Dr Reddy's Laboratories last week announced that it had reached an agreement with Teva and an affiliate of Allergan to acquire a portfolio of eight abbreviated new drug applications, or ANDAs, in the United States for $350 million in cash.
An ANDA, once approved by the United States Food & Drug Administration, or US FDA, allows the applicant to launch a generic version of the patented medicine. The branded versions of the ANDAs acquired by Dr Reddy's, which includes one already approved by the US FDA, reported annual sales of $3.5 billion in the year to April 2016, the company said, quoting IMS Health data. It hopes to start selling these generic products next year.
While the rest of the industry is still psyched by the experiences of Tata Steel, and a handful of other overseas asset purchases that have gone sour, the pharmaceutical industry seems to have got into the mood for some big-ticket deals. In mid-2015, Lupin bought Gavis, a generic company in the US, for $880 million. In 2013, Cipla paid over $500 million to acquire MedPro, its long-time distribution partner in South Africa. More such deals could be announced in the days to come, as Indian companies hunt for assets and capabilities abroad.
There is a definite push factor at work here. Doing business in India, thanks to stringent price controls, is getting more and more difficult; that has made Indian companies look overseas for growth options. Their favourite destination is the US where a law gives pharmacists and retailers the liberty to switch branded medicine with generic medicine. Thus, a generic company just needs to ensure that its medicine is available on the retail network - it does not need to maintain an army of medical reps to generate demand from the doctors' end. This saves vital marketing dollars. That said, it is not easy to get the US FDA's nod to sell in the US.
Many companies had realised early on that India would be a restrictive market and had therefore set out to establish a global footprint. Thus, Ranbaxy, Sun Pharma and Lupin set up units practically all over the world several years ago. Many of these were just marketing outfits, which sold inexpensive medicine their parents made in their low-cost factories in India. Most of these early acquisitions were small; only a few were big: some of those worked out, some didn't.
Dr Reddy's had acquired Germany's fourth largest generic company, Betapharm, in 2005 for around $570 million. The cost of the purchase was much more than Dr Reddy's revenue of $370 million for the year. Betapharm was a prize catch and more than one Indian company was interested in it, including Ranbaxy, then the largest one. At the end, it became a bidding war and Dr Reddy's walked away with the German company.
In 2007, the German government, alarmed by the spiraling prices of medicine, took away the power to prescribe medicine from doctors and gave it to insurance companies. As was to be expected, the insurers called for tenders and orders were placed with the lowest bidders. Apart from thinning the profit margins, this rendered the large sales force of Betapharm, which was its USP, totally useless. Dr Reddy's was left with no choice but to write down the investment over two years and report a loss in 2008-09, its silver-jubilee year.
All these years later, that experience has left Dr Reddy's wiser, but has not killed its appetite for inorganic growth - the deal with Teva/Allergan is evidence of that. Of course, it has a much stronger balance sheet now, which gives it the bandwidth to execute big deals with ease.
Ranbaxy in March 2006 bought Terapia, Romania's largest independent generics drug company, for $324 million. (In that month, it announced two more buyouts, one in Italy and the other in the US). The unit's new owner is Sun Pharma and, regulatory filings show, it is reasonably profitable. However, Sun struggled for the initial few years with its first purchase in the US, Caraco, though the company, rechristened Sun Pharma Industries Inc., is now in profits. Sun's other big buy, Taro, of course, remains highly profitable.
Over the years, Indian companies have become more discerning about their purchases. They tend to analyse more carefully the advantages that will accrue to them. For instance, in the US, it is not enough to have the right to launch a generic medicine: the timing is equally, if not more, important. In case a company is late to launch, the price erosion renders the whole effort worthless.
In the recent past, some of these companies have ratcheted up the game and have started to buy brands as well as over-the-counter products which can be sold without a doctor's prescription. As the generics space gets crowded, this is one way of creating differentiation. Some are eyeing specialty generics and even bio-similars.
So, while the rest of industry dithers, the captains of India's pharmaceutical industry can be expected to announce high-voltage acquisitions abroad.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
