.3 billion pharma major Ranbaxy probably has the sharpest negotiating skills in the business. So, it won't be a surprise if it finally manages to acquire the generics business of German firm Merck KGaA.

Ranbaxy is the only Indian pharmaceutical company to have shown an interest in the $2 billion unit. However, several private equity (P/E) funds such as KKR, Texas Pacific, Blackstone and Carlyle, are understood to be in the fray.

That apart, in a twist to the story, the Mumbai-based Cipla, is believed to have discussed with potential P/E bidders, the supply of low cost products to the generics unit.

But Ranbaxy's not trying to make a backdoor entry. And it's clear why it wants to clinch this deal. For one, it will catapult the company to the number three slot in the global hierarchy. Moreover, it fits in neatly with its existing business.

Says Ramesh Adige, executive director, "Merck's generics unit is a quality asset and offers a strategic fit to our global business. It will enable us to further strengthen our front and back-end capabilities."

But even as it is busy finalising the acquisition strategy, the latest numbers suggest all might not be well with Ranbaxy's new strategy of focusing on Europe. The company invested over $350 million in four acquisitions in the continent.

Today, it has a presence in 23 of the 27 EU markets. But it ended 2006 with a turnover of $194 million in Europe, four per cent lower than in 2005. Sales fell in each of the three key markets "" the United Kingdom, France and Germany.

With the US market for generic medicine getting more and more competitive, Ranbaxy decided to hedge its risks by expanding rapidly in Europe some years back.

The rapidly aging population and the high cost of medication pointed towards a great future for companies like Ranbaxy, which specialise in producing off-patent at competitive rates. But given the latest numbers, did Ranbaxy read the market incorrectly?

Managing Director and CEO Malvinder Mohan Singh says that its first big ticket acquisition in Europe "" Aventis' generic arm in France "" in 2003 is yet to come out of the red and its turnaround is still a year behind schedule. "Prices have been down in France, Germany and UK. But we should make an operating profit by 2007 when we move more products to India for production," he says.

The only solace for the company was the fact that all the markets where it had made acquisitions, except Germany, performed well, thereby reducing the magnitude of the business loss in the three key markets. The rest of Europe, backed by strong performance in Spain, Italy and Poland, showed 14 percent growth to garner sales of $ 61 million in 2006.

Industry watchers, however, are not too surprised at the numbers. Observes Sarabjit Kaur Nagra, an analyst with Angel Broking, "Ranbaxy's poor performance in Europe was anticipated. Growth in European markets will depend on the strategic positioning of businesses in select markets."

Sujay Shetty, associate director and spokesperson for pharma sector, PricewaterhouseCoopers, agrees. "The profits have been hammered down throughout Europe and that will continue," he says.

Shetty points out that all other markets are increasingly becoming price sensitive. "Germany will continue with its healthcare reforms as its generic requirements are growing due to an aging population and the generic substitution is catching up in France and the US too," he notes.

Asked if the European investment has been a mistake, Adige says Ranbaxy remains positive on the longer-term potential of Europe and will strengthen its presence in the region.

"With healthcare costs continuing to escalate, generic alternatives will progressively play a greater role," he asserts. The executive director says the company will pursue both the organic and inorganic routes. Neither path is new to Ranbaxy, both are well-travelled.

EUROPEAN SAGA

March 2006 Acquired unbranded generics business of AllenSpA in Italy

March 2006 Bought generics company Terapia for $324 million in Romania

March 2006 Took over Ethimed NV in Belgium

July 2006 Acquired Mundogen, a generics unit in Spain