Seven years after Piramal deal, Abbott way off revenue target

It acquired the formulations business from Piramals in 2010 in a $3.7-bn deal

When US-based global health care major Abbott acquired the formulations business of Piramal Healthcare in a $3.7-billion deal in 2010, it had projected a revenue target of $2.5 billion within 10 years. As things stand today, this target seems an uphill task for the company to achieve. 

The acquisition, a part of the multinational drugmaker’s strategy to expand its emerging market presence, propelled the pharma giant to No. 1 position in the domestic market. But recent government actions, including capping prices for drugs and stents, and curbs on sale of fixed-dose drug combinations (FDCs), have intensified the challenges for the drugmaker. 

Abbott, which operates through two main entities in India, had made the acquisition in the privately held Abbott Healthcare. 

While the listed entity, Abbott India, is smaller in size and profitable, the privately held firm is loss-making. Besides the 350 branded drugs that it bought from Piramal, stents business, too, is housed in Abbott Healthcare. 

While the two companies combined have lost numero uno position to Sun Pharma (after the Ranbaxy acquisition), it could become increasingly difficult for the US-based drugmaker to gain traction in India. The Abbott combine commands a market share of 6.28 per cent in India’s Rs 1-lakh crore market, after Sun Pharma’s 8.78 per cent.

The US parent had expected a 20 per cent sales growth from the acquired products over the next five years at the time of the acquisition, which didn’t materialise.

The Piramal brands that it acquired had a revenue of Rs 2,000 crore in 2010, while that of Abbott’s Indian operations was around Rs 2,200 crore.  

As of March 2016, Abbott had a combined sales for both the Indian entities of over Rs 6,800 crore, which is a little over $1 billion at current exchange rates. At the time of Piramal transaction in May 2010, the dollar was valued at around Rs 45 and the rupee has since declined around 40 per cent in value.

Going forward, to achieve the target, the two companies together have to achieve an annual sales growth of 25 per cent each year till March 2020. Given its current growth rate, which is less than half that number, the 2020 target seems a tall order. Sales growth in India for the 12 months ended March 2017 stood at 11.3 per cent, according to the All India Organisation of Chemists & Druggists data.

Abbott has been adversely impacted by the government’s stent pricing policy, which mandates a cap of under Rs 30,000, while some of Abbott’s products were priced higher. Abbott Healthcare’s vascular division, which includes stents, contributed 12 per cent to its FY16 revenue. 

Also, the regulation on FDCs in 2016, which resulted in key brands, including its bestseller Phensedyl cough syrup, coming under pressure.  

Abbott did not divulge if it has reset the target. A company spokesperson said, “We cannot share future growth projections. External environment is dynamic and our business strategy accounts for external variables.” 

According to the Registrar of Companies filings, Abbott Healthcare made a net loss of Rs 1,741 crore on a revenue of Rs 4,134 crore in FY16. The pharmaceutical business, which includes products acquired from Piramal, contributed 64 per cent of the sales. The company’s interest expense was at Rs 401 crore on a debt of Rs 5,598 crore in the last financial year (FY17). At the operating profit level, however, it made a profit of Rs 527 crore. In contrast, the listed firm, Abbott India, made a net profit of Rs 259 crore on a revenue of Rs 2,678 crore in FY16.

The Abbott spokesperson said the Rs 5,598-crore debt, which was infused by the parent, will be converted into equity. “This debt has been due to the funding requirement for capital asset/procurement. Abbott Healthcare is already profitable at the operating profit level and continuously works on maintaining the same with revenue improvement and cost optimisation initiatives.” The spokesperson added that it is not appropriate to compare sales of both these companies, as their brands, market shares, price points and in-market strategies are different.

Globally, Abbott ended 2016 with revenues of about $21 billion, with India being one of the fastest-growing markets for the drugmaker. “India is one of the most important places in the world for Abbott, and we are investing here accordingly,” Miles D White, the company’s global chairman, had said during his India visit in 2015.  

The company’s biggest investment in India now will be in a 100,000-square feet innovation and research centre for branded generics, which will come up in Maharashtra in early 2018. However, with the Indian government working on a code, which makes it mandatory for doctors to prescribe generic drugs, Abbott could be impacted. 

Abbott is also introducing new products across various therapies, focusing on exports and also investing in an innovation hub to develop drugs for India and other countries, and doubling its number of scientists to 100. 

In 2014, Abbott opened its nutritional products plant in Gujarat and is expanding its manufacturing facility in Baddi, which is the second-largest facility globally and will export products to South America, West Asia and Asia Pacific markets. “Abbott’s presence in India has steadily expanded over the years. Today, we offer more than 500 health care products in the country and are creating new solutions in pharmaceuticals, nutrition, medical devices and diagnostics,” Abbott said.

While the company is facing pressure due to pricing caps, it introduced 17 new products and launched a vaccine division last year. “Vaccines are a high margin and a limited competition business, and the company is opening up new growth opportunities. The insulin distribution business has risen 15-20 per cent, enabling the company to grow its revenue,” said an analyst with a domestic brokerage.