The pharmaceutical sector in India, among the fastest growing markets globally in the segment, is likely to witness less demand from multinational corporations (MNCs) for larger buyouts in 2013.
Though there was demand for buying out domestic drug manufacturing businesses in India early last year, the mood has been dampened by latest developments such as changed foreign direct investment regulations and the recent compulsory licence issues.
“Multibillion dollar inbound deals have been slow to come, given the high valuation expectations of promoters, coupled with regulatory challenges from CCI (Competition Commission of India) and FIPB (Foreign Investment Regulatory Board),” said Deepak Gaurav, managing director, Avendus Capital.
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India saw growth of about 290 per cent in outbound deals in 2012. Eight outbound deals worth $872 million took place in 2012 against seven worth $224 million in 2011. Though the number of inbound deals went down to six in 2012 against nine in 2011, the size grew 70 per cent to $246 million in 2012 against $130 million in 2011, show VCCedge data.
“Acquisition is always the best way to tap the fast-growing Indian pharma market. However, the mood of buyouts was dampened in 2012 by the regulatory hurdles put up by the government. We expect the same mood to continue in 2013,” said Sujay Shetty, partner, pharma & lifesciences, PricewaterhouseCoopers. Compulsory licences and high valuations are other factors that play spoilsport for inbound merge and acquisition (M&A) deals in pharma, he added.
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In March 2012, the controller of patents had granted the first-ever compulsory licence to Natco Pharma, to make a generic version of Bayer’s high-priced anti-cancer drug, Nexavar. By Indian patent law, a compulsory licence can be granted if the patented drug is not available to patients at a reasonable price. Bayer’s patented drug costs about Rs 2.8 lakh for a month’s treatment in India, against which Natco sells the drug at Rs 8,800.
In the current policy, all expansion projects in the sector would now be cleared by FIPB, which has also raised concern over inbound acquisitions. However, the new market-based pricing policy, which caps the price of 348 essential medicines, is unlikely to affect the appetite of MNCs’ acquisitions in India.
Chetas Desai, managing director, Ambit Corporate Finance, said, “The pricing policy will affect margins or profitability, rather than sector growth. Therefore, there should be an impact on value perceptions of buyers but this should not detract buyers seeking growth.”
Recently, the National Pharmaceutical Pricing Policy, notified by the department of pharmaceuticals, capped the price of 348 essential medicines at the arithmetic average of all drugs in the segment with a minimum one per cent market share. In the earlier policy, the price control was based on the cost-plus mechanism.
Under the new pricing regime, the price control threshold has been expanded to 30 per cent from the earlier 18 per cent of the Rs 67,000-crore market. The control is expected to affect three to eight per cent of the profit of Indian majors such as Alembic, Dr Reddy’s Labs, Cipla, Cadila and Ranbaxy.
“About 75 per cent of the growth in the market is volume-driven. Even after accounting for the price ceilings as proposed by the new pricing policy, the growth in the market is expected to continue. Price ceilings will be a one-time adjustment, as the new pricing policy allows for an inflation-driven adjustment,” added Deepak.
MNCs, which believe buyout in the Indian market is a costly affair, are looking to tap the market through alliances and joint ventures (JVs). Says Sujay Shetty, “Tie-ups or JVs are the other route to tap the Indian market, where growth can be achieved in a slow manner, compared to buyouts.”
Last month, pharma major Eli Lilly and Bangalore-based Strides Arcolab had entered into an agreement for supply of cancer medicines to emerging markets.
And, Japanese firms Otsuka and Mitsui & Co had set up a JV with Claris Lifesciences, under which the latter would transfer common solutions, anti-infectives, plasma volume expanders and parental nutrition therapies businesses to the joint venture, Claris-Otsuka
“Mid-market inbound pharma deals will continue to happen, given the attractive growth profile of the Indian market vis-a-vis other pharma markets globally. 2013 will also see selective Indian companies acquiring abroad for niche capabilities and brands,” said Deepak.