Pharma industry in India, one among the fastest growing markets, is likely to witness a lesser demand from MNCs for larger buyouts in 2013. Though there was demand for buying out domestic drug manufacturing business in India early last year, the mood is dampened by the latest developments such as changed FDI regulation and recent compulsory licence issues.
"The multi-billion dollar inbound deals have been slow to come given the high valuation expectations of the promoters coupled with regulatory challenges from the CCI and FIPB," said Deepak Gaurav, MD, Avendus Capital.
According to data, India has witnessed a growth of about 290 per cent in outbound deals in 2012. About 8 outbound deals worth $872 million took place in 2012 against 7 deals worth $224 million in 2011. Though the number of inbound deals has gone down to 6 in 2012 against 9 deals in 2011, the size of deals grew 70 per cent to $246 million in 2012 against $130 million in 2011, as per 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 will continue in 2013 also," Sujay Shetty, Partner – Pharma & Lifesciences, Pricewaterhouse Coopers said. Compulsory licence and high valuations are other factors which spoilsport the inbound M&A deals in pharma space, Shetty added.
In March 2012, the Controller of Patents had granted the first-ever compulsory licence to Natco Pharma to make the generic version of Bayer’s high-priced anti-cancer drug Nexavar. As per Indian patent law, compulsory licence can be granted if the patented drug is not available to the 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.
As per the extant policy, all brown-field projects in the pharma sector will now be cleared by The Foreign Investment Promotion Board (FIPB), which also raised concerns over the 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 should not detract buyers seeking growth."
Recently, the National Pharmaceutical Pricing Policy, notified by the department of pharmaceuticals, caps the price of 348 essential medicines at the arithmetic average of all drugs in the segment that have a minimum one per cent market share against the previous policy, where 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 18 per cent of the Rs 67,000-crore Indian pharma market. The control is expected to affect 3-8 per cent of 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.
The MNCs, which believe that buyout in Indian market is a costly affair, is looking to tap the market through alliances and JVs.
Says Sujay Shetty, "Tie-ups or JVs are other route to tap Indian market, where the growth can be achieved in a slow manner, compared to the buyouts."
Last month, pharma major Eli Lilly and Bangalore-based Strides Arcolab had entered into an agreement for the supply of cancer medicines to the emerging markets. Similarly, Japanese firms Otsuka and Mitsui & Co. had set up a JV with Claris Lifesciences Limited under which Claris will transfer Common Solutions, Anti-Infectives, Plasma volume Expanders and Parental Nutrition therapies businesses to JV – 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.
