Betting big on M&As

Dr Reddy’s Laboratories’ June 11 announcement that it had entered into an agreement with Teva and Allergan to buy eight Abbreviated New Drug Applications (ANDAs) for $350 million is the latest in a series of global buys by big Indian pharma companies.

DRL’s peers like Sun Pharma, Lupin, and Cipla have been on an acquisition spree but they have been shopping very selectively. The collective wisdom seems to be that selective buys of brands and research leads are a much better bet than big buys, which might take longer and prove difficult to digest.

These Indian pharma companies are cashing in on opportunities provided by mergers between their global peers. For instance, DRL’s latest deals cover products that need to be divested by Teva as it seeks to acquire Allergan’s generics business. DRL’s deal is subject to approval from the US Federal Trade Commission as well as Teva’s buy of Allergan’s generics portfolio going through. This adds a layer of complexity to the deal but once it goes through, DRL is obviously looking at the end game: according to IMS Health, the combined sales of the branded versions of these eight ANDAs in the US is approximately $3.5 billion MAT for the most recent 12 months ending in April 2016.

Deal by deal, Indian pharma companies are deepening their forays into global markets as  pricing pressures increase in the domestic market. For instance, according to PharmaTrac’s MAT for May, the fixed dose combination (FDC) related market continued its degrowth (by 14.6 per cent), while the non-FDCs market grew at 8.4 per cent. The impact of the ban on FDCs is greater on Indian companies with their FDC portfolios showing a degrowth of 20.2 per cent whereas that of MNCs degrew by 0.9 per cent for May. Thus their focus on global markets will only increase but how will this impact prices of and access to medicines with India?

Similar concerns were raised after a slew of inbound M&As raised concerns that in response to the government opening the pharma sector for foreign direct investment (FDI), deals were skewed in favour of brownfield investments (more than 90 per cent, $989 million during April 2012-April 2013 compared to $87.3 million for greenfield investments).

A report released in November last year titled, ‘Impact of Merger & Acquisitions in Indian Pharma on Production, Access and Pricing of Drugs’, analysed six major cases in which Indian pharma companies were acquired by MNCs, covering three years before and after the acquisition. They were Ranbaxy’s acquisition by Daiichi Sankyo (its subsequent acquisition by Sun Pharma is out of the purview of this study), Fresenius Kabi’s acquisition of Dabur Pharma, Piramal Healthcare’s acquisition by Abbott,  Matrix Laboratories’ acquisition by Mylan, acquisition of Orchid Chemicals’ generic injectable business by Hospira and acquisition of Shantha Biotechnics by Sanofi Pasteur.

The study was implemented by IPE Global, with support from the Knowledge Partnership Programme (KPP) supported by Government of UK’s Department for International Development (DFID). While the overall impact for the concerned companies was positive, the study highlighted some areas of negative social impact of these six M&As.

For example, according to the IPE Global study, post M&A, rate of growth for these companies increased for tier 1-2 towns but a lower growth rate was seen in lower town class as compared to pre-acquisition period, possibly due to the industry view that lower tier markets are much more complex to penetrate and present less profitable opportunities in short term. Thus it   recommends that policy makers should incentivise availability in these areas while  pharma companies should participate in developing and sharing supporting infrastructure to ensure availability of medicines in rural areas is not impacted even after M&As.

The study ends with a suggested policy roadmap to maximise the positive public health impact of such M&As in pharma sector, which includes measures such as promoting competition in molecules with high market share of one or two companies, molecule level price monitoring post-acquisition for a defined time period, harmonisation among national drug regulatory agencies in developing countries and incentivising exports to meet medicine access needs across the globe.

It is still too early to analyse the social impact of Indian pharma majors are increasing investments into global and mostly the US market. But if these forays allow them to grow big enough to lessen the pinch of pressures they face in the domestic market, will they plow back some profits into India? Will they increase R&D spend on molecules specific to India? For the short term, there may be some pain as the cover story in this issue points out (June 16-30, 2016 issue, M&As ka side effects, pages 12-16) but let’s hope that these big bets play out all the way.

Viveka Roychowdhury
Editor

viveka.r@expressindia.com