Promise of large deals hit by high valuation expectations from Indian promoters and regulatory hurdles in the West.
The year started with a lot of promise for merger & acquisition (M&A) deals in the pharmaceutical (pharma) sector. The reasons were strong. In 2010, Abbott had acquired Piramal Healthcare for $3.72 billion (Rs 17,500 crore).
Many expected similar valuations – the Piramal one was over eight times domestic sales–and deals this year. However, despite expectations of big buyouts, the year ended quietly.
The major deals in pharma & healthcare in 2011 included Danone's buyout of Wockhardt's nutrition business for $355 million and Akorn's acquisition of the assets of Kilitch Drugs for $44 million. While the names of Indian pharma majors Lupin and Cipla were floated, both strongly denied these.
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Materials Holdings Inc
But industry experts believe though deals did not fructify in 2011, there are several Indian promoters willing to exit at the right price. As Krishna Kumar, partner-life sciences at Ernst & Young says, Indian pharma promoters continue to be keen to exit their business. “The pharma business is becoming increasingly tougher to be in, given the tightening pricing framework in India, and the tightening regulatory framework in Western markets. Also, several Indian promoters' families are facing real succession issues and their businesses are unlikely to survive the current managing promoters,” he said.
The major deterrent, according to Krishna Kumar, was the high valuation expectations (eight to 10 times of revenue, regardless of margins) from Indian promoters. Agrees Chetas Desai, managing director, Ambit Corporate Finance, “The benchmark has been fixed by the Abbott-Piramal deal, which buyers are unwilling to pay.” Also, multinational companies (MNCs) are not in a rush to strengthen their India operations through big-ticket deals, as their own presence in India has grown rapidly.
MNC pharma companies, with sales growth of 15.6 per cent, outperformed the overall market growth of 13.9 per cent in the moving annual total of the 12-month period till this August. Says Abhishek Sharma, head of life sciences, MAPE advisory group, “The top five MNCs have aggressively ramped up their sales force, adding close to 6,000 sales representatives in the past three years. This, possibly, highlights their emphasis on organic growth."
The other big concern of MNCs is on compliance with good manufacturing practices (GMP) in the Indian assets they buy. Recently, Shantha Biotech lost its prequalification from the World Health Organisation for its pentavalent vaccine, Shan5, after the Sanofi deal. Later, Sanofi had completely stopped producing Shan5. Similarly, Ranbaxy was warned by the US Food and Drugs Administration on compliance issues immediately after Daiichi Sankyo’s buyout and is likely to pay about $500 mn for a settlement.
Investment bankers believe 2012 will be a slow year for big-ticket deals. Krishna Kumar says, "Companies will follow a “wait and watch” policy, as they wait for the dust around the price-control issue to settle. They would want to understand the implications of the new pricing regime on business profitability before spending big monies.”
The need for approval from the Foreign Investment Promotion Board or the Competition Commission of India for every inbound deal will add uncertainty and timelines to the deals, says Desai. Growth itself is not an issue. According to a recent PricewaterhouseCoopers report, the Indian pharma industry is expected to grow from $11.5 bn to $74 bn in sales by 2020. What could hurt deal making has been and is also likely to be, high valuations. “Given the scarcity of assets, valuations in the sector have gone up over the last 12 to 18 months," the report says.
In 2008, when Japanese drug maker Daiichi Sankyo paid a whopping $4.2 billion for Ranbaxy, the deal was struck at four times sales. The 2010 Abbott-Piramal deal was double Ranbaxy’s. If one goes by experts, deal making will be slower in the coming year and at lower valuations. In 2008, when Japanese drug maker Daiichi Sankyo paid a whopping $4.2 billion for Ranbaxy, the deal was struck at four times sales, against Abbott-Piramal deal which was stuck at eight times sales of Piramal's domestic sales.
